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THE EUROZONE CRISIS AND IMPLICATIONS 

FOR THE UNITED STATES 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

INTERNATIONAL MONETARY 

POLICY AND TRADE 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

OCTOBER 25, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–76 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON INTERNATIONAL MONETARY POLICY AND TRADE

GARY G. MILLER, California, Chairman 

ROBERT J. DOLD, Illinois, Vice Chairman 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

BILL HUIZENGA, Michigan 

CAROLYN MCCARTHY, New York, Ranking 

Member 

GWEN MOORE, Wisconsin 

ANDRE ́ CARSON, Indiana 

DAVID SCOTT, Georgia 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

October 25, 2011 ............................................................................................... 1 

Appendix: 

October 25, 2011 ............................................................................................... 35 

WITNESSES 

TUESDAY, OCTOBER 25, 2011 

Collyns, Hon. Charles, Assistant Secretary for International Finance, U.S. 

Department of the Treasury ................................................................................ 6 

Elliott, Douglas J., Fellow, Economic Studies, Brookings Institution ................. 23 

Lachman, Desmond, Resident Fellow, American Enterprise Institute ............... 21 

Rashish, Peter, Vice President, Europe and Eurasia, U.S. Chamber of Commerce ..................................................................................................................... 19 

APPENDIX 

Prepared statements: 

Collyns, Hon. Charles ....................................................................................... 36 

Elliott, Douglas J. ............................................................................................. 40 

Lachman, Desmond .......................................................................................... 50 

Rashish, Peter ................................................................................................... 56 

(1) 

THE EUROZONE CRISIS AND IMPLICATIONS 

FOR THE UNITED STATES 

Tuesday, October 25, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON INTERNATIONAL

MONETARY POLICY AND TRADE, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:04 a.m., in room 

2128, Rayburn House Office Building, Hon. Gary Miller [chairman 

of the subcommittee] presiding. 

Members present: Representatives Miller of California, Dold, 

Manzullo, McCotter, Huizenga; McCarthy of New York and Carson. 

Also present: Representatives Lynch and Green. 

Chairman MILLER OF CALIFORNIA. The hearing will come to 

order. 

The hearing today is entitled, ‘‘The Eurozone Crisis and Implications for the United States.’’ I ask unanimous consent that Mr. 

Lynch of Massachusetts and Mr. Green of Texas, both of whom are 

members of the Financial Services Committee, be permitted to sit 

in with members of the subcommittee today for the purposes of delivering a statement, hearing testimony, and questioning the witnesses. 

We have limited the opening statements to 10 minutes for each 

side, based on agreement with the ranking member. 

I recognize myself for as much time as I might consume. 

Today’s hearing is focused on the Eurozone’s debt crisis and its 

potential impact on the U.S. economy. Despite the financial assistance provided by the European Union (EU), and the International 

Monetary Fund (IMF), Greece, Ireland, and Portugal plunged into 

deep recessions during the past year. The economies of Spain and 

Italy are fragile, while the German and French economies are also 

starting to show signs of strain. 

In the past year, there has been a series of credit rating downgrades for many EU members, often following the rounds of stress 

tests on systemically important European banks. These rating 

agencies have warned about the risk associated with the global 

interconnectedness of European banks and the potential risk of investing heavily in government bonds. The EU must take bold and 

aggressive action to ensure this crisis is addressed and contagion 

in the international capital markets is prevented. 

We meet as Eurozone leaders prepare to convene in Brussels tomorrow to hopefully arrive at some agreement about how to adVerDate Nov 24 2008 18:12 Apr 20, 2012 Jkt 072617 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\72617.TXT TERRIE
2 

dress the worsening debt crisis. There is no question that this is 

a difficult and fragile situation. 

Over the weekend, work was done to come to an agreement. We 

expected finalization of a plan to resolve the crisis on Sunday, but 

the target had to be changed to Wednesday. It is our hope that 

things will be finalized tomorrow so that Europe will be set on a 

path to recovery as quickly as possible. 

Our hearing today will consider the impact of the crisis in Europe on the United States. While the solution to the Eurozone crisis 

must be a European one, the United States is not insulated from 

the problems in Europe. The Eurozone debt crisis has significant 

implications for the U.S. economy. The U.S. economy is highly dependent on trade with the EU and will suffer if our largest trading 

partner cannot fix its economy. 

Our economic relationship with Europe is significant. It exceeds 

$4 trillion. More than 20 percent of U.S. goods are exported to Europe, totaling more than $400 billion. Thirty-five percent of U.S. 

service exports are to Europe. Seventy percent of foreign direct investment (FDI) in the United States is from Europe. This is a result of jobs for U.S. workers, and it is a very important one. 

If the crisis leads to even slower growth in the Eurozone and a 

general weakening of the euro against the dollar over the long 

term, this could have a severe impact on trade by depressing demand for U.S. exports. 

In addition, the market is interconnected, and lack of market 

confidence can become contagion. We have already seen the impact 

of the crisis on U.S. stock prices. We are also concerned about the 

exposure of our U.S. financial institutions into the crisis. 

There is no question there will be a U.S. consequence to further 

decline in the Eurozone. It is in our interest that there be a swift 

and effective resolution to the crisis in Europe. Stability in the 

Eurozone is very important to U.S. economic interests, and we 

should play a constructive role where appropriate. 

As we look at this issue, we need to be concerned about the U.S. 

exposure to foreign sovereign debt in Europe. However, we must 

ensure that the U.S. Government is not using taxpayer money to 

bail out foreign governments or bank institutions, as taxpayers 

should not be on the hook for failure of foreign governance. 

Today’s hearing is focused on the European policy options under 

consideration for containing the crisis, the impact of problems in 

Europe on the U.S. economy, particularly related to future trade 

flows and job growth in the United States. Our first witness from 

the Treasury Department will be able to shed light on the role the 

United States has played in the European policy deliberations and 

steps European officials are contemplating to stabilize markets and 

reduce uncertainties in Europe. 

Given the Administration’s involvement in the talk in Brussels, 

our subcommittee’s oversight role is important. We want to know 

who the United States is meeting with and what is coming out of 

these meetings. We want to know what kind of commitments the 

Administration is making during these meetings. In addition, we 

are concerned about the impact of any commitment on U.S. taxpayers. Overall, I hope this hearing sheds some light for our memVerDate Nov 24 2008 18:12 Apr 20, 2012 Jkt 072617 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\72617.TXT TERRIE
3 

bers on what the appropriate U.S. role should be during the crisis 

and how to protect U.S. taxpayers from exposure. 

Our second panel of witnesses will help members understand 

how instability in Europe can affect the U.S. economy and transatlantic trade because of the dependence of the U.S. economy on 

the EU economy. We want to understand the implications of the 

U.S. economy, particularly with respect to the exposure of U.S. 

banks and nonbank entities such as hedge funds. We want to understand the impact of our U.S. companies, particularly regarding 

their exports. We are concerned about the impact on jobs in this 

country and the risks this crisis poses to our own economic prosperity. 

