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What Would a Euro Collapse Mean for the United States?

Economic & Financial Consequences:

In assessing the effects of a potential collapse of the euro, timing is everything. A sudden disintegration of the euro due to financial panic on international markets would almost certainly increase the risk of financial contagion spreading to the United States, especially in light of America’s $12 trillion debt load. In the ensuing turmoil, American banks could stand to face billions or possibly trillions of dollars in losses on their credit exposure to Europe, and thus call into question the solvency of the entire American financial system. At a very minimum, economic and financial chaos in Europe would severely disrupt American exports to Europe, and thus slow the economic recovery in the United States.

On the other hand, in a controlled break-up of the euro (a scenario whereby Germany tires of its role as EU paymaster and makes a policy decision to exit the single currency and reinstate the Deutsche Mark in an orderly, phased-in fashion), the United States could stand to benefit handsomely. Any unraveling of the euro would end that currency’s function as a reserve currency and boost the demand for safe-haven assets in the United States. As a result, a stream of money from Asia and elsewhere would flow into United States Treasury bonds, and thus provide financing for U.S. deficits. Although a stronger dollar would hurt American companies trying to sell abroad, a stronger greenback would also bring benefits to American consumers, in the form of lower oil and commodity prices and lower inflation.

Geopolitical Consequences:

A collapse of the euro would almost certainly spell the end of the EU as we know it. This, in turn, would have broadly positive implications for the United States. The architects of European integration have always dreamed of building a United States of Europe that could act as a counter-balance to America on the global stage. In recent years, European zeal to achieve superpower status has caused endless transatlantic friction on questions ranging from Airbus aircraft to Chiquita bananas to the war in Iraq.

But the euro crisis has already underscored the fundamental weakness of the EU by calling into question the financial viability of its social welfare model, which has long been promoted as a primary element of the EU’s soft power alternative to American hard power.

Unfortunately for Europe, the entire European project is hanging by the thread of a highly symbolic but woefully fragile euro. If the euro comes undone, it would rob the EU of its main source of international influence. A post-euro EU would probably devolve from the economic and political union that it is today to a simple free trade zone. In the process, it would deprive Europe of any hope of becoming a viable pole in a future multipolar world. It would also eliminate a would-be geopolitical rival to the United States.

With so much at stake, Europeans are unlikely to abandon the euro without a fight. Nor will Eurocrats, who understand that having a single currency is their best hope of holding and accumulating more power, allow the current crisis to go to waste. Thus it comes as no big surprise that rather than addressing the fundamental root cause of the EU’s current problems, namely profligate spending, Europe’s elite class is now advocating the transfer of yet more political power to an unelected bureaucracy in Brussels.

European leaders are saying that in order for the euro to survive, Europe urgently needs an “economic government,” one that would transfer all remaining responsibility for economic decision-making from individual EU nation states to Brussels. Under the scheme, EU countries would forfeit complete sovereignty over national tax and spending policies, all in the interests of “improved coordination.”

Romano Prodi, the former president of the European Commission, once told CNN that the euro was “not economic at all; it is a completely political step. The historical significance of the euro is to construct a bipolar economy in the world. The two poles are the dollar and the euro. This is the political meaning of the single European currency. It is a step beyond which there will be others. The euro is just an antipasto.”

It remains to be seen whether the euro will stand or fall. But either way, Europe seems set to lose.