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THE EUROZONE CRISIS:

DESTABILIZING THE GLOBAL ECONOMY

HEARING

BEFORE THE

SUBCOMMITTEE ON EUROPE AND EURASIA

OF THE

COMMITTEE ON FOREIGN AFFAIRS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

OCTOBER 27, 2011

Serial No. 112–94

Printed for the use of the Committee on Foreign Affairs

(

Available via the World Wide Web: http://www.foreignaffairs.house.gov/

(II)

COMMITTEE ON FOREIGN AFFAIRS 

ILEANA ROS-LEHTINEN, Florida, Chairman 

CHRISTOPHER H. SMITH, New Jersey 

DAN BURTON, Indiana 

ELTON GALLEGLY, California 

DANA ROHRABACHER, California 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

STEVE CHABOT, Ohio 

RON PAUL, Texas 

MIKE PENCE, Indiana 

JOE WILSON, South Carolina 

CONNIE MACK, Florida 

JEFF FORTENBERRY, Nebraska 

MICHAEL T. MCCAUL, Texas 

TED POE, Texas 

GUS M. BILIRAKIS, Florida 

JEAN SCHMIDT, Ohio 

BILL JOHNSON, Ohio 

DAVID RIVERA, Florida 

MIKE KELLY, Pennsylvania 

TIM GRIFFIN, Arkansas 

TOM MARINO, Pennsylvania 

JEFF DUNCAN, South Carolina 

ANN MARIE BUERKLE, New York 

RENEE ELLMERS, North Carolina 

ROBERT TURNER, New York 

HOWARD L. BERMAN, California 

GARY L. ACKERMAN, New York 

ENI F.H. FALEOMAVAEGA, American 

Samoa 

DONALD M. PAYNE, New Jersey 

BRAD SHERMAN, California 

ELIOT L. ENGEL, New York 

GREGORY W. MEEKS, New York 

RUSS CARNAHAN, Missouri 

ALBIO SIRES, New Jersey 

GERALD E. CONNOLLY, Virginia 

THEODORE E. DEUTCH, Florida 

DENNIS CARDOZA, California 

BEN CHANDLER, Kentucky 

BRIAN HIGGINS, New York 

ALLYSON SCHWARTZ, Pennsylvania 

CHRISTOPHER S. MURPHY, Connecticut 

FREDERICA WILSON, Florida 

KAREN BASS, California 

WILLIAM KEATING, Massachusetts 

DAVID CICILLINE, Rhode Island 

YLEEM D.S. POBLETE, Staff Director 

RICHARD J. KESSLER, Democratic Staff Director 

SUBCOMMITTEE ON EUROPE AND EURASIA

DAN BURTON, Indiana, Chairman 

ELTON GALLEGLY, California 

GUS M. BILIRAKIS, Florida 

TIM GRIFFIN, Arkansas 

TOM MARINO, Pennsylvania 

JEAN SCHMIDT, Ohio 

TED POE, Texas 

GREGORY W. MEEKS, New York 

ELIOT L. ENGEL, New York 

ALBIO SIRES, New Jersey 

THEODORE E. DEUTCH, Florida 

(III)

C O N T E N T S 

Page

WITNESSES 

Mr. Jacob Funk Kirkegaard, research fellow, The Peterson Institute for International Economics .............................................................................................. 7

Desmond Lachman, Ph.D., resident fellow, American Enterprise Institute ....... 28

Mr. Bruce Stokes, senior Transatlantic fellow, German Marshall Fund of 

the United States ................................................................................................. 43

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

The Honorable Dan Burton, a Representative in Congress from the State 

of Indiana, and chairman, Subcommittee on Europe and Eurasia: Prepared 

statement .............................................................................................................. 3

Mr. Jacob Funk Kirkegaard: Prepared statement ................................................ 10

Desmond Lachman, Ph.D.: Prepared statement ................................................... 31

Mr. Bruce Stokes: Prepared statement .................................................................. 45

APPENDIX 

Hearing notice .......................................................................................................... 60

Hearing minutes ...................................................................................................... 61

Congressional Reserch Service Memorandum: The Eurzone Debt Crisis ........... 62

(1)

THE EUROZONE CRISIS: DESTABILIZING THE 

GLOBAL ECONOMY 

THURSDAY, OCTOBER 27, 2011

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON EUROPE AND EURASIA, 

COMMITTEE ON FOREIGN AFFAIRS, 

Washington, DC. 

The subcommittee met, pursuant to notice, at 2 o’clock p.m., in 

room 2172, Rayburn House Office Building, Hon. Dan Burton 

(chairman of the subcommittee) presiding. 

Mr. BURTON. The committee will come to order. This hearing is 

on the eurozone crisis and the potential destabilizing of the global 

economy. And the subcommittee will come to order. 

Since the fall of 2009, starting with the revelation of Greek fiscal 

problems, we watched a series of unfortunate events take place 

that have fostered bailouts of Greece, Ireland and Portugal and 

possible intervention in Spain and Italy. Europe and the entire 

global economy are in a dire predicament that has far-reaching 

consequences. Trillions upon trillions of dollars are at stake as we 

look to stem a possible worldwide economic depression. 

Members of the European Union created the Eurozone in 1992 

with a vision to create a single monetary policy for all of Europe. 

The euro would become the common currency adopted among nations who all adhered to a strict monetary policy that provided 

greater stability. However, the Eurozone also brought additional 

bureaucracy where individual nations still acted in their own best 

interest, oftentimes hiding or misstating realities of their economy, 

which only exacerbated the situation. In addition, the European 

Union failed to adopt mechanisms that could move swiftly to deal 

with quickly changing market conditions and important oversight 

institutions to provide transparency and accountability among the 

Eurozone partners. 

The current economic situation in Europe has uncovered many of 

these shortfalls and has exposed them as the main causes of the 

ongoing crisis. Accordingly, the Europeans have left the world wondering if the steps they are taking to right the crisis are effective 

and enough. 

Due to the crisis, we have witnessed a creation of three European lending mechanisms, the largest, the trillion dollar European 

Financial Stability Facility, along with the assistance from the European Central Bank and the International Monetary Fund, has so 

far lent Portugal, Greece and Ireland over $1 trillion. This is only 

the beginning as some analysts estimate that Europeans will need 

2

another $2 trillion to recapitalize European banks and the coffers 

of crisis countries. 

Meanwhile, European leaders continue to meet repeatedly and 

results depend on a clear consensus on how to resolve a problem 

that has been fluctuating for nearly 2 years. 

The United States is not immune from these troubles, and this 

is not just a European problem that Europeans must solve. 

The U.S. economy intertwines with the European economy, and 

the nations of Europe combine to be the largest trading partner of 

the United States and the partnership is approximately five times 

greater than our partnership with China. Due to the crisis, U.S. exporters face tougher market conditions, as the euro devalues and 

European partners cannot afford to import as many manufactured 

or agricultural goods. 