Given the significant economic and financial relationship between the United States and Europe, the United States has a substantial stake in the resolution of this crisis. How Europe manages 

this issue it currently confronts will directly impact the United 

States economy. This crisis poses a significant threat to global economic stability overall. 

Again, I want to be clear that this is a European problem that 

must be solved by Europe. That said, there is no question that our 

economy will be impacted by the success or failure of the measure 

to resolve the crisis, which is why the committee will follow 

progress on Europe closely. We must work to insulate U.S. taxpayers by ensuring that U.S. funds are not on the hook for any resolution measures, and we must work to insulate our own economy, 

given our trade and financial markets’ interconnectedness with Europe. 

I want to thank the witnesses for being here today and for being 

able to present a good and honest, forthright testimony of what is 

going on; and I yield to the ranking member for 3 minutes. 

Mrs. MCCARTHY OF NEW YORK. Thank you, Chairman Miller, for 

holding this important hearing to examine the European economical crisis and what the potential impact could be for the United 

States. 

The global financial crisis that we are continuing to recover from 

set the backdrop for what have become unsustainable debt levels 

and unsustainable financial positioning for a number of Eurozone 

countries. 

What has become the Eurozone crisis first started with the solvency debt crisis in Greece in early 2010. Fear and concern over 

the potential fall of Greece and how that could spread to other 

countries set in across European and U.S. markets’ participations. 

European leaders responded to the situation in Greece, followed by 

Ireland and Portugal, through a mix of financial assistance through 

a newly created crisis fund and several spending reductions. 

The policy responses implemented thus far have been reviewed 

by many in the international community as far too short. Longterm solutions are necessary to address slow economical growth, 

lack of investment confidence, and undercapitalized banking systems which plague many of the Eurozone countries. If Europe cannot contain the crisis, given our strong economical relationship 

with the European Union it could pose a significant risk to our economical recovery efforts. 

4 

The President and the Administration officials have been consulting with their European counterparts, encouraging bold and aggressive action to stifle potential spread to other countries and the 

international markets. As we await the details of the final agreement by the European leaders, media sources report solutions may 

include a leveraged European Financial Stability Facility as well as 

new financing instruments for the International Monetary Fund. 

I look forward to hearing our witnesses today as we examine the 

impact European’s economic problems may have on our own efforts 

towards economic recovery. Given the panel’s expertise, I am interested in hearing their thoughts on what the European crisis strategy should be and ultimately how they pursue economical recovery. 

With that, I yield back my time. 

Chairman MILLER OF CALIFORNIA. Thank you. 

Vice Chairman Dold is recognized for 4 minutes for an opening 

statement. 

Mr. DOLD. Thank you, Mr. Chairman, and I certainly want to 

thank you for holding this important hearing. 

I also want to thank you, Mr. Collyns, and the rest of our panelists for your time and testimony here today. 

Since the end of World War II, the United States has maintained 

a very close and mutually beneficial relationship with Europe. For 

many decades, our political, military, cultural, and economic connections have served vital American economic and national security 

interests. In the process, the European Union, as a whole, has become our largest trading partner, with over $4 trillion in annual 

commercial trade, while the European Union alone accounts for 

over 20 percent of all American exports. 

Our financial and capital markets have become highly interconnected with the European Union’s financial and capital markets. The United States has become the largest source of foreign 

direct investment in Europe, and Europe has become the largest 

source of foreign direct investment in the United States. As a result, European economic conditions necessarily have a meaningful 

impact on American jobs, exports, and economic prosperity. So as 

Europe goes through these difficult economic problems, the United 

States has a vital national interest in how those European economic problems are resolved. 

For example, if Europe’s solutions don’t inspire market confidence or if they impose too many losses on creditors, then American investors and financial institutions will be negatively impacted, which will negatively affect American jobs and economic 

growth. If Europe’s solutions don’t promote European economic 

growth, then we could see significantly diminished trade with Europe, which again could negatively impact American jobs and economic growth. 

Meanwhile, according to the Bank for International Settlements, American financial institutions have over $600 billion of direct and 

indirect exposure to the most challenged Eurozone countries. So for 

America’s benefit and for Europe’s benefit, we need to see Europe 

resolve its economic issues as quickly and as effectively as possible 

without exposing American taxpayers to undue risk. 

I look forward to hearing from Mr. Collyns and our other witnesses on how Europe’s economic problems could impact the AmerVerDate Nov 24 2008 18:12 Apr 20, 2012 Jkt 072617 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\72617.TXT TERRIE
5 

ican economy, especially with respect to trade, investment, and 

jobs. I also look forward to discussing the European policy options 

that are under consideration and America’s role in those policy deliberations; and, finally, I think that many people are interested in 

hearing about the International Monetary Fund’s participation in 

resolving the Eurozone’s economic issues and how the IMF can provide meaningful support without exposing the American taxpayers 

to undue risk. 

Again, I want to thank you, Mr. Chairman, for holding the hearing. I want to thank our witnesses for their time and testimony, 

and I yield back. 

Chairman MILLER OF CALIFORNIA. Thank you. 

Mr. Lynch, you are recognized for 2 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman, Ranking Member McCarthy, and members of the subcommittee for holding this critically 

important and timely hearing. I want to thank you also for your 

courtesy in allowing me to attend and participate. I want to thank 

the witnesses for their willingness to come forward and help this 

committee with its work. 

I have been increasingly concerned for some time now about the 

growing sovereign debt crisis in Europe and its effect on the American financial system and the global economy in general. That is 

why I wrote to Chairman Bachus back in July requesting a hearing 

on this very issue, on the effect of the Eurozone crisis on U.S. 

banks, and that is why I asked to join this subcommittee for today’s hearing. 

I commend the chairman and the ranking member for starting 

what I hope will be an ongoing conversation in this Congress about 

the economy’s preparedness to cope with the growing sovereign 

debt crisis in Europe. As the chairman noted earlier in his remarks, the U.S. and Eurozone economies are more globally interconnected and intertwined than ever before. 

The relationship between the United States and the European 

Union is particularly interdependent. The U.S. and EU combined 

make up about 25 percent of global trade and 40 percent of GDP 

and hold assets between 60 and 70 percent—excuse me, and hold 

a share of 60 to 70 percent of the world’s banking assets between 

them. 

As we have seen during our own financial crisis, closely intertwined financial markets come with both benefits and risks, one of 

those risks being the rapid and unpredictable spread of financial 

contagion in times of financial stress. 

While it is clear that the U.S. financial system’s direct exposure 

to troubled European economies appears manageable, our indirect 

exposure through derivatives, contracts, and other credit commitments is considerably less clear. The Bank for International Settlements estimates that the U.S. banking institutions’ indirect exposure to Greece, Ireland, Portugal, Spain, and Italy alone could total 

as much as $550 billion, while the indirect exposure of other financial institutions, such as money markets, insurance, pension funds 

is completely unknown. 

