Financial crisis

Politicians in the United States, Asia and Europe are watching helplessly as a faceless mass of investors shifts billions of euros and dollars across world markets, dictating future fiscal and economic policy in the process.

US President Barack Obama and European leaders are clearly not in control of the situation – they are merely reacting to the whims of the market herd. German Chancellor Angela Merkel and French President Nicolas Sarkozy's weak assurances from the last euro crisis summit three weeks ago have done little to restore confidence in the monetary union.

The apocalyptic mood hanging over the market is irrational. Economic and fiscal conditions have changed very little in the past two weeks, yet panicked investors and fund managers have been dumping stocks and bonds in favor of "safe haven" alternatives like gold and the Swiss franc.

Downward spiral

Standard & Poor's decision to cut the United States' credit rating added fuel to the fire by confirming what markets have long suspected: The 'most powerful man on earth', US President Barack Obama, is simply no match for Wall Street.

Washington will now have to pay more to borrow money. And the US economy may experience a double-dip recession, triggering a new wave of financial and economic collapse similar to the chaos witnessed in 2008.

However, this time around European governments are not in a position to prop up their economies with stimulus measures like Germany's 2009 "cash for clunkers" car wrecking scheme. The biggest members of the eurozone are already stretched and can't afford to take on more debt.

Should international speculators now zero in on Rome's debt problem and drive its borrowing costs through the roof, Europe will simply be unable to bail the country out. Italy is just too big. Such a scenario could even spell the end of the eurozone if future crisis talks in Brussels fail to make a lasting impression on the all-powerful markets.

Time to act

Therefore, it's high time European policymakers move beyond stop-gap rescue facilities, create a solid monetary fund to assist troubled member states, and harmonize financial policy throughout the eurozone. It's also high time politicians face up to reality and tell their constituents that everyone needs to shoulder part of Europe's debt burden through higher rates of inflation.

If Merkel, Sarkozy and other leaders don't change course, the European monetary union will soon be consigned to history as a failed experiment. And it will only be a matter of time before ratings agencies strip nations like France, Britain or even Germany of their triple A status. After all, the structural problems facing Paris are not much different from those in Washington. And Berlin is also amassing public debt at a record rate.

Optimists hope the European Union, the G7 group of industrialized nations or the G20 club of powerful and emerging economies wlll be able to avert disaster. But a lasting resolution remains doubtful as long as ratings rule and the herd mentality of the markets dictates policy.

Author: Bernd Riegert / sje
Editor: Michael Knigge