The United States stock markets, which are going up like a rocket today, are in a constant flux as traders react to the changing 

stabilities of the investment climates. U.S. banks, despite ample 

warnings of the ongoing market volatility, still hold European 

bonds and securities, a value estimated to be as high as $2 trillion, 

and we will talk about that in a few minutes. 

As chairman, I visited with leaders and discussed with experts 

the complexities of the crisis. Many public leaders I have met with 

have not provided clarity and have not been forthcoming regarding 

the true extent of the crisis. Political leaders over the months, including U.S. officials, have routinely relayed to us that the crisis 

is close to stabilizing, that recovery is working, that governments 

are taking reform measures and that growth is just around the corner. 

In contrast, the EFSF has grown from 440 billion euros to 780 

billion euros to now over 1 trillion euros. Additionally, I asked 

Treasury officials to testify in September, to which they asked for 

postponement until after the IMF and the World Bank meetings 

and the meetings they had yesterday. This past Tuesday, they 

again asked us to delay this hearing to November until after the 

G–20 meetings. Their excuse, contrary to what we hear from public 

statements, is that the markets are too volatile and that any statement can further harm the situation. 

These are not signs that recovery is working or that growth is 

just around the corner. The U.S. Government should not ask or expect the American people to play kick the can while political leaders sort out the global economy behind closed doors. The people and 

the markets have a right to know. If we are not open and transparent, we are only preserving an artificial sense of stability. And 

this is not sustainable, and the longer we wait, the worse it will 

be when reality comes crashing down. 

The current situation does not call for us to point fingers and lay 

blame. I recognize that the crisis is not easy to solve. The complexities of the crisis are diverse and unique, with each country having 

its own cocktail that has led to its current predicament. However, 

we must be honest about the situation and no longer gloss over dilemmas that may drag the entire globe into a deep recession, and 

we are very concerned about the financial involvement that the 

United States may face down the road. 

3

And with that, I will yield to my goodlooking friend here, my 

ranking member Mr. Meeks. 

[The prepared statement of Mr. Burton follows:]


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Mr. MEEKS. Thank you, Chairman. 

And I want to thank Chairman Burton for scheduling this hearing on the Eurozone crisis and its effects on the global economy. 

The Transatlantic trade relationship is the largest in the world, 

and it is in our interest to make sure that this works to the benefit 

of the estimated 15 million jobs that have been generated from this 

relationship on both sides of the Atlantic. 

I agree with the chairman that it is important for us to get an 

accurate perception of U.S. exposure to the Eurozone crisis. But I 

think it is just as important to look forward and examine how we 

can transition from this situation, where the Eurozone is under immense pressure, to a situation where growth is generated and jobs 

are created from our mutual trade and investments. 

The financial crisis has exposed serious structural shortcomings 

in the mechanisms governing the euro project and tested European 

unity. I find it relevant to note that while it has not been beautiful 

to look at, European leaders do appear to have the resources, the 

capacity and the political will to deal with the challenges they face. 

Just yesterday European leaders reached an agreement with the 

banks to take a 50-percent loss on the value of their Greek debt 

and expanding their capital reserves. There is also an agreement 

to expand the European Financial Stability Facility to approximately $1.4 trillion. And I hope that these measures will allow Europe to move forward. 

I think it is important for us to acknowledge that there are different reasons for the Eurozone problems. I suspect that we are 

committing an analytical error by discussing one Eurozone crisis as 

opposed to a Greek fiscal crisis, an Irish banking crisis and a Portuguese competitiveness crisis. Are they even really related? Are 

we throwing ourselves off track by cobbling these issues together 

and looking in vain for single causes, symptoms and solutions? I 

hope that our panel can give us a detailed perspective on that. 

Some of the commentary that I have read recently seems more 

like Schadenfreude, the German expression, which I did not pronounce correctly, but taking delight in others’ bad fortune, than actual analysis. We can probably agree that the euro came into existence prematurely and without the requisite institutional oversight. 

But it seems to me that we may have lost sight of the advantages of the euro entirely during the last couple of years. I would 

point to price transparency and stability; elimination of exchangerate fluctuations; fees and transition costs; increased cross-border 

trade; market expansion; and lower interest rates. And I ask our 

panelists to evaluate whether these benefits no longer outweigh the 

disadvantages that are more obvious today than they were in the 

past. 

Estonia just joined earlier this year, and as far as I am aware, 

others are still lining up to qualify. What should we make of this 

fact? Is there a scenario under which the euro emerges from the 

current situation in a stronger, leaner and meaner form? I believe 

that it is important to know the details about how problems arose 

in the Eurozone in order for us to avoid them in the future. 

But ultimately, I think the biggest question is how do we find opportunities to ensure growth and job creation together with the Europeans, for it is important for both sides of the Atlantic to create 

6

jobs and to lift ourselves out of this economic situation that we are 

in? 

And I thank you, Mr. Chairman. I yield back. 

And I apologize because, Mr. Chairman, I know this hearing is 

important, but there is an airplane waiting for me, and there is a 

meeting waiting for me in New York. 

Mr. BURTON. And your wife is waiting for you. 

Mr. MEEKS. And my wife is waiting for me. I got 670,000 who 

vote for me, and they need me there. 

Mr. BURTON. That is more information than I need, but I am 

glad you are here. We will give you all the questions and answers, 

and the other members. 

Mr. MEEKS. Great. Thank you, sir. And thank you for being here. 

Mr. BURTON. I want you to know that, since you are only looking 

at me——

Mr. MEEKS. I am just nervous leaving you here by yourself, 

though. You know, generally, I have to hold your hand and kick 

you under the table. 

Mr. BURTON. Get out of here. 

Let me just say to you that this is a very important hearing, 

even though you just have me to look at. 

Many of my colleagues had to get back to their districts; that is 

why they left. But I can assure you that all of the information you 

are going to give us today will be utilized and that everybody on 

the committee will have it, as well as others, because this is a very, 

very important issue right now. I know the stock market and everybody is Kumbaya today, everything is great, but I hope you will 

give us the real picture so the American people know where we 

stand. 

Jacob Kirkegaard, you have been with the Peterson Institute for 

International Economics since 2002. Your diverse current research 

focuses on long-term fiscal challenges, European regional economic 

integration, structural economic reform issues, among other issues, 

and it is good to see you again. 

I appreciate you being here. 

Desmond Lachman joined American Enterprise Institute after 

serving as managing director and chief emerging market and economic strategist at Salomon Smith Barney. He previously served as 

deputy director on the International Monetary Fund’s Policy, Development and Review Department and was active in staff formation of IMF policies. At AEI, Mr. Lachman is focused on the global 

macro-economy, global currency issues and the multilateral lending 

agencies. 

I really appreciate you being here as well. 

And Bruce Stokes joined the German Marshall Fund as a senior 

Transatlantic fellow for economics in September 2010. He is a 

former international economics columnist for the National Journal, 

a Washington-based public policy magazine, where he is now a contributing editor. He is also a former senior fellow at the Council on 

Foreign Relations. 

So since I am going to be using your testimony in a lot of ways, 

I need to swear you in, so that we have it, because I am going to 

have the Treasury testify, and if there are any differences, we want 

to make sure that we have got it on the record. 