In short, we know the problem is bad. We just don’t know how 

bad it is. I hope we can get a little clarity today about how bad the 

problem is and what we are doing to address it before the EuroVerDate Nov 24 2008 18:12 Apr 20, 2012 Jkt 072617 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\72617.TXT TERRIE
6 

pean sovereign debt crisis becomes another American economic crisis. I look forward to having a constructive conversation with the 

witnesses here today about steps Congress might take to address 

this crisis. 

I thank the chairman and the ranking member, and I yield back. 

Chairman MILLER OF CALIFORNIA. I would like to welcome our 

first witness today. The Honorable Charles Collyns serves as the 

Department of Treasury’s Assistant Secretary for International Finance. In this position, Secretary Collyns is responsible for leading 

Treasury’s work on international monetary policy, international financial institutions, coordinating with the G7, G8, and G20 in regional bilateral economic issues. 

Previously, Secretary Collyns served as the deputy director of the 

research department at the IMF where he led the team responsible 

for preparing the World Economic Outlook report. Secretary 

Collyns received a doctorate in economics from Oxford University 

after obtaining first class honors as an undergraduate at Cambridge University. 

Normally, we have a summary of 5 minutes, but I would like you 

to take as much time as you deem appropriate to make your presentation, and you are now recognized. 

STATEMENT OF THE HONORABLE CHARLES COLLYNS, ASSISTANT SECRETARY FOR INTERNATIONAL FINANCE, U.S. DEPARTMENT OF THE TREASURY 

Mr. COLLYNS. Thank you very much, Chairman Miller, Ranking 

Member McCarthy, and distinguished members of the subcommittee. Thank you for this opportunity to discuss recent developments. 

Chairman MILLER OF CALIFORNIA. You might want to pull that 

microphone closer. It is not picking up very well. 

Mr. COLLYNS. Europe’s financial crisis poses the most serious 

risk today to the global recovery. As members of this committee 

have noted, the United States has deep trade, investment, and financial links with Europe; and stability in Europe is crucial for our 

exports and for American jobs. 

It is clear that the Europeans have the resources and capacity 

to deal with the challenges they face. European leaders have made 

progress over the weekend towards designing a comprehensive 

framework for tackling this crisis; and leaders will meet again tomorrow, aiming to reach agreement on this framework well before 

the G20 summit in Cannes next month. This agreement will need 

to be implemented quickly and firmly. 

Stepping back for a moment, the macroeconomic and financial 

challenges faced by several European countries since the 2008 financial crisis have exposed serious structural tensions within the 

European monetary union. Recent experience has revealed the 

need for a stronger mechanism to ensure financial fiscal discipline, 

for more flexible markets that allow countries to adjust competitiveness and achieve their growth potential, and for an adequate 

crisis response toolkit to respond to economic and financial stress. 

In response to these challenges, Europe has taken wide-ranging 

action, both to strengthen national policies and to reinforce the 

overall framework for the euro area. At the country level, over the 

7 

last 18 months, much of the region has embarked on accelerated 

fiscal consolidation, growth-oriented structural reform, and banking 

sector repair. This is an extremely challenging agenda, and completion will require determined efforts over a sustained period of time. 

In parallel, European leaders have pledged to do whatever it 

takes to ensure the future of the euro. They have provided financing, together with the IMF, to Greece, Ireland, and Portugal as 

these countries undertake very difficult reforms. 

Moreover, leaders have recently expanded the effective financial 

capacity of the main European crisis facility, the European Financial Stability Framework, the EFSF, and have broadened the ways 

in which these resources can be deployed. 

Meanwhile, the European central bank has played a crucial role 

providing liquidity to banks and buying sovereign bonds in the secondary market; and to prevent future crises, the Europeans have 

agreed to governance reforms that include a broader array of surveillance tools and enforcement devices to improve fiscal discipline. 

They have also agreed on a permanent crisis resolution mechanism. 

In recent days, the Europeans have been working hard to design 

credible and effective approaches to mobilize the increased resources and greater flexibility of the EFSF with the aim of reaching agreement at the leader summit tomorrow and delivering a 

comprehensive plan to address their crisis by the Cannes G20 summit in early November. 

This plan will need to have four parts: 

First, Europe needs a powerful firewall to guard against contagion concerns to ensure that governments outside the periphery 

can borrow at sustainable interest rates while they bring down 

debts and strengthen growth. 

Second, European authorities will need to ensure that their 

banks have sufficient liquidity and stronger capital to maintain the 

full confidence of depositors and creditors and, if needed, access to 

a capital backstop. 

Third, Europe will need to craft a sustainable path forward in 

Greece as it implements its difficult fiscal and structural reforms. 

And, finally, European leaders must tackle difficult governance 

challenges to address the root causes of the crisis and ensure that 

every member state pursues economic and financial policies that 

support growth. 

Let me emphasize that the successful resolution of the current 

European crisis matters deeply to us here in the United States because our country has no bigger, no more important economic relationship than we have with Europe. While the direct exposure of 

the U.S. financial system to the most vulnerable countries in Europe is limited, we have substantial trade and investment ties with 

Europe, and European stability matters greatly for American exporters and for American jobs. 

Already, the crisis has slowed growth significantly in Europe and 

around the world as increased uncertainty has reduced risk appetite, undermined business and consumer confidence, and reduced 

household wealth. These developments clearly pose very serious 

downside risks to the outlook for the U.S. economy and job creation. It is thus vitally important to the United States that Europe 

8 

is able to address its issues effectively and in a timely fashion. For 

this reason, the Administration has closely engaged with European 

leaders to encourage them to move forward in an effective way. At 

the same time, our supervisors have for some time been working 

closely with U.S. financial institutions to identify risks and to improve their ability to withstand a variety of possible financial contagion stress events emanating from Europe. 

In managing global risks, one key challenge is to ensure sufficient financing in crisis situations. The European countries themselves are appropriately contributing the bulk of financing for countries in the Eurozone periphery. 

In addition, the IMF has played an important role as a source 

of financing and as a source of expertise in the effort to contain the 

crisis. With its long experience and independent judgment, the IMF 

sets strong economic conditions for its loans, which help return 

countries to sustainability. By promoting greater stability and safeguarding against a more abrupt deterioration of economic conditions, the IMF supports the global economy and with that, U.S. 

growth, jobs, and exports. In addition to its involvement in Europe, 

the IMF has continued to offer financial support more broadly to 

countries all around the world at a range of income levels. 

In closing, we appreciate the leadership and support of this committee on these key challenges, and we look forward to working 

with Congress as we engage with our international partners. 

Thank you. 

[The prepared statement of Assistant Secretary Collyns can be 

found on page 36 of the appendix.] 

Chairman MILLER OF CALIFORNIA. Thank you very much. 

Dealing with Greece specifically right now is a very small percentage of the EU, which everybody recognizes; and it seems apparent that there is some form of a write-off going to take place as far 

as some of the debt that they currently owe, which has to take 

place, the resolution of that, before you can move on to Italy and 

Spain. You stated in your testimony that you believe the EU leaders are finally ready to come to an agreement, but what if it doesn’t 

occur in the next few days? What downside is there to that not taking place? 

