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The Weakest Link is Weakening

By Larry Doyle on March 3, 2009 at 9:10 AM in Bank Bailouts, Commerce, Credit Risk, Current Affairs, Deficit, Economic Stimulus, Economy, Equity Markets, European Union, Foreign Affairs, Global Finance, Sense on Cents (Larry Doyle blog)

The other day I highlighted the fact that 12 eastern European countries would solicit a bailout from the European Union over the weekend in Brussels. I defined this bloc of eastern European countries as currently the Weakest Link in the global economy. Well, if they were the weakest link then they just got weaker as they were rebuffed in their request for aid.

The dynamic at work in the weekend’s emergency meeting held in Brussels is a play on beggar-thy-neighbor policies implemented during times of economic stress.

There are actually a number of factors influencing the European Union’s refusal to provide bailout money to these eastern European nations. Included in these factors are the following:

1. lack of coordination even within the eastern European countries themselves. Certain countries, such as Poland, are in better shape than others. Beggar-thy-neighbor within a beggar-thy-neighbor framework!!

2. a desire by some of these eastern European nations to accelerate their formal acceptance into the European Union fell on deaf ears. The acceptance into the EU would have helped them gain the stability of the common currency, the Euro.

3. problems within the EU itself as certain countries, such as Ireland and Portugal, are already massively stressed with their own financial problems.

Where do these eastern European countries go now to get help? They will likely solicit the IMF, International Monetary Fund initially. The IMF is already hard strapped for funding.

While the EU Rejects a Rescue of Faltering Eastern Europe, my concern is that ultimately this stress will cause the eastern European nations to become more isolated from their western European neighbors. In the process of aligning themselves more with their Asian neighbors to the east, we may see heightened political tensions and instability as well. It may be premature to make the assumption that this situation ultimately leads to increased politcal tensions in this part of the world, but that assumption is not a stretch by any means.

Clearly in the German mindset is the desire to maintain strict support for its currency, the Euro. I can never get away from the fact that embedded deep in the German culture is the experience of hyperinflation after the Weimar Republic. That experience was truly the precursor to the German fascist state, which led to WWII.

It is very conceivable that we will see other political changes develop during this time of turmoil. I will be monitoring in an attempt to help us all navigate the economic landscape.

  • CG

    …embedded deep in the German culture is the experience of hyperinflation after the Weimar Republic. That experience was truly the precursor to the German fascist state, which led to WWII

    Pretty fascinating and of course scary; even if we could look to economic conditions in our nation, as well as others, that might eventually create a similar result, as unintended consequences, if you use only a little imagination… It’s frightening.

    LD, so things are going to turn upward now, right? (just hopeful, and joking) http://www.msnbc.msn.com/id/29484896/ Fed launches program to aid consumer credit; $200 billion to make credit more available to consumers, small businesses

  • HARP

    Barack Obama cancels press conference with Gordon Brown “because of snow”

    No sooner had the Prime Minister’s plane touched down at Andrews Air Force on Monday evening when word was passed to travelling Westminster correspondents that the press conference they’d been told to expect had been called off “because of snow”.

    http://blogs.telegraph.co.uk/toby_harnden/blog/2009/03/03/barack_obama_cancels_press_conference_with_gordon_brown_because_of_snow

    • tek

      HARP: Wait, I thought the O didn’t believe in canceling things because of snow. Didn’t he make fun of the D. C. officials for canceling school?

  • Docelder

    What comes to mind to me is the question… How strong is the radical Islam element in Eastern Europe? Is there a chance that the collapse of these economies could lead to hyperinflation and resultant shortages of supplies and then civil unrest that could help drive these countries to radical Islam? Will the radicals be there whispering in their ears about how the “evil West” helped sink their economies? How Western influence maybe contributed to this snub of cash when it was needed most? Could this be the start of something much larger? Just thinking.