7

So could you stand and raise your right hand, please? 

[Witnesses sworn.] 

Mr. BURTON. Thank you very much. Okay. 

Mr. Kirkegaard, would you like to start off? 

Mr. KIRKEGAARD. Most certainly. 

Mr. BURTON. If we could try to keep the remarks to 5 or 6 minutes, we would really appreciate it, so we can get into the dialogue 

and questions. 

STATEMENT OF MR. JACOB FUNK KIRKEGAARD, RESEARCH 

FELLOW, THE PETERSON INSTITUTE FOR INTERNATIONAL 

ECONOMICS 

Mr. KIRKEGAARD. Chairman Burton, Ranking Member 

Meeks——

Mr. BURTON. I don’t think your microphone is on. 

Mr. KIRKEGAARD. Chairman Burton, other members of the committee, it is a pleasure for me to appear before you to testify on 

the origin, current status of and responses to the euro area crisis. 

In my oral remarks today, I intend to summarize my available 

written testimony as well as briefly touch on the events of last 

night in Brussels. It is clear that the euro area has gradually, since 

May 2010, taken the central place in an increasing volatile global 

economy. The correct diagnosis for the euro area crisis is, however, 

not one but at least four deep overlapping and mutually reinforcing 

crises: A crisis of institutional design, a fiscal crisis, a crisis of competitiveness; and a banking crisis. None of the four crises can be 

solved in isolation. The current euro area situation is therefore 

characterized by an extreme degree of complexity. 

Essentially no single comprehensive answer to the crisis is currently available to European policymakers, and as a result, the 

drawn-out inconclusive crisis containment efforts witnessed in Europe since early 2010, in which I will include yesterday’s deal in 

Brussels, will continue. Economic catastrophes may be avoided, but 

certainly all volatility will remain with us for the foreseeable future. 

The euro area suffers, first and foremost, from a fundamental institutional credibility problem. It needs a new rule book. Binding 

rules for individual member states’ fiscal performance must be 

crafted enabling the euro area as a whole to compel even large 

countries, such as Italy, to comply with them. The currency union 

must moreover be equipped with a sizable independent fiscal capacity capable in a crisis of both providing emergency financial assistance to member states in need and act broadly and forcefully 

to restore market confidence. European leaders have so far merely 

begun these tasks, and ultimately any credible solution will require 

a revision of the European treaty, a process which in itself will 

take several more years. 

Secondly, the euro area suffers from a fiscal crisis centered in 

Greece, a country which will need to restructure its government 

debt. However, as concerns over fiscal sustainability in the euro 

area stretches also to Italy, a country which is too big to bail out, 

the principal challenge in the euro area is how to avoid the issue 

of contagion and how to ring-fence an inevitable Greek debt restructuring so as to avoid a generalized undermining of the riskVerDate 0ct 09 2002 14:50 Feb 14, 2012 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 F:\WORK\EE\102711\70950 HFA PsN: SHIRL
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free status of euro area government debt. To achieve this goal, substantial further financial support will in the years ahead have to 

be made available to Greece, Ireland and Portugal, and it is clear 

that such resources should overwhelmingly come from the euro 

area itself with a component provided by the IMF. However, ultimately euro area fiscal stability will only be achieved through the 

longer-term domestic consolidation and reform effort, notably in 

Italy. 

Thirdly, large parts of the euro area’s southern periphery suffers 

from an acute crisis of competitiveness, which these countries, 

without the ability to devalue national currencies, have no shortterm way to overcome. Instead, the euro area periphery is compelled to gradually restore their competitiveness through deep supply-side structural reforms of labor and product markets. Previous 

experiences from other countries suggest that this type of reform 

will only have a positive economic effect in the long run, while indeed adversely affecting growth in the short term. 

Lastly, the euro area suffers from an oversized and undercapitalized banking system which owns a large amount of national government debt from the euro area. There is, consequently, across the 

euro area a large degree of interdependence between the financial 

solidity of large domestic banking systems and the national government—and national government solvency. Euro area leaders have 

recently raised capital requirements for euro area banks last night 

again to 9 percent core tier equity, but recalling the precarious fiscal situation of several governments themselves, they will be unable to bring the longer-term recapitalization process of the euro 

area banking system to an expeditious conclusion. Instability will 

consequently continue to haunt the euro area banking system in 

the times ahead. 

Now, turning now to the Transatlantic relationship and the effects on the U.S. from this farfetched crisis, there is no doubt that 

Europe, as the largest destination of U.S. exports and foreign direct 

investments, as well as extensive cross ownership of loss financial 

institution, the United States will suffer a significant negative adverse shock from a further unexpected rapid deterioration in the 

euro area crisis. 

It is consequently in the vital national interest of the United 

States that Europe fixes its problem. However, the possible direct 

action by policymakers in the United States had been limited by 

the fact that this is, despite increasing global spill-over potential, 

still at heart a domestic economic crisis inside another sovereign 

jurisdiction. The ability of U.S. Government—of the U.S. Government to bilaterally affect the outcome of the euro area crisis is consequently and indeed appropriately limited. 

At the same time, in my opinion, the U.S. Government representatives have since the beginning of the euro crisis exercised important indirect pressure through multilateral channels and especially 

the IMF to expedite the European crisis resolution process and 

push it in generally beneficial directions. 

However, it is not for the United States to bilaterally provide any 

financial support to the euro area. This is a task predominantly for 

Europe itself as well as the appropriate multilateral organization, 

notably the IMF. Indeed, the euro area crisis has underlined how 

9

it is in America’s evident national interest to help maintain the 

prominence of the IMF as the key global financial crisis manager. 

As a declining relative share of the global economy, it is evidently 

in the United States’ direct interest to sustain the global dominant 

role of the IMF, thereby shielding it from potential threats from 

new institutional initiatives originating outside the traditional G–

7 countries. 

Upholding the dominant position of the IMF, in whose establishment, design leadership, and current modus operandi the United 

States has historically played a far larger role than its current and 

especially future global economic weight will dictate, is a critically 

important issue. It is consequently in the direct interest of the 

United States to continue to fully support the IMF and participate 

fully in all internationally agreed capital commitments to the IMF 

and provide the organizations with the biggest possible toolkit with 

which to combat future global economic crisis in general, including 

currently in the euro area. 

However, the euro area crisis is first and foremost a European 

crisis and should and will ultimately be solved predominantly 

through European efforts and resources. 

I thank you for this opportunity to address the committee today 

and look forward to answering any questions you might have. 

[The prepared statement of Kirkegaard follows:]

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Mr. BURTON. Thank you very much. 

Mr. Lachman. 

STATEMENT OF DESMOND LACHMAN, PH.D., RESIDENT 

FELLOW, AMERICAN ENTERPRISE INSTITUTE 

Mr. LACHMAN. Thank you, Mr. Chairman, for giving me the 

honor to testify before this subcommittee. 

In my remarks, what I would like to do is to emphasize the seriousness of this Eurozone crisis and to provide reasons why I think 

we are going to see an intensification of the crisis in the months 

ahead, despite the summit last night. 