Mr. COLLYNS. There is clearly deep commitment from the European leaders to reaching a strong agreement over the next few 

days, because there is a deep understanding that failure could have 

very damaging consequences within the euro area. Although 

Greece itself is a relatively small share of the European economy, 

there has already been a considerable contagion affecting other 

countries in the euro area from events in Greece, and European 

leaders have realized the serious dangers if they do not act sufficiently quickly. The longer action is delayed, the more the dangers 

increase. 

That is why we do think that they are going to take actions in 

a comprehensive way over the next few days to put in place a 

framework for protecting the rest of the euro area from potential 

contagion from events in Greece, strengthening the capacity of 

Eurozone sovereigns to continue to access markets at reasonable 

rates, and making sure the European banking system is adequately 

9 

capitalized and adequately funded, while at the same time continuing— 

Chairman MILLER OF CALIFORNIA. But on that capitalization, I 

think the concern is that our downturn, our banks held real estate, 

theirs hold sovereign debt. The ones now who have invested in 

Greece know they are going to take some form of a loss. 

Mr. COLLYNS. Right. 

Chairman MILLER OF CALIFORNIA. Are they moving rapidly to 

make sure there is adequate capitalization for their banks so they 

don’t tend to pull their head in like a turtle and say we are not 

going to get further involved based on the debt we currently hold? 

Mr. COLLYNS. European banks have already taken significant action to strengthen their balance sheets, both writing down the 

value of Greek debt and also raising additional capital earlier this 

year. Despite this, we do think that they do need to take substantial additional action to strengthen their balance sheets, in particular to further boost their capital. 

The concern that markets have is not only just with exposure to 

Greece but also exposure to other sovereigns that have come under 

pressure, and for this reason we understand that agreement is likely as part of this comprehensive package on an approach to ensure 

adequate bank capitalization and to provide a path to raise European bank capital to at least 9 percent core Tier 1 capital relative 

to risk-weighted assets, which would be a strong capital base. 

Chairman MILLER OF CALIFORNIA. What role has the Administration played in the negotiations so far and what, if any, commitments have they made on the part of the American taxpayers to 

this issue? 

Mr. COLLYNS. The Administration has been closely engaged with 

the Europeans at all levels. 

Mr. LYNCH. Mr. Chairman, could I ask that the witness move his 

microphone a little closer to his mouth? I am really having a hard 

time hearing him. 

Chairman MILLER OF CALIFORNIA. Just be proud of who you are 

and belt it out. 

Mr. LYNCH. There you go. 

Mr. COLLYNS. The Administration has been closely engaged with 

European officials at all levels. The President himself has regular 

contact with his counterparts in Europe to raise the deep concerns 

that we have in the United States. In the Treasury, we have continuing conversations. Secretary Geithner has visited Europe many 

times. In international meetings like the recent G20 meeting, the 

situation in Europe dominates the conversation. I—along with 

Under Secretary Brainard and our whole European team—am in 

constant conversation by phone and visiting Europe. 

We feel that we can play a constructive role by sharing our own 

experience in the United States that we gained in dealing with our 

own financial crisis. We think there are some useful lessons that 

Europeans can learn. 

I think the Europeans themselves are very interested in our perspectives and our views, and they welcome our close participation, 

but our participation does not involve any commitments of U.S. 

taxpayer money. We believe that the IMF can play a very imporVerDate Nov 24 2008 18:12 Apr 20, 2012 Jkt 072617 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\72617.TXT TERRIE
10 

tant role in supplementing European financial resources, and 

through the IMF, the United States can be very supportive. 

The United States has a substantial financial commitment to the 

IMF, but involvement in the IMF does not put a material risk on 

U.S. taxpayers. The U.S. taxpayers have never lost any money 

from our financial commitments to the IMF. The IMF has preferred 

creditor status, which means that the IMF is always paid first before any other creditor; and the IMF, in fact, has a very strong 

track record of being repaid by countries that do run into continuing difficulties. 

We also believe that the very strong commitment of the European leaders and the very strong commitment to European finances demonstrates the very strong likelihood that the Europeans 

will achieve success and that, ultimately, countries in Europe will 

be able to meet their financial commitments. So we are not concerned about exposure of U.S. taxpayers. 

Chairman MILLER OF CALIFORNIA. Germany has been moving at 

a very cautious pace, which I understand. I hope that pace picks 

up rapidly in the next day or two. 

The ranking member is recognized for 5 minutes. 

Mrs. MCCARTHY OF NEW YORK. Thank you. 

Thank you for your testimony. I want to go on to two questions. 

The European Financial Stability Fund that is going to be replaced in the year 2013 by a permanent lending facility, the European Stability Mechanism, ESM. Do you anticipate the ESM 

framework will complement the Dodd-Frank Act reforms that we 

have here? And going back to some of the issues that you had 

talked about with the IMF, if the IMF creates additional crisis assistance mechanisms, how would that impact its lending capabilities for the future? 

Mr. COLLYNS. The ESM will basically be a device for providing 

financing to sovereigns that run into difficulties. It will have a 

somewhat different structure than the current EFSF, but essentially it will undertake the same activities that the EFSF does. So 

it is not directly related to the implementation of the financial regulatory reforms in Europe similar to the Dodd-Frank reforms in 

the United States. 

Nevertheless, the Europeans are certainly taking actions to implement regulatory reforms that largely parallel the reforms that 

we are implementing here in the United States; and certainly we 

in the U.S. Treasury are closely engaged with European counterparts to make sure that, as we move ahead in the financial regulatory area, we are maintaining a level playing field and ensuring 

that we are achieving high-standard regulatory regimes in Europe 

as well as in the United States. 

In terms of the IMF’s resources, the IMF has already committed 

substantial resources to the Eurozone periphery countries, to 

Greece, Ireland, and Portugal. Nevertheless, those commitments 

are still a relatively small share of the IMF’s total available financial resources. There remains a very substantial arsenal of financial resources to the IMF which it could use if needed to extend financing to European countries or countries around the world. 

We think the IMF does play a very constructive role in Europe 

but it is equally important that that role continues to be in the conVerDate Nov 24 2008 18:12 Apr 20, 2012 Jkt 072617 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\72617.TXT TERRIE
11 

text of a strong and comprehensive commitment by the Europeans 

to dealing with the problems. The Europeans themselves have the 

financial resources to deal with this crisis. The IMF has a supplementary role. It cannot substitute for European financial resources. 

Mrs. MCCARTHY OF NEW YORK. Good, I have another minute. 

Following up on that, when the emerging markets are able to 

adequately fill potential gaps created by reduced European investments in the U.S. economy, the emerging markets, will they be 

able to support it? If the EU is having a tough time, can they fill 

that spot? 

Mr. COLLYNS. Certainly, the emerging markets are playing an increasingly important role in generating momentum for the global 

economy. I think around 80 percent of global growth over the past 

year or so has been, in fact, contributed from emerging market 

economies like China, India, and Brazil, as opposed to advanced 

economies like the United States, Europe, and Japan. 

