This is intelligent because it addresses the widespread concern in the markets that the European banks haven't written down as many of their losses as the Americans; that they remain undercapitalized; and that they are in considerable risk from their exposure to the wobbly debt of Greece, Spain, Italy and Ireland.

It is dangerous for those same reasons. If the markets' fears prove justified, that alone could precipitate another banking crisis. That would mean more massive problems for the eurozone countries just as they look to be heading into the second slowdown of a double-dip recession.

Drastic cuts in public spending already announced in Germany, Spain, Greece, Ireland and Italy, with more on their way in France and the Netherlands (not to mention in non-euro Britain) will be taking some $300 billion and more out of the eurozone economies over the next three years.

Think of it as an anti-stimulus package, brought on by fears of mounting government debt and the nagging worry that at some point the markets will revolt and the countries won't be able to borrow any more or at least not without paying savagely high interest rates. Add in the longer-term concern that an aging society faces ever-steeper pension and health costs with fewer working-age citizens to tax and create wealth and the European decision becomes understandable.

That doesn't make it helpful for the global economy as a whole. The world's largest economic bloc is going into a freeze. And, while not a member of the euro (for which it thanks its lucky stars), Britain as the world's fifth-largest economy is about to launch the toughest cuts of all.

Within days of taking office, the new Conservative-Liberal Democrat coalition government announced $9 billion in cuts. Late last week, it announced that it was scrapping another $15 billion in public spending commitments. On Tuesday, the new emergency budget will be unveiled to Parliament, which is expected to lay out a road map for cutting 8 percent of gross domestic product (about $170 billion) out of public spending over the next four years.

This isn't impossible. Between 1994 and 2000, Britain cut the same amount of 8 percent of GDP out of public spending, about two-thirds from spending cuts and freezes and one-third from higher taxes. But it will hurt and public sector employees like civil servants and health workers will bear the brunt since they benefited most from the lavish spending in the course of this decade.

Conservative think tanks, such as Policy Exchange, are arguing for a complete freeze on public-sector pay for the next four years, saving about $35 billion a year, plus cuts in the very generous public sector pensions. It calculates that since 2002 the wage bill in the public sector has risen three times faster than in the private sector, even as public productivity fell, while in the private sector it rose 28 percent.

Just like Greece and Ireland and Spain, the public employees of Britain were pampered and overpaid with borrowed money. And since they have much better protection against unemployment than those in private industry and better (inflation-linked) pensions, it is time for them to pay back the largess.

It may sound fair but it will be unpopular and it carries the risk of throttling demand and consumption and sinking the economy back into recession. That risk is all the higher because of the parallel austerity programs under way among Britain's trading partners across the English Channel. European demand is going into the deep freeze for the next three years and more.

How do they plan to recover? The unspoken strategy (or rather hope) is that they can ride on the back of the growth under way in emergent markets and benefit from the cheap euro (and devalued pound sterling) to export to the United States. At the same time, they want to shore up the euro's long-term defenses by tightening rules on public debt and budget deficits and matching the single currency with a single economic policy.

"The single currency cannot work without economic coordination and hopefully this crisis will convince governments that coordination is the way forwards," International Monetary Fund chief Dominique Strauss-Kahn (and likely candidate for the next French presidency) noted last week.

But the EU government leaders made little progress toward this goal at their Brussels summit last Thursday. Instead, they went for stress-testing of the banks, pushed into it by Spain, which said it was going ahead anyway. It was all very last-minute. The Franco-German summit earlier in the week had made no mention of any such plan and nor had the preliminary statements of the new EU Council President Herman van Rompuy.

And publishing the results of the stress tests could be damaging, which is why the German banking sector has been lobbying so hard against it. French and German banks each have some $500 billion in exposure to Portugal, Ireland, Greece and Spain, and British banks some $400 billion. Other European banks, mainly Dutch and Spanish, have another $400 billion exposed. These are the latest figures from the authoritative Bank for International Settlements.

This is looking like an interconnected banking crisis about to happen, which is why the bond markets are demanding ever higher interest payments, if they lend at all. (Spain is now almost wholly reliant on the European Central Bank for funds.)

Stress-testing them at this point is more than risky; it is a massive gamble that Europe's banks aren't as much at risk as the figures say they are.

del.icio.us	Digg	Reddit
YahooMyWeb	Google	Facebook

Memory Foam Mattress Review

SPACE MEDIA NETWORK PROMOTIONS Solar Energy Solutions Tempur-Pedic Mattress Comparison ... Newsletters :: SpaceDaily :: SpaceWar :: TerraDaily :: Energy Daily XML Feeds :: Space News :: Earth News :: War News :: Solar Energy News