What I would also like to do is I would also like to emphasize 

the importance of this crisis for the United States economy, both 

through our export side and through our bank exposure. 

I agree that the crisis is a complex crisis, but I would say that 

the main origin of the crisis is that for many years, the countries 

did not play by the rules of a currency union. Whereas the 

Maastricht criteria required that these countries run budget deficits of 3 percent of GDP, countries, Greece, Portugal, Ireland and 

Spain, routinely ran deficits either well in excess of 10 percent of 

GDP or very close to 10 percent of GDP. As a result, they built up 

huge debt positions well over 100 percent of GDP; they lost competitiveness; and they had very large balance of payment deficits. 

The essence of the peripheral countries’ problem right now is, 

how do you correct those kind of imbalances when you don’t have 

a currency to devalue? IMF EU-imposed fiscal austerity in these 

circumstances is driving these economies into very deep recessions. 

That in turn is making them lose their tax base, make them lose 

the political willingness to stay the course, and it is an exercise in 

futility to impose further fiscal austerity on them of the type that 

we are getting right now. 

I think that what is also important to understand in the crisis 

is that while we are talking about relatively small countries at the 

European periphery, these countries are enormously indebted to 

the banks in the core countries. If we look at Portugal, Ireland, 

Greece and Spain, we are talking about $2 trillion worth of sovereign debt, and a lot of that is held by the banks. 

What we have seen in recent months is not an easing of this crisis but an intensification of the crisis. Greece’s economy is on the 

cusp of a major default. Its economy is in free fall. They are not 

meeting the IMF targets. There is really real political tension on 

the streets. The Papandreou government doesn’t look like it has got 

a long life ahead of it. 

This has spread to Ireland and Portugal, but what is really of 

concern is the difficulty of Spain and Italy to borrow in capital 

markets without the support of the ECB. If Spain and Italy were 

to fail, that would be the end of the European experiment. 

The European banking system is already showing real signs of 

strain that are reminiscent of our banking crisis in 2008–2009. 

Banks are not lending. Banks are parking money with the ECB. 

They don’t trust one another’s balance sheet. We are already at the 

start of what could be a credit crunch in Europe. 

The final point about the intensification of the crisis is we are 

seeing that the key economies of Germany and France are losing 

29

steam. They look like they are already on the close edge of a recession. And if we do get a banking credit crunch, that is almost certain to push them into recession. And without growth in Europe, 

there is no way that the countries on the periphery are going to 

resolve their problem. 

A positive sign in Europe is that at last, after many months of 

denial, the Europeans are recognizing that they have got a major 

problem. What they tried to do last night is move the crisis in the 

right direction. They tried to get resolution on the Greek situation. 

They tried to begin recapitalizing the banks. And they tried to put 

up a firewall against Spain and Italy. 

I am afraid that I have got doubts about the efficacy of this program, and I think that this might be another episode of too little 

too late that has characterized the Europeanefforts to date. It is 

not clear that a haircut of Greece of 50 percent puts Greece on a 

sustainable path when the Europeans themselves recognize that 

Greece’s debt after all of this is still going to be at 120 percent of 

GDP. 

It is also not clear that the Europeans can come up with $1.4 

trillion of unconditional money to provide a credible firewall to 

Spain and Italy. That money is going to be subject to Italy and 

Spain agreeing to conditions either imposed by, effectively, the Germans through their Bundestag or through the IMF. 

Funny, I would say, that on the issue of the bank recapitalization, the way in which it is being gone about is this is likely to provoke a deepening in the credit crunch in Europe because the banks, 

far from raising capital at depressed equity prices, what they are 

going to do is they are going to engage in restricting their lending 

and selling off assets, which is going to be not good for the European economy. 

My final point is that we in the United States should not take 

any comfort out of what is going on in Europe from purely self-interest reasons. You have mentioned that the United States has got 

very strong trade relations with Europe. We have got very strong 

investments in Europe. I would say that that is certainly true. But 

what is of deep concern is the interconnection between the United 

States financial system and that in Europe. 

I would just point out that money market funds in the United 

States were reported by Fitch rating agency to have as much as 45 

percent of their $2.7 trillion of assets lent out to European banks. 

That is an amount that is way in excess of $1 trillion. The U.S. 

banks themselves have got loan exposure to France and Germany 

of $1 trillion. And we don’t know the extent of credit default swaps 

and other derivatives that our banks have written both on the periphery and on the European banking system, so we really do have 

to hope that the European situation resolves itself. 

The U.S. is helping the Europeans, both through the Federal Reserve, providing liquidity through their swap operations and 

through the IMF. 

I would just close by saying that I am not sure that there is a 

whole lot more that the United States can do or that the United 

States should do. The problems in Europe, in my view, are ones not 

of liquidity but are ones of solvency that require debt write downs 

and don’t require more money to be thrown at it. I don’t see why 

30

United States taxpayers should be putting up more money risk on 

that side. 

And I would just note that in 2008–2009, when the United States 

had a banking and credit market crisis, the Europeans did not 

come and provide us with financing. I think I would see it exactly 

the same way; this is a European problem that the Europeans need 

to address. And we have got to hope that they address it correctly 

because if they don’t, we are in the same boat as they are. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Lachman follows:]

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Mr. BURTON. Thank you very much. 

Mr. Stokes. 

STATEMENT OF MR. BRUCE STOKES, SENIOR TRANSATLANTIC 

FELLOW, GERMAN MARSHALL FUND OF THE UNITED STATES 

Mr. STOKES. Chairman Burton and Ranking Member Meeks and 

distinguished members of the committee, it is a distinct honor and 

a privilege to appear before you today. My remarks today, of 

course, represent my own opinions and not the views of the German Marshall Fund of the United States. 

I would like to focus my remarks, if I could, not on how we got 

into this mess and not even on what the U.S. could do directly to 

help Europe with its problems, but how we can both work together 

to both help grow the Transatlantic economy out of the dilemma 

we now face in a way that is of mutual self-interest to both Europe 

and the United States. 

I think it is particularly timely that you have called this session 

today, Mr. Chairman, after the European summit about the euro 

crisis. It is far too early, I think we all agree, to have a definitive 

decision about what has been decided last night and whether Europe can stem its bleeding and start to heal its own wounds. 

But experience has taught us that at every juncture of this unfolding saga, the European actions have been a day late and a euro 

short, so I think we have every reason to be skeptical. And we can 

only hope for the best. 

As you mentioned, Mr. Chairman, America has a huge stake in 

Europe finally resolving its crisis. I don’t need to belabor you with 

the numbers. But clearly, we have intertwined economies. And as 

Ben Franklin once said, we may all hang together, or we are going 

to hang separately here. So we have to work together on this crisis, 

because a European lost decade would do profound damage to the 

U.S. economy. 

To date, much of the discussion in Washington about the euro 

crisis has been about how to defend ourselves against contagion 

from Europe’s sovereign debt problems, but to turn the old American football maxim on its head, in this case, I suggest you use it: 

The best defense would be a good offense. 