We think the emerging markets could play an even stronger role 

going forward by shifting the balance of their economies, relying 

less on exports to other countries, and boosting the strength of domestic demand in their own economies; and we, at the same time 

as we have been working with the Europeans to resolve the European crisis, we have also been working hard at the G20 to encourage the emerging economies to take steps to ensure that their own 

growth momentum is sustained by boosting their own domestic demand momentum and by adopting more flexible exchange rate regimes, which we think are fully consistent with and would encourage the shift in the pattern of global demand growth. 

Mrs. MCCARTHY OF NEW YORK. Thank you. My time has expired. 

Chairman MILLER OF CALIFORNIA. Vice Chairman Dold is recognized for 5 minutes. 

Mr. DOLD. Thank you, Mr. Chairman. 

Secretary Collyns, thank you again for being here. 

I would like to discuss, if I could, just your thoughts on the International Monetary Fund’s role in resolving the European crisis. 

Could you tell me and tell us, the panel, how the IMF is assisting 

the European countries and how the IMF’s participation benefits 

the United States and, if you could, the degree to which the IMF 

participation exposes the American taxpayers to potential losses? 

Mr. COLLYNS. The IMF is playing a crucial role in Europe 

through a variety of channels. The most obvious one, of course, is 

the financial channel. The IMF has contributed around a third of 

the financial resources that have been provided. 

Mr. DOLD. Can you give me just a rough estimate of what a third 

is? 

Mr. COLLYNS. A third is around maybe $150 billion. It is around 

a third of the total commitments by the European economies. 

The IMF is also playing a crucial role in the design of the adjustment programs, and it plays a crucial role as an independent partner with the European countries to make sure that the adjustment 

programs are strong and well-designed and able to address the fundamental issues. So we are, in the Treasury, strong proponents of 

the IMF playing this role. 

As I mentioned before, the IMF can play and has played a critical part in sustaining global financial stability through this crisis 

12 

management role without exposing U.S. taxpayers to the risk of 

material losses. The IMF has a very strong record of getting repaid 

by countries, given its preferred creditor status. We believe that 

the IMF can continue to play this very strong role, but, as I have 

said, it needs to be in conjunction with the European commitment 

to the right policies and the European commitment of adequate financing. 

Mr. DOLD. Secretary Collyns, from the U.S. economic perspective, 

what do you think are the most sensitive issues in resolving the 

Eurozone’s economic problems, from our perspective? 

Mr. COLLYNS. From our perspective, the key issue is really containing the contagion effects. As investors are concerned about possible implications of what is happening in the relatively small 

countries in the periphery, what are the implications for larger 

countries in Europe that have relatively slow rates of growth and 

relatively high rates of public debt? These are countries that are 

much more significant in terms of their trading relations and financial relations with the United States. If there were to be a further 

deterioration in investor confidence in these countries, that would 

clearly have a very dangerous impact on U.S. financial markets 

and global financial markets. So the key instrument that is needed 

is to create imposing firewalls that break the connection between 

difficult—counters the difficult situations like Greece with the 

stronger countries that are closer to the Eurozone core. 

We know the Europeans are working hard. We have heard about 

various devices that they are looking for to leverage the resources 

that they have set aside in the FSF to build this firewall. So a very 

important task in the days ahead is to provide a mechanism that 

will work effectively, that will be a mechanism that the markets 

can work with to continue to provide adequate fiscal resources, adequate financing to meet countries’ fiscal needs. 

Mr. DOLD. Secretary Collyns, there are those who believe the 

reason why the focus has not been on the United States is because 

of the problems in Europe right now and that we are going to be 

next. Do you believe that the United States has a similar spending 

problem as Europe does? And how would you compare Europe’s 

problems to our problems? What are the similarities and what are 

the main differences? 

Mr. COLLYNS. The United States clearly has a serious fiscal issue 

over the medium term. 

Mr. DOLD. ‘‘Medium term’’ being defined as what? 

Mr. COLLYNS. The Administration has committed to a very substantial reduction in the fiscal deficit over the next few years. 

Under the President’s plan, the fiscal deficit will be reduced very 

sharply over the next 3 years, and it will be put on a path that 

will lower the public-debt-to-GDP ratio consistent with our commitments to the G20 at the Toronto Summit. 

At the same time, however, the United States does not face the 

short-term fiscal pressures that are faced by some countries in Europe. We believe that there is an important role for providing additional fiscal support to the U.S. economy over the next year or so 

to maintain the momentum of the present recovery. 

The present recovery is not as strong as we would like. The 

progress on raising employment and reducing the unemployment 

13 

rate has not been as strong as we would like, and we think it 

would make sense to provide some additional fiscal support to slow 

the pace of the fiscal consolidation. 

In Europe, there are other countries outside the periphery that 

also have maintained the confidence of markets and where the imperative of fiscal consolidation is not as urgent. A country like Germany, for example, although its debt-to-GDP ratio is quite high, it 

does have room to—within the constraints of its own debt rate, it 

has room to let automatic stabilizers work to support the German 

economy, which will play an important part in sustaining the momentum of growth in Europe. 

So fiscal issues are certainly important in the United States over 

the medium term, but if we are able to put in place a convincing 

and credible approach to dealing with these issues, that would also 

provide us with room to taking steps to support our economy in the 

short term and supporting American jobs. 

Mr. DOLD. Thank you, Mr. Chairman. My time has expired. 

Chairman MILLER OF CALIFORNIA. Mr. Carson is recognized for 

5 minutes. 

Mr. CARSON. Thank you, Mr. Chairman. 

Mr. Collyns, in the wake of the 2009 financial crisis, the United 

States passed comprehensive financial regulatory reform designed 

to promote transparency, monitor systemic risk in the financial system, and ensure that U.S. financial institutions can withstand 

shocks to the system. How have these reforms improved the ability 

of U.S. regulatory authorities and financial institutions to mitigate 

the impact on the U.S. financial market of economic turmoil in Europe? 

Mr. COLLYNS. I think the financial reforms have played an important part in strengthening the resilience of the U.S. financial 

system and helping to contain potential risk coming from Europe 

in a number of different ways. One is that Europe—the United 

States’ banks are much more strongly capitalized today than they 

were before the 2008 financial crisis. 

Chairman MILLER OF CALIFORNIA. You need to move the microphone a little closer. We are having trouble hearing up here. 

Mr. COLLYNS. The largest U.S. banks now have average Tier 1 

core capital to risk-weighted asset ratio of over 10 percent, substantially higher than it was back in 2008. There has also been a major 

reduction in reliance on market funding, on wholesale funding to 

fund U.S. bank lending, and a substantial improvement in the liquidity situation of American banks. All of this is consistent with 

the stronger capital, liquidity, and funding requirements put in 

place by Dodd-Frank. 

