Investing

The US Can't Feed Europe To The Wolves

The U.S. contributed $13 billion to rebuild Europe after World War II. More than 60 years later, Uncle Sam may ride to the continent’s rescue again.

Financial markets reacted Wednesday to a report that U.S. was considering increasing its support for the IMF’s fund to aid the European Union. The report was later denied, but certainly seems like a trial balloon floated by the Obama administration.  So far, the reaction seems to be largely negative.

Red-blooded Americans from coast to coast probably shrieked in horror at the news that the U.S. was considering picking up some of the tab of the European bailouts.  After all, with a $1 trillion plus deficit Uncle Sam can’t afford to support the financial needs of its own citizens.  A presidential commission yesterday proposed sweeping across the board spending increases and massive tax hikes to bring America’s fiscal house in order.

One lawmaker,  Rep. Mike Pence (R-IN), told Dow Jones Newswires that he would strongly oppose any moves by the U.S. to increase its support for the IMF’s fund to assist the European Union.  News of the possible U.S. assistance to Europe boosted the euro while U.S. Treasuries fell.  Right wing blogs were critical as well.

Such a knee-jerk reaction is short-sighted. The Obama administration does not want Europe to drown in a sea of red ink. After all, the worldwide economy is integrated. If Europe sneezes, the U.S. catches a cold and vice versa.  U.S. firms exported more than $220 billion worth of goods to the EU in 2009. American financial firms have much to lose as well. Goldman Sachs  Inc. (NYSE:GS)  reported $4.129 billion in net earnings from Europe, the Middle East and Africa last year.  JPMorgan Chase & Co. (NYSE:JPM) reported $2.483 billion in net earnings  from EMEA in 2009.

Moreover,  where do you think the cash-strapped Europeans are going in search of financial opportunities if the EU’s economy collapses?  The United States.  For example, the numbers of Irish migrants are swelling, which is not surprising considering the country’s financial problems.

“Since the fall of the Celtic Tiger boom, thousands of Irish, mainly young, have made the life-altering decision to leave their homes, families and Irish lifestyles,” according to IrishCentral.com. “Preliminary figures for this coming tax year estimates that 65,300 people will have left the country.”

Now add other basket cases such as Greece, Spain and Portugal to the mix and the potential for increased illegal immigration becomes a serious concern.  Of course, the U.S. is a second choice for jobless Europeans given its distance. but its a chance that many will take.

Finally, China would be more than happy to lend money to Europe if the U.S. closes its checkbook.   The influence of the People’s Republic would grow exponentially,  which would hurt America’s long-term interests.  Another option for the EU would be to seek a bailout from another rich Middle Eastern country such as Saudi Arabia.  That’s another bad idea.

Though Tea Party supporters may argue otherwise, the U.S. cannot afford to shut itself off from the rest of the world.   Helping Europe now may avoid big headaches later.

–Jonathan Berr