The great recession has demonstrated once again that the economic fates of Europe and America are inextricably linked, stubbornly high unemployment on both sides of the Atlantic and flagging consumer and investor confidence has shaken the Transatlantic marketplace more than any other event since the Great 

Depression. The need for closer economic cooperation to overcome 

these problems, I submit to you, has never been greater. 

Americans and Europeans are both telling their elected leaders 

that they need jobs, and they need growth. Our mutual debt overhang and the near exhaustion of monetary policy means both 

Washington and Brussels must look elsewhere to address their citizens’ needs. The most promising and immediate way to do this is 

by launching a Transatlantic jobs and growth initiative, anchored 

in an effort to remove all taxes on and barriers to Transatlantic 

trade and investment. Never has such an initiative been more 

timely, nor more necessary. 

44

The benefits of such an effort would be significant. A study last 

year by the European Center for International Political Economy in 

Brussels estimated that the elimination of all EU tariffs on U.S. 

goods would boost American exports to Europe by $53 billion. In 

2009, a European Commission study found that eliminating nontariff Transatlantic trade barriers would add more than $50 billion 

to the U.S. economy. 

These estimates are a reminder that Transatlantic barriers to 

trade and investment may be small compared to the barriers we 

face in other parts of the world, such as China, but their removal 

will pay significant dividends. To put these prospective benefits in 

context, the payoff from eliminating Transatlantic trade barriers 

exceeds the likely economic benefit to the United States from completion of the Doha round. It also exceeds the potential economic 

benefit to the United States of TPP, the Trans-Pacific Partnership, 

which we are now negotiating. 

How can we possibly leave these benefits sitting on the table 

while we pursue less substantial, more elusive payoffs elsewhere? 

Interest in a Transatlantic jobs and growth initiative is growing. 

The U.S. Chamber of Commerce has called for the elimination of 

all barriers to goods traded between Europe and the United States 

as a first step toward a full fledged Transatlantic free trade agreement. The U.S. Coalition of Services Industries has suggested pursuit of a Transatlantic free trade area in services. The Transatlantic Business Dialogue has long advocated the establishment of 

a barrier free Transatlantic market. The Transatlantic Policy Network, made up of Members of Congress, the European Parliament 

and Transatlantic business leaders, has recently called for a 

growth and jobs initiative that would lead to the creation of a 

Transatlantic market by 2020. 

And late in September your counterparts in the European Parliament called for a comprehensive Transatlantic growth and jobs 

initiative. I might add, the German Marshall Fund is also helping 

to facilitate a task force led by the Swedish trade minister and 

your former colleague, Representative Jim Kolbe of Arizona. Early 

next year, it will add its own recommendations to these calls for 

creating jobs and growth through greater Transatlantic trade and 

investment. 

So how might we proceed? At the U.S.-EU Submit November 

28th, President Obama and his European counterparts should instruct their teams to come up with a Transatlantic jobs and growth 

initiative. This initiative should be ready to be signed in mid-May 

2012 at the G–8 submit in Chicago. The initiative should have multiple pillars. These could include but would not necessarily be limited to elimination of all tariffs, free trade in services and an investment agreement. Most important, these efforts should run in 

parallel but not be dependent upon each other. We can eliminate 

tariffs rapidly so we should do so. If it takes longer to hammer out 

an agreement on services, that should not hold us back from harvesting the benefits of eliminating taxes on goods. 

Mr. Chairman, the current economic crisis presents a unique opportunity for political leadership. Americans and Europeans, both 

as consumers and investors, want jobs. They want growth. And I 

submit to you, above all, they want a reason to hope. What they 

45

lack is a sense of direction and purpose. A Transatlantic jobs and 

growth initiative is a way to turn the euro crisis into an economic 

opportunity for all Americans. 

Thank you and I look forward to your questions and comments. 

[The prepared statement of Mr. Stokes follows:]


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Mr. BURTON. Do you have a proposal? I would like to have that 

to be able to disseminate that to my colleagues. 

Mr. STOKES. I would be happy to do that. 

Mr. BURTON. Because that might be food for thought. 

When we draft some legislation, that might be helpful. 

Mr. STOKES. Terrific. 

Mr. BURTON. Obviously, it is not going to happen right away; it 

is going to take some time. 

The first thing I wanted to ask you about is, and it is very interesting, after listening to you, how the stock markets jumped up 300 

points or so today because of the announcement yesterday. Talk 

about building hopes on dreams. I mean I think it is great, but 

from what you all said, it is pretty obvious that there is a long way 

for us to go or for the world to go. 

According to the information that we got from the CRS, Congres- sional Research Service, we have about $2.08 trillion in direct exposure and potential exposure to Europe from the countries of Portugal, Ireland, Italy, Greece, Spain, Germany and France. And I 

was interviewed on television a while ago, and they said, well, why 

are you including Germany and France, because they don’t have 

any problem? But Germany and France, according to CRS, have a 

great deal of exposure to these other countries, Portugal, Ireland, 

Italy, Greece and Spain. And as a result, if they go belly up, then 

it is going to have an impact on them as well. 

So I guess the first question I would like to ask is, what do we 

do? I just got back from Greece, and you just said, Mr. Stokes, that 

we ought to have this Transatlantic initiative and that there ought 

to be the ability to create jobs so that there will be more purchasing. I don’t know how that is going to work. 

I had people I was with over there from the government that 

were having their salaries cut by 40 percent, their retirement cut 

by 40 percent, and that is just the first tranche. I mean, according 

to what happened yesterday, there are going to be additional cuts 

in economies in Greece and these other countries, and I don’t know 

how they are going to be able to expand their economy when these 

cuts take place. I mean, how can a person or a country that has 

a 40-percent cut in the incomes of people or in their retirement, 

how can they afford to buy products or even produce products and 

expend them and sell them around the rest of the world? The solution is kind of a Gordian Knot. 

And what we wanted to find out from you today is, first of all, 

what is our exposure? And second, what can we do, without exposing ourselves further, to stimulate a solution to the problem? And 

I will ask any of you to answer that question. It is a tough one. 

Go ahead. 

Mr. LACHMAN. First, let me take your question on exposure. That 

is the right way of looking at it, is if the United States has loaned 

money to French and German banks that are themselves exposed 

to Greece, Portugal and Ireland, we are exposed to Greece, Portugal and Ireland. So our exposure to the German and French 

banking system is of relevance, even though we don’t—even though 

we haven’t made loans to Greece and Portugal and Ireland. By 

lending to the banks in France and Germany, we have got that exposure. 

51

So the crisis in the periphery can lead to a major European 

banking crisis. Officials at the European Central Bank worry about 

if Greece defaults, then we are going to get a whole wave of defaults and the European banking system is going to have its Lehman moments, and that would really impact us. I think on your 

second question, that goes to the heart of the matter in terms of 

Greece. 