In addition to this, Dodd-Frank has put in place important mechanisms to make sure that U.S. regulators work closely with U.S. 

banks to anticipate potential risk events. In particular, the Financial Stability Oversight Committee, the FSOC, has met frequently 

to assess potential risks, and supervisors have benefited from the 

insights of this work to work closely with financial institutions here 

in the United States to strengthen the financial institutions’ capacity to deal with potential risk events coming out of Europe. 

Mr. CARSON. What is the role for the G20 in coordinating policy 

responses? 

14 

Mr. COLLYNS. The G20 has played an important part and continues to play an important part, and one area where its role is 

crucial is in the financial regulatory area. The Dodd-Frank legislation has put in place very strong, very high standards of regulatory 

requirements in the United States, but it is important that the 

leading financial centers around the world also adopt high-standard regulatory framework consistent with what we are doing in the 

United States, and the G20 has played an important part in making sure that this is achieved. 

The G20 has also provided a forum in which challenges to global 

stability such as those coming out of Europe are discussed and 

where key countries, emerging market countries can also express 

their concerns. So, for example, in G20 meetings, the situation in 

Europe is discussed extensively, and the concerns that are expressed, it is not just the United States that is expressing concerns 

but also the large emerging market countries are also expressing 

their deep concerns and I think helping the Europeans understand 

the critical importance of addressing their issues in a fundamental 

and decisive way. 

Mr. CARSON. Thank you. 

Thank you, Mr. Chairman. I yield back. 

Chairman MILLER OF CALIFORNIA. Mr. McCotter, you are recognized for 5 minutes. 

Mr. MCCOTTER. Thank you very much. 

Just a quick question: How does what is happening in the 

Eurozone and the policy prescriptions that are being put forward 

differ from what the United States did during the TARP situation 

back in 2008? 

Mr. COLLYNS. In some respects, there are similarities, but there 

are also important institutional differences, of course, between the 

United States and Europe. Important similarities are that this is 

a crisis of confidence and a crisis that has led to a huge increase 

in uncertainty with potentially very negative impact if not contained, both here in the United States and in Europe. What is 

needed, therefore, is an overwhelming, powerful response to reduce 

concerns, to reduce the uncertainty, to reassure investors that the 

situation is being contained. 

In Europe, it has been more difficult to put this decisive response 

in place because of institutional constraints. There are 17 members 

of the Eurozone, and they all need to reach agreement on steps to 

establish and develop these crisis resolution mechanisms. That has 

taken time, and politics is always complicated, but now we are 

talking about the politics in a multiplicity of countries. 

There is also a difference in the role of the European central 

bank, the ECB, from the role of the Federal Reserve (Fed). During 

our financial crisis, the U.S. Treasury and the Fed were able to 

work very closely together and very quickly to develop effective 

tools to reassure markets that funding would continue to be available. 

The ECB’s legal constraints have meant that there could not be 

such a close relationship between the ECB and European treasuries, and for this reason the mechanisms that are being created 

now to reassure markets that funding will be available need to be 

more complicated and have taken more time to design. 

15 

Mr. MCCOTTER. In discussing those differences, one of the reasons that Europe seems to be having difficulty with this is because, 

unlike the United States where we have a union of 50 sovereign 

States governed by a Federal Government, the individual nations 

of the EU seem to be having trouble, I think very understandably 

so, with the concept of their taxpayers bailing out the investors for 

problems that were caused by other nations’ lack of fiscal discipline. In the United States, that was clearly a much lower hurdle 

to get over for the Federal Government to do, rather than trying 

to corral 50 different State legislatures to agree to do that. 

But doesn’t the central principle of what they are trying to do in 

the EU equate with what was done in the TARP? In short, whether 

it is by individual nations of the EU or done in the United States 

by the Federal Government, the way they are trying to solve this 

crisis of confidence is to essentially tell investors to the greatest of 

their ability that you will not lose money under any circumstance 

and that the taxpayers will cover it if you run into this. Is that not 

the case? 

Mr. COLLYNS. That is certainly the case. That is particularly relevant for the creation of this firewall that we have discussed. 

But I think the problems in Europe go well beyond the construction of the firewall. There also needs to be fundamental economic 

reforms in a number of countries in Europe, Greece being the most 

prominent example, a commitment to massive fiscal consolidation 

and to deep-rooted reforms that restore dynamism to the Greek 

economy. Ultimately, the European crisis cannot be resolved until 

countries around Europe are able to convince markets they are 

going to be able to achieve the fiscal adjustments and the economic 

reforms that restore sustainability. 

Mr. MCCOTTER. If I may, Mr. Chairman, just a quick point. 

One of the problems that Greece experienced, much like it once 

did during the time of the Athenian city-state, was when people realized they could avail themselves of the public treasury for their 

own benefit, and the absence of fiscal discipline that you see out 

of a country like Greece where they have an exploding public sector 

and an anemic private sector are not necessarily constrained to Europe. 

Thank you. 

Chairman MILLER OF CALIFORNIA. I like starting with Athenian 

democracy, working through the Roman Republic. We could go on. 

It would be a great way to start this. I like that. 

Mr. Lynch, you are recognized for 5 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman, and Ranking Member 

McCarthy. Again, this is a very important hearing. 

Mr. Secretary, one of the next panel witnesses, Desmond 

Lachman from the American Enterprise Institute, has raised some 

interesting questions; and he points out that now the IMF is acknowledging that Greece’s economic and budget performance has 

been very much worse than originally anticipated. He points out 

that there has been a 12 percent contraction in Greece’s real GDP 

over the last 24 months, their unemployment has increased to over 

15 percent, and that the situation there makes a substantial writedown of Greek sovereign debt in the amount of about $500 billion 

highly probable within the next few months. So in many analysts’ 

16 

minds it is not a question of whether Greece will default but when. 

That would be the largest such default in history. 

The IMF is proposing that the European banks accept a 50 to 60 

cents on the dollar write-down on their Greek sovereign debt holdings, and that would have a material impact on European banks’ 

capital reserve positions. So what I am worrying about is whether 

these European banks or have these European banks or will these 

European banks be required to mark to market their Greek debt 

before the recapitalization plan goes forward. Because that obviously represents a delta or a difference between what they are saying their capitalization will be versus what we determine it to be 

after stress tests and after properly marking down this Greek debt. 

And do we have any sense of the real strength, the real health of 

these European banks? 

Mr. COLLYNS. The European banks have already been significantly marking down— 

Mr. LYNCH. But the IMF now is saying, given today’s situation, 

they are looking for a 50 to 60 cents on the dollar write-down of 

Greek debt. 

Mr. COLLYNS. Right. Markets have already been pricing in a very 

substantial discount on— 

Mr. LYNCH. But the banks aren’t marking to market their assets. 

That is the problem. The markets are discounting them, but the 

banks—the banks are not showing that markdown on their balance 

sheets. So if you are going to stuff those banks full of money to 

save them, there would be a lot more money involved than what 

the banks are saying. That is the problem I have. 

Mr. COLLYNS. Right. The banks have, in fact, been making 

progress in marking down their exposure to Greece on their balance sheets. They haven’t gone all the way. 

