Great Britain and the Nature of Europe

Since 2008, the pound has lagged the euro.
Image credit: Yahoo! Finance

Among the bystanders caught up in the Eurozone crisis is the United Kingdom of Great Britain. As the NY Times correctly notes, the UK is stuck between a rock and a hard place.

While the Brits are a party to the European Union, they are not a member of the Eurozone--they kept the British pound instead of transitioning to the euro note. As such, their monetary security should not be immediately affected by a collapse of the European currency. The British pat themselves on the back for this decision, especially (but not limited to) PM David Cameron and his ruling Conservative Party. But should they be so self-satisfied?

In a previous era, staying on the pound would have guaranteed a buffer against continental woes. But Britain's membership in the European Common Market--and the simple matter of their geographically-defined exposure to the European economy--guarantees that the UK would be hit hard by the disruption in trade and finance that would likely follow the euro's implosion.

Moreover, one need only glance at the performance of three major currencies since 2008 to take a bit of polish off of the pound sterling: Britain's independent currency has underperformed both the US$ and the euro since the onset of the financial crisis (see top right).

Whither collapse and recovery?

Federal Reserve Board Building
Photo credit: Wikipedia

Mark and Mauricio recently sent me a pair of articles that relate to what we've discussed in class this semester.

In the first article, Paul Krugman (Nobel-winning economist) and Larry Summers (former adviser to President Obama) debate whether the US is facing a "lost decade," or a long period of slow growth that doesn't quite count as a recession. Mr. Krugman believes we are, while Summers disagrees. I happen to agree with Summers. What do you think?

In the second piece, Bloomberg reveals that the Federal Reserve (the US central bank) lent out $7.7 trillion (with a 't') to beleaguered banks during the 2008 financial crisis. This is something that we're just learning about now, and it dwarfs the $770 billion Troubled Asset Relief Program (TARP) that became the focal point of the government's stimulus program.

Should the Fed have disclosed these loans earlier? Or should it have protected these banks from the stigma of failure that may have precipitated a run?