We have got to realize that over the past 2 years, Greece’s GDP 

has already fallen by 12 percent. Their unemployment is already 

at 16 percent. The main driver in that process has been a savage 

approach to the budget, massive cuts all around, raising revenues 

to the tune of something like 5 full percentage points of GDP in 

a single year at a time that the country is already in recession, 

that is driving it further into recession. What Greece has now got 

to look forward to under the IMF EU program is more fiscal austerity in even worse circumstances. So it shouldn’t be any great 

surprise if the Greek economy collapses any further in 2012. 

The way out of the solution from Greece’s point of view is problematic from the rest of Europe’s point of view, is that Greece has 

to write down its debt in a major way. A start was made last night 

toward that. But that is not nearly sufficient if Greece is, after all 

of these cuts in this restructuring, Greece’s debt is still going to be 

120 percent of GDP. That is far too high for—after a restructuring. 

But Greece is probably going to have to leave the euro at some 

stage, that it has a very much depreciated exchange rate; that 

would boost both its export sector and its tourist sector, would 

allow Greece to become a more viable economy. I am not saying 

that that is an easy path for Greece to follow, but what I am saying 

is that for Greece not to follow that path is a sure recipe for a deep 

depression, not for 1 year, not for 2 years, but probably for the 

whole decade. 

Mr. BURTON. Go ahead. 

Mr. STOKES. Just a couple of points, Mr. Chairman. 

One, I think to echo Desmond’s point that he made in his testimony, it is not clear that we understand our total exposure. If you 

talk to the Fed or you talk to the IMF, they aren’t sure who holds 

a lot of this insurance that banks have taken out on their debt. 

Now, it may well be they know and they just aren’t about to 

share it because it would move markets. But it does seem to me 

that certainly in closed session, that is something that Congress 

should press them on, because at least people like yourself and the 

committee need to know what our real exposure is, and if they 

don’t know, to find out what needs to be done to find out so that 

we don’t have an AIG experience. 

Mr. BURTON. Pardon me for interrupting, but we just met with 

some of the officials from the Treasury Department, and we were 

not able to at that particular moment get any additional information other than what we already had. And they kind of downplayed 

the situation, saying that over the next several months, when Europe and the EU work out these kinks and come up with a final 

plan, that the solution or the situation could get a whole lot better. 

They didn’t allay a lot of my fears, and that is why I wanted to 

have you gentlemen here today, so we could get the independent 

view from outside our Government. 

52

Mr. STOKES. Two other points. One to your point about, why 

would we assume that there could be demand in places like Greece 

in the immediate future. And I think that is absolutely right; there 

is not going to be. I was trying to lay out a strategy, it seems to 

me, if we are trying to somehow at some point in the future help 

restore growth in Europe. But I think in the immediate term, we 

have to assume that Europe is in for a prolonged period of stagnation, if not recession. 

And that leads me to my third point, which seems to me a valid 

point for this committee to be focusing on, is what are the foreign 

policy implications to the United States of a Europe that is stagnating or actually having a lost decade in terms of our ability to 

work with Europe on a range of issues from Russia to other parts 

of its periphery, to the global public goods issues of defense and foreign aid and things of that nature? How do the Chinese take advantage of this? I think all of those are legitimate concerns that we 

all need to be more worried about. 

Mr. BURTON. Well, what I would really appreciate, and you gentlemen are the experts, and you have the expertise and the background to come up with potential solutions, and those of us in the 

Congress are neophytes when you start talking about world economics, we just obviously don’t know the answers. And when you 

talk to the people in the government, as you said, it is kind of a 

veiled answer with a lot of hyperbole without any real juice. So 

what I would really appreciate, and I really mean this, I would like 

to have you and your think tanks to come up with, as well as the 

Heritage Foundation, to come up with some potential solutions, 

even if it is not of an immediate nature, something that might take 

5, 10 years. Because from what I see in my small amount of wisdom, this thing is not going to go away any time soon, and it is 

going to have an impact on us. 

Now, the other question I wanted to ask is, the President has 

been calling Sarkozy and the German leader every day or two talking to them about this. And Sarkozy said that he is planning to go 

to China to talk to them about these bonds and the potential purchasing of these bonds. You are shaking your head there, so I 

would like to hear your response after I ask the question. And they 

are also talking about Japan purchasing some of these bonds. 

What puzzles me is if financial institutions and individuals are 

taking a 50-percent haircut on Greece and the problem is not 

served, you still have 120 percent of GDP, what is the incentive for 

anybody to buy the bonds, knowing the fiscal problems that exist, 

not only in Greece but these other countries? And if these countries 

do buy the bonds, what is the incentive? Is it going to be a high 

rate of interest, which is going to be a very difficult thing to deal 

with? And is the United States in some way going to be involved 

in purchasing some more of this problem? And that is really concerning me, because as I looked at these figures from CRS, and I 

know I am covering a lot of ground, so please bear with me, because this is not an easy issue, and you see that we have got a 

total by, in CRs’ opinion, of exposure of over $2 trillion, how in the 

world could we involve ourselves by buying more of that debt? And 

can the Fed and the Treasury Department circumvent Congress as 

it has in the past with the first two tranches to buy these bonds? 

53

Is there a way that they can do that and circumvent Congress? I 

know I am covering a lot of ground here. 

Mr. KIRKEGAARD. Well, starting with your first question regarding the Chinese and potential Asian involvement in these type of 

bonds, I will say that I think these type of headlines should basically be discarded in my opinion. 

Mr. BURTON. Well, then where is the money going to come from, because they are talking about taking this up to $1 trillion? 

Mr. KIRKEGAARD. Well, I would say that every talk coming out 

of Europe in the last day or so, since last night, about turning the 

EFSF into a bazooka, whether you do it with leverage or you do 

it with Chinese or other bricks or oil investments or whatever you 

choose to do, is a side show. It is not essentially in my opinion 

going to be credible. Because the money, in my opinion, is not going 

to be there. Because China has a long history of essentially meeting with various European leaders and promising maybe a lot—

there are a lot of headlines in the press—but they basically never 

commit. The only major assets that China buys, euro-denominated 

assets that China buys, are essentially safe German Government 

bonds as well as a relatively small amount of these EFSF bonds. 

The idea that China is going to pour hundreds of billions of dollars 

into this new investment vehicle I regard, frankly, as a fantasy. 

Mr. BURTON. How about Japan? 

Mr. KIRKEGAARD. Again, I think the Japanese might be willing 

to do it. But again, it is not to the tune that is required. If the idea 

here that we want to turn this into a bazooka, something that can 

intimidate and have the respect of markets, that is where the number of the 1.4 trillion euros comes from. It is not—the money isn’t 

going to be there. And I think the biggest illusion, and this is essentially where I come back to the side show that I talked about, 

is that the Europeans are trying to basically create the illusion 

that the European Central Bank is going to hand over to this new 

leveraged EFSF, this new bazooka, if you like, these new entities, 

such that the European Central Bank no longer has to be directly 

involved. But the reality is very different. The reality is that the 

European Central Bank is going to remain very directly involved 

as the ultimate financial backstop for the euro area as a whole, and 

essentially, all these both of these two new options, the leveraged 

bond insurance scheme that they have talked about, as well as this 

new special investment vehicle that is open for interested private 

and public investors, as I said, I don’t think we should expect very 

much of that. But it doesn’t actually matter very much because the 

ECB is going to remain involved. The one thing that we were sure 

about last night was that there will be no handover. 