Mr. LYNCH. Not nearly, though. Fifteen percent. Not 50 percent. 

Mr. COLLYNS. Over time they are moving—in the recapitalization 

effort exercise that is now under way, this exercise will take into 

account sovereign risk in assessing banks’ need for capital, and 

that assessment of sovereign risk will be based on market valuations rather than book value valuations of bank capital. So this 

exercise should be much more effective in boosting bank capital 

than previous exercises that the Europeans have undertaken over 

the past— 

Mr. LYNCH. Don’t you think your analysis is unrealistically rosy 

from what we are seeing? Just look at the data, look at what is 

happening, look at the contraction in the economies, look at the 

slowdown even in some of the core countries like Germany and 

France. 

I am not—look, I am not trying to take you to task for anything. 

I think you are doing a great job. I just think that we are not being 

realistic with what is coming down the road, and that is inhibiting 

our ability to prepare for that. That is all I am saying. I am not 

trying to be the bearer of bad news. I just know what the numbers 

tell me. And you try to prepare for that instead of constructing 

this. 

From what we have seen so far and the response from the European Union—and God bless them, it is difficult because they are 

not unitary like we are, as Mr. McCotter pointed out before. They 

17 

don’t have a single Fed and a single Treasury totally committed to 

one program; it has been rather fragmented. 

But all I am saying is that we can’t build our expectations or our 

course of action based on the very rosy scenarios that you are playing out here. Someone has to sound the alarm, and I think your 

folks at Treasury are probably the people to do that. And if you 

don’t, then you are letting us walk this—we are walking right into 

this, and we are not taking, I think, reasonable precautions under 

the circumstances. 

Mr. COLLYNS. We are certainly expressing our grave concerns 

based on our perceptions of the downside risks. We don’t just look 

at baseline scenarios that may be optimistic, but rather we try to 

think, well, what could go wrong, and how do we take steps to 

make sure that the downside risks are not realized, both by encouraging the Europeans to take more forceful action to deal with their 

problems and by making sure that we have adequate defenses here 

in the United States, and particularly the U.S. financial system is 

adequately protected from potential risk events. That is the crucial 

part of what the FSOC has been doing. 

Mr. LYNCH. Have we done an assessment on what our exposure 

is? 

Chairman MILLER OF CALIFORNIA. The gentleman’s time has expired. 

Mr. LYNCH. I am sorry. Thank you, Mr. Chairman. Thank you 

for your tolerance. 

Chairman MILLER OF CALIFORNIA. You and I have the same concern. I wish Germany would use more of a Panzer approach to getting this done, but they are very cautious on that kind of concept. 

But them moving rapidly wouldn’t hurt the market. 

Mr. Huizenga, you are recognized for 5 minutes. 

Mr. HUIZENGA. Thank you, Mr. Chairman. I appreciate the opportunity to be here. And I apologize; I had a bill up in front of 

another committee and I had to testify on that, so I wanted to try 

to catch up based on some notes and some things that were handed 

to me. I just thought if you could address a little bit about U.S. exposure, whether there is direct exposure or exposure through other 

organizations that were involved in IMF, for example, and what 

that may mean to the taxpayer. 

Mr. COLLYNS. U.S. direct exposure to the weakest countries in 

the periphery to Greece, Portugal, and Ireland is really quite minimal. Financial institutions have been aware of the risks, they have 

been lowering their exposure, and the residual risk is very small. 

The concern is that there is a deep interconnectiveness more 

broadly between the American financial system and the European 

financial system. The exposure to financial institutions in the European core is very large indeed, and these are institutions that 

themselves are exposed to risk in the European periphery. So any 

increase in volatility and market uncertainty about the financial 

institutions in the European core very quickly translates into increased uncertainty in U.S. financial markets. 

We have seen that playing out over the past couple of months, 

and this is an area where U.S. financial supervisors have been 

working very closely together with U.S. financial institutions to try 

to identify these risks and contain the risks, an important topic 

18 

for—an important focus for the FSOC as they consider the financial 

system. 

Mr. HUIZENGA. It seems to me that exposure and risk might be 

two different things to a way—I understand the mitigation of the 

risk, but do we have exposure through the IMF or through some 

other organizations? If and when—because I think I agree with my 

colleagues here as well. I am very concerned about what may be 

happening and how does that translate, and then adding into that 

some of the requirements that may be coming under Basel III and 

those types of things, how does that all play into their ability to 

recover? 

Mr. COLLYNS. The U.S. Government has minimal direct exposure. We do not lend significant sums to countries like Greece. We 

are supportive of the IMF playing a significant role in helping Europe to deal with this crisis. The IMF has provided around a third 

of the financing for countries like Greece, Ireland, and Portugal. 

The United States makes a financial contribution to the IMF; however, this financial contribution does not put the U.S. taxpayer at 

material risk. 

The IMF has preferred creditor status, which means it gets repaid first. In the past, the record of repayment to the IMF has been 

excellent. The U.S. taxpayer has never lost a cent through its exposure to the IMF. So the IMF is an ideal vehicle for us to make sure 

that the European programs are well designed, based on the IMF’s 

role joining on its long experience and expertise in dealing with financial crises, while at the same time providing a certain amount 

of financing. 

Mr. HUIZENGA. We have just over a minute, and I am wondering 

if you could touch on Basel and what that may mean as they are 

trying to recover? 

Mr. COLLYNS. Basel III is very important to improve the capital 

adequacy standards in banks in the United States and in Europe 

in reducing reliance on—excessive reliance on market funding and 

improving liquidity. As banks have moved towards strengthening 

their positions in these respects, their exposure to potential risk is 

correspondingly reduced. So we think that Basel III is already 

playing an important factor. The rules themselves do not yet come 

fully into effect, but financial institutions are anticipating in advance the requirements that they will face. 

Mr. HUIZENGA. In my closing seconds here, you just used a 

phrase, ‘‘excessive reliance on market funding.’’ So you are expecting that there needs to be government funding as opposed to the 

market? 

Mr. COLLYNS. No. By market funding, I mean wholesale funding 

rather than deposit funding. Banks need a stable funding base 

based on consumer deposits, retail deposits, and other resources 

that can be relied upon to be stable rather than using wholesale 

funding from the market to an excessive degree that could expose 

a bank to risk in a volatile financial market. I am certainly not 

talking about official funding for banks, either in the United States 

or in Europe. 

Mr. HUIZENGA. Thank you. 

My time has expired. Thank you, Mr. Chairman. 

19 

Chairman MILLER OF CALIFORNIA. That concludes our first panel. 

The Chair notes that some members may have additional questions 

for this witness which they may wish to submit in writing. Without 

objection, the hearing record will remain open for 30 days for members to submit written questions to this witness and to place his 

responses in the record.. 

We have many more questions, and you have a lot of answers. 

We just don’t have the time. Secretary Collyns, thank you for your 

testimony today, and the panel is dismissed. Thank you, sir. 

Now, I invite the second panel to come forward. I would like to 

welcome our witnesses. 