    • JozefAL

      I don’t really believe there’s a large Muslim population in Eastern Europe as a whole. The majority live in the southern half (the Balkan states), and I’d be willing to believe that the long-standing ethnic troubles in the area are more likely to cause radicalization than any current economic conditions.
      Do you remember the Bosnian conflict? Millions of Bosnian Muslim men were killed during the war through both direct conflict and being rounded up and put into “camps”, while Bosnian Muslim women were routinely raped by ethnic Serbian fighters (who were well aware of the double psychological whammy of doing so, not merely the regular trauma induced by rape but rather the CULTURAL impact–Muslims aren’t alone in treating rape victims as “undesirable”).
      Or maybe Kosovo rings some bells? A region which for more than 500 years has had a Muslim majority population found itself under assault by a Serbian government attempting to reprise its Bosnian ethnic cleansing program, all in the name of “preserving Serbian national history” (it only became a full part of Serbia at the end of the 12th Century; the Serbs actually lost a battle in the late 14th Century in Kosovo as the “Great Serbian Kingdom” was in the midst of a very rapid decline and was eventually conquered by the Ottoman Empire by the middle of the 15th Century; Serbia regained its independence in 1878 but the Kosovo area was only “restored” to Serbia in 1913, after the Balkan Wars, and, of course, Kosovo became a part of Yugoslavia after WWI, and became an autonomous part of the Yugoslav Republic of Serbia during the years of the Communist federation).
      If anything, it’s actually surprising that there hasn’t been a massive radicalization of the Balkan region’s Muslims as a result of the (almost exclusively) Serbian assault on them for the last 20 years. The main difference between the Muslims in Western Europe as opposed to Eastern Europe is that the Western European Muslims are almost exclusively immigrants (or the children and grandchildren of immigrants) while the Easter European Muslims are almost exclusively native-born (in some areas, going back centuries). Few of the Eastern Europeans claim the “persecuted minority” status since, for decades, ALL religions were equally persecuted by the State, and most of the region’s Christian churches haven’t been willing to persecute other religions (the Russian Orthodox and Serbian Orthodox Churches, notwithstanding).
      Also, there’s the overall fact that most Eastern European citizens are used to periods of great shortages from the decades of Communist control, and the immediate years following the collapse of Communism as the economies of the area fell prey to truly greedy capitalists only interested in making money for themselves (governments were only too willing to overlook unimportant things like health and safety issues if they meant a company would be less eager to do business; also prostitution, among both women and young men exploded–the 1990s, in fact, saw a massive boom in the gay porn industry with literally thousands of titles being produced featuring young Eastern European men*, literally willing to do anything for a few dollars).

      *In fact, the main reason these guys were in such demand was they had that overall “American farmboy” image but without the seeming calculatedness that ran so rampant among American gays wanting to break in to the biz.

  • jangles

    I do like that British sense of humor. I guess Brown is really down and just about out. He does not seem to know that the O only pays attention to those he can use.

    • Docelder

      Someday hopefully when we are past this… and people in the know are writing the tell-all books… stories like this will be funny. Probably, it’s something as mundane as the teleprompters wouldn’t work in the wet of the snow. But we will have to wait for the book I guess to really know. Were it that… this really was just the big “reality tv show” that it has turned into and not our reality.

      • http://americanpumainitaly.blogspot.com/ American Girl in Italy

        Probably, it’s something as mundane as the teleprompters wouldn’t work in the wet of the snow.

        HAHA

  • tek

    Larry: good article. My first thought was that most of western Europe has never wanted to accept East European states into the European Union. It’s a shame because those are the states that had to really struggle to get free of the old Soviet Union. They never wanted to be part of the communist bloc in the first place. I could understand that they didn’t want countries like Turkey in the EU, because the culture is so different and human rights are a big issue that Turkey is not willing to address.

    • http://americanpumainitaly.blogspot.com/ American Girl in Italy

      Italy is having issues with Romania now, as part of the EU. A lot of sexual assaults are leading to violent attacks, and there is not much Italy can do, because the borders are open now.

  • Pat Racimora

    Thank you, Larry, for educating me (and the family) more about this matter. I was having trouble understanding the situation in Europe, but, as usual, you explain things so very well!

  • LD

    Pat,

    Happy to help.

  • I’m a Linda too

    Slowly those walls are going back up. Gee, funny, (not), when things are difficult for them, it’s everyone for themself.

  • TeakWoodKite

    LD, The ripple effect of this global meltdown is on a pond of many reflections. I am curios how one can prevent feed back loops which I see, disturbingly, appearing with more frequency.

    I try and visualize it like one would break a rack on the pool table…All the balls scatter but will eventually come in contact with the O’ness of it all.

    Again thanks for your expertise and point of view, might I suggest a colloquy between you and Mr. Johnson regarding the ebb and flow of global economic forces on your radio program. (as LJ indicated his ‘Phd’ in Global Econ and your experience…

    Question; if there was one person you would want to interview who would that be?

    Certianly would be interesting to listen.

  • LD

    If I had one person to interview I would want it to be you!!

    JK, in all seriousness if I had one person to interview I think it would this individual John Mauldin. Of all the people whom I have been tracking he strikes me as the most astute, relatively unknown, global, and accurate.

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