Mr. BURTON. How can the European Central Bank come up with 

the funds that are necessary? I mean, I am——

Mr. KIRKEGAARD. Well, the European Central Bank is a central 

bank. They can create money. That is the ultimate——

Mr. BURTON. How do they create money? They don’t have the 

ability to print money like we do in our Treasury, do they? 

Mr. KIRKEGAARD. Yes, they do. They call it a security markets 

program in which they can basically——

Mr. BURTON. So they can inflate the money supply? 

Mr. KIRKEGAARD. If they wanted to. 

54

Mr. BURTON. Okay. I am sorry, go ahead. 

Mr. LACHMAN. Well, I would agree with Mr. Kirkegaard that the 

Europeans don’t have a bazooka in place, and that is cause for 

great concern about Italy and Spain over the longer run, whether 

Italy and Spain aren’t going to be tested by the markets in the way 

in which they were in July, which would really be a big headache 

for Europe. But the issue on the ECB is while theoretically the 

ECB could behave like the Federal Reserve and print money and 

go out and buy bonds and engage in quantive easing, the major 

shareholder of the ECB, namely Germany, thinks that that is the 

road toward deflation, debasing the currency, all sorts of problems, 

that we have already had two governors of the ECB of German origin, Axel Weber and Juergen Stark, leave the ECB precisely for 

those kind of reasons. The president of the Bundesbank doesn’t 

think it is a good idea. The President of Germany thinks that the 

ECB is on the wrong track. So the notion that the ECB is going 

to go up there and print the money, I just don’t see that the German are going to allow it. And that was part of the deal yesterday 

with Mrs. Merkel that the Bundestag indicated that they were 

dead set against converting the EFSF into a bank that would then 

be able to borrow from the ECB. So there are serious political constraints on the ECB from the German——

Mr. BURTON. I will go back to you, but they have had huge inflation problems in past history in Germany. 

Mr. LACHMAN. Absolutely. 

Mr. BURTON. And assuming that the European Central Bank 

does inflate the currency supply, it would seem to me that the big 

kahunas over there, i.e. Germany, would say, ‘‘Hey, no.’’

Go ahead. 

Mr. KIRKEGAARD. Maybe I should just clarify. When I say that 

the ECB is going to be the final backstop, I am not saying that—

I am certainly not suggesting that I believe the European Central 

Bank is going to go out and do what we understand as quantitative 

easing here in the United States. 

What I suggest is that the ECB will do what is necessary to calm 

a financial panic, which means that they will effectively put a floor 

under the—or they will cap what, for instance, Italian yields can 

go up to. Currently Italian yields are somewhere between 5.5 and 

6. When they reached 6.2 or 6.3 in early August, the ECB intervened, bringing them back down again. 

Mr. BURTON. How long can they do that? 

Mr. KIRKEGAARD. Well, they can essentially continue to do that 

for as long as they want. They would prefer not to do that. But 

what I am suggesting is that they can do that to the extent they 

won’t be able to drive it back down to say a spread of, or a yield 

of say 300 or 400 basis points, so that the economic pressure will 

remain very heavily on the Italy and especially the Italian Government, but from the perspective of the ECB, this is actually leverage. This is something that the ECB arguably, in my opinion, believes is necessary to force the Italian Government under Silvio 

Berlusconi to do the kind of structural reforms that the ECB has 

been calling for the Italian Government to do for many, many 

years. They basically are effectively painting Mr. Berlusconi into a 

corner. 

55

And the other thing is that when they do these emergency interventions, and I think we should try to keep things in perspective, 

because they have done this already, they have expanded their balance sheet with about 1—or just 1.6 or maybe about 2 percent of 

euro area GDP. The Federal Reserve and the Bank of England 

have expanded their respective balance sheets, you know, 13 or 14 

percent of GDP. So the relative magnitudes of ECB interventions 

are quite small, much, much smaller, and they are also sterilized. 

So the expansion area effect on the monetary supply isn’t there, or 

essentially not there at least. So I don’t think that there is any immediate inflationary risk involved with this. And the really key 

issue here is the ECB is the only institution that has that capacity, 

and they use this power strategically to put pressure on elected 

politicians in Europe to do the kinds of reforms that they believe 

are necessary for the European——

Mr. BURTON. I don’t know, that just sounds like a stretch to me 

that they are going to be able to control all that. But then you guys 

are the experts, and I am not. 

Now, let me ask the big question, how do we protect America, 

and is there anything we can do to protect America? Because we 

have this potential 2 trillion, and it is probably a lot more than 

that—because of what you said awhile ago, I think it was you, 

Desmond, where you said that 45 percent of our money market 

funds are invested in Europe. My gosh, that is trillions and trillions of dollars. So if they go south, how do we protect ourselves? 

I mean, the financial institutions, what is the answer? 

Mr. LACHMAN. Well, I think that the answer is at least to try to 

be transparent about it to recognize what the problem is, to come 

up with solutions that would be of a prudential side. I think the 

same thing would be true of economic planning in general. If we 

really do have the risk that Europe is going to be into recession 

and that it is going to impact our economy, it doesn’t make sense 

for us to be basing our budget projections, for instance, on very 

rosy scenarios that the Congressional Budget Office is coming up 

with. This really would underline how much more serious our longrun budget problems are. It would also inform how we would deal 

with foreign stimulus in the short run. 

All of these kind of issues I think really have to be looked at 

rather carefully that one really has to take into account that Europe accounts for a third of the global economy, that if Europe runs 

into trouble it is almost certain to impact us in a very hard way, 

and we should be basing our policy on that basis. I don’t think that 

we can do much to stop this event in Europe occurring, that that 

is way beyond what we can do or what we should do, but we should 

at least base our policies on the likelihood that we are going to be 

hit by European shock in 2012. 

Mr. BURTON. You think it is going to be in 2012. 

Mr. LACHMAN. I should just mention that I spent a career at the 

International Monetary Fund looking at fixed exchange rate systems. And I think I know when an exchange rate system is approaching its end game; that this is really occurring in Europe. 

If you look at what has occurred over the last 18 months, this 

is accelerating that what we are getting both in the periphery, we 

are getting what we call austerity fatigue that the people—there is 

56

so much more budget adjustment that they can do. Yet in the core 

countries, the richer countries of the north—and I am not just 

thinking about Germany. I am thinking about the Netherlands. I 

am thinking about Finland. I am thinking about Austria. I am 

thinking about Slovakia. They are suffering from bailout fatigue. 

Their taxpayers feel that they have been lied to by the politicians, 

that in May 2010, this was only going to be a one-shot deal. Then 

we get Ireland in December. Then we Portugal in April. Then we 

get another round—this is endless. 

The taxpayers, 70 percent of the German population is against 

bailouts. You know, that this is what is occurring, that as this crisis continues, what you are going to get is you are going to get 

more austerity fatigue in the periphery; you are going to get more 

bailout fatigue in the core. And that doesn’t, in my view, make for 

a happy outcome. 

Mr. STOKES. If I might just amplify what Desmond said in terms 

of our own condition. It seems to me that at the end of the day, 

we will do what we need to do for the U.S. economy, based largely 

on our domestic needs. But as we move forward, I think the prospect of stagnation in Europe has to inform more of our discussion 

than it has in the past. 

And this is going to run counter to some of the things that we 

seem to now hold dear to our heart about trying to cut the budget. 

It may in fact mitigate against cuts in our budget initially, just because we may need the stimulus. 

It does, it seems to me, impact on what we do about promoting 

exports. I think we are going to have to do more to try to promote 

exports because if Europe is stagnant, the dollar may rebound, and 

that would hurt our exports. 

Mr. BURTON. You think the euro is going to devalue? 

Mr. STOKES. I say that, but there is no explanation as to why the 

euro is as strong as it is now. But that may well be because money 

is flowing back into Europe from European banks overseas to try 

to fortify their positions. That won’t last forever. 

And I think we also, to answer your question, how do we unwind 

this? We have to do it very carefully because if we pull our money 

out of Europe in a very defensive and dramatic way, we could really send things spiralling downward. 

Mr. BURTON. I am going to ask you a pretty tough question here. 

You may not have the answer. 

I am on the Government Reform and Oversight Committee as 

well, and we had Secretary Paulson before the committee and 

Geithner. And I believe they misled us. But nevertheless, I think 

I could even prove it. But I don’t think I will go into the details. 

But the thing is, there was a financial institution, and it eludes 

me which one it was, and Paulson allegedly talked to the chairman 

of the board and told them they had to do certain things to purchase another entity and if they didn’t do it, that the CEO was 

going to lose his job. And I think the CEO ultimately did lose his 

job. It was later on. 

I just wonder, do you think it is possible that the administration 

through the various agencies of government, Treasury and so forth, 

could literally force financial institutions to buy these euro bonds 

to try to help void up the situation over there? 

57

Mr. LACHMAN. If they did, I think that that would be terribly 

misguided. 

Mr. BURTON. I am sure of that. 

Mr. LACHMAN. Why expose them to further losses? We have got 

a sufficient exposure to Europe without our buying additional 

bonds. 

Mr. BURTON. So you would not see that under any circumstances? 

Mr. LACHMAN. I would think that if they coerced—it is another 

thing if markets are operating and they decide——

Mr. BURTON. No, I am not talking about markets. 

Mr. LACHMAN. I think that a coercive purchase would be rather 

foolish because part of the problem is that we are dealing with solvency problems and that what has been going on for a long time 

is we are kicking the can forward just by financing. So to engage 

in this kind of operation, one is just continuing the process of kicking the can further down the road, only to have a bigger crisis 

down the end. 

Mr. BURTON. Let me ask you one more time, each one of your 

think tanks, if you could—the chairman of the Ways and Means 

Committee is a friend of mine and Appropriations. I would be 

happy if you could give us some suggestions on things we can do 

to try to protect the American economy and our currency, either 

legislatively or through talking to the various agencies of government. If you could get that to me, I will make sure it gets to the 

proper people. 

Our committee oversees Europe and Eurasia from a number of 

standpoints, but fiscally, we are not the ones to make these suggestions or changes. But I will get it to them. 

Now, let me ask you one last question, why is the stock market 

up 300-plus points today, because everything you have told me 

makes it sound to me like we are still building this castle on a 

house of cards? And I just don’t understand it, because there is no 

real solution. They haven’t even come up with a plan. 

Mr. STOKES. As a friend of mine on Wall Street once said to me, 

Bruce, you have to understand these trades are made by overcaffeinated 24-year-olds, who basically trade on the headlines. They 

don’t even read the details. And not only do they trade on the 

headlines, but they trade on how they think the other 24-year-olds 

are going to trade on the headlines. In other words, it is about how 

other people will react, not even whether they think the headline 

is right. 

So I think we won’t know whether this is sustainable for another 

week or so, when people begin to actually delve into the details. 

Mr. KIRKEGAARD. I would just add to that, it certainly shows the 

European leaders were very good at playing down expectations in 

the market for the actual deliverable, so that when they came up 

with what they came up with last night, which I was, I will say, 

I was personally marginally surprised on the upside; clearly, the 

market was surprised substantially on the upside. So it is clever 

expectation management to a certain extent in my opinion as well. 

But I agree with what Bruce said; we won’t ultimately know 

whether last night’s deal was really worth anything until we see 

the fine detail or until we know what, for instance, Silvio 

58

Berlusconi and others are actually going to do what they said they 

were going to do. 

Mr. BURTON. Well, I just met with the Treasury Department people before this. They didn’t want to testify in an open session. But 

Berlusconi sent a 7-page letter, I guess, explaining how and why 

and what he would do to comply with the EU and their demands. 

And it remains to be seen. 

The other thing that they said, from the Treasury, was that—I 

asked well, who is going to buy these bonds? And they both mentioned both China and Japan. And you seem to have a different 

opinion about that. And if that is not the case, I still wonder where 

in the world they are going to get the money. And you keep going 

back to the European bank—Central Bank. Anyhow, go ahead. 

Mr. LACHMAN. I think that you could get outside money by the 

way in which they are doing it, because what they are doing is they 

are taking $250 billion euros, and they are using that to provide 

insurance that they will take the first loss. So what they are doing 

is they are offering to take the first 20 percent of any loss on bonds 

purchased. 

So, for instance, if you buy an Italian bond, you know that if the 

Italian bond goes from 100 to 80, you don’t lose; you pick up the 

5-percent interest rate. So that is a reasonable deal in the case of 

Italy, where it is unlikely that Italy is going to devalue by more 

than 20 percent. So you could get people to buy on that basis. 

What you are doing, though, is you are putting the German and 

the French taxpayer at huge risk, that this is like a structured 

product where the German and the French have got the equity 

tranche of a CEO, which isn’t a good idea for them to have. But 

if you are the Chinese, you can feel comfortable having the mezzanine or the AAA rated part of that structure. 

Mr. STOKES. And I think, to amplify Desmond’s point, I mean, 

what Desmond was saying, in essence, the money is going to come 

from the Germans. And whether the Germans like that or not, and 

there is no political support for that, the Germans can afford to do 

this. They have to make a calculation about whether it is in their 

self-interest to do it or not. And their leadership has certainly not 

convinced their public that it is in their self-interest. And I think 

that we have to continue to pressure them to say look, there is 

money in Europe to deal with a lot of this problem and you haven’t 

mobilized all of your own resources. And I think we need to continue to press them on that. 

Mr. BURTON. I want to thank you very, very much and your testimony has been very, very enlightening. And I will make sure—and 

I would like to have your opening statements and all of the details 

of it, and I am going to make sure that our colleagues on the financial institutions committees get a copy of that and make sure they 

read it. 

With that, thank you very much. We will stand adjourned. 

[Whereupon, at 3:15 p.m., the subcommittee was adjourned.] 

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