Mr. Peter Rashish is vice president for Europe and Eurasia at 

the U.S. Chamber of Commerce. Mr. Rashish leads a team focused 

on advancing the broad and deep economic and commercial relationships that exist between the United States and the European 

Union in developing new opportunities in the continent’s emerging 

markets. 

Dr. Desmond Lachman is a resident fellow at the American Enterprise Institute focusing on the global macroeconomy, global currency issues in multilateral lending agencies. Previously, Dr. 

Lachman served as deputy director to the IMF Policy Development 

and Review Department. In this role, he was active in staff formulation of the IMF policies. Dr. Lachman has written extensively on 

the global economic crisis, the U.S. dollar, and the strains in the 

European area. 

Mr. Douglas Elliott is a fellow at the Brookings Institute and focuses on issues surrounding both public policy and private financial 

institutions. Mr. Elliott was an investment banker for 2 decades 

principally with JPMorgan and was president and principal researcher for the Center on Federal Financial Institutions. 

I would like to welcome you all here today. And, Mr. Rashish, 

you are recognized for 5 minutes. 

STATEMENT OF PETER RASHISH, VICE PRESIDENT, EUROPE 

AND EURASIA, U.S. CHAMBER OF COMMERCE 

Mr. RASHISH. Thank you. Chairman Miller, Ranking Member 

McCarthy, and distinguished members of the House Financial 

Services Subcommittee on International Monetary Policy and 

Trade, my name is Peter Rashish, and I am vice president for Europe and Eurasia at the U.S. Chamber of Commerce. The transatlantic commercial relationship is by far the largest in the world, 

with the United States and the European Union surpassing $4.3 

trillion in trade, investment, and sales by foreign affiliates of companies in one another’s markets. U.S. companies have over $1 trillion invested in the EU. In Ireland alone, the stock of U.S. FDI totaled $165 billion at the end of 2009, which is more than the 

United States has invested in China, India, Russia, and Brazil 

combined. EU investment in the United States supported 3.6 million jobs in 2008. Its investment in California alone supported 

287,000 jobs, while its investment in New York supported 255,000 

jobs. 

These figures make it plain that the fate of the U.S. economy is 

intimately entwined with the fate of the European Union and the 

20 

Eurozone. Because of the deep level of integration between our two 

economies, we will sink or swim together. 

The collapse of the Eurozone would not only mean the end of the 

common currency and the efficiencies that it has brought to the European economy, but would also likely lead to the disintegration of 

one of the EU’s crowning achievements, the single market enacted 

in 1992. Without the single market and its four freedoms of movement of people, goods, services, and capital, not only would Europe’s economy suffer, but U.S. companies would no longer be able 

to benefit from operating across a barrier-free internal EU market 

just as European firms do. 

While Europe’s political commitment to finding a solution to the 

crisis is strong, it is struggling to identify the right policy tools that 

contain financial contagion, shore up the banking system, and rein 

in fiscal deficits, while at the same time boosting economic growth. 

Without economic growth, no amount of budgetary austerity or financial rescue programs will provide a long-term solution to Europe’s economic woes. 

Where can Europe find the economic growth it needs which 

would ensure that the United States continues to reap the enormous commercial benefit from its trade and investment with the 

European Union? One avenue is for the EU and its member states 

to pursue structural reforms of their economies that would liberate 

growth. 

Another path is for Europe to invigorate its push to complete its 

internal market. While most barriers to trade across the EU have 

fallen, an important number remain in the services sector. The creation of the single market has led to a surge in intra-EU investment, and this internal dynamism has been a key source of the 

EU’s economic growth. The elimination of the remaining barriers 

in a single market would have major benefits for its economy, but 

also for ours. 

There is, however, one area that until now has been neglected as 

a source of increased economic growth in the EU, and for that matter in the United States, and that is the trade relationship between 

these two commercial partners. If the two transatlantic economic 

powers want to inject more dynamism to their economies in a noninflationary way, there is one quick step they could consider: Agree 

to eliminate all tariffs in transatlantic trade. 

While these tariffs are low between the United States and the 

EU, because of the enormous size of the economic relationship, 

even small steps can yield very large gains in prosperity. According 

to a report by a Brussels-based think tank, the European Center 

for International Political Economy, such a transatlantic zero tariff 

initiative—elimination initiative would increase combined U.S.-EU 

GDP by $180 billion over 5 years. That is more added growth than 

we would receive from the completion of the Doha Round of multilateral trade talks. 

Now, while the Doha Round is facing serious obstacles to its completion, a transatlantic zero deal could be agreed to quickly as the 

kinds of issues that have in the past held up bilateral trade pacts 

such as social, labor, and environmental standards shouldn’t be a 

factor between the U.S. and the EU. 

21 

The U.S. and the EU should be ambitious and not stop at eliminating tariffs. They should be aimed at opening up their services 

markets to each other, create a single investment area, and pursue 

compatible regulatory regimes. Such an initiative does not have to 

be a traditional free trade agreement, based upon what is called a 

single undertaking, and which could take years to complete if 

progress in one area is dependent on how far negotiators have gone 

in another area. But to avoid the unfulfilled solemn declarations 

that have characterized the U.S.-EU relationship in the past, the 

two sides should commit themselves in a legally binding way to the 

achievement of a barrier-free transatlantic market. 

On November 28th, the United States and the European Union 

will hold a summit meeting in Washington in which President 

Obama will welcome European Council President Van Rompuy and 

European Commission President Barroso. An announcement at the 

summit of a bold transatlantic initiative for jobs and growth, including elimination of tariffs on trade, would inject a sorely needed 

sense of confidence into both the U.S. and EU economies and would 

produce significant gains to both sides. Such an agreement would 

not in itself free the EU and the Eurozone of the task of finding 

lasting solutions to the current crisis, but it would create prospects 

of growth in Europe without which the crisis will likely endure. 

The U.S. Chamber of Commerce looks forward to working with 

the members of the subcommittee to seek the full benefits of the 

transatlantic economy for American workers and companies. Thank 

you very much. 

[The prepared statement of Mr. Rashish can be found on page 56 

of the appendix.] 

Chairman MILLER OF CALIFORNIA. Thank you. 

Without objection, the written statements of all of the witnesses 

will be made a part of the record. I should have announced that 

beforehand, but I didn’t. 

Dr. Lachman, you are recognized for 5 minutes. 

STATEMENT OF DESMOND LACHMAN, RESIDENT FELLOW, 

AMERICAN ENTERPRISE INSTITUTE 

Mr. LACHMAN. Thank you very much, Mr. Chairman, for inviting 

me, and thank you, Ranking Member McCarthy. 

What I propose to do is divide my remarks into four groupings: 

first, I want to talk about the intensification of the crisis in Europe; 

second, I want to touch on the implications for the United States; 

third, I want to discuss what the Europeans are doing to address 

this crisis and why I think their efforts might fall short; and 

fourth, I just want to touch on the United States’ role, what the 

appropriate role for the United States is in this crisis. 

Turning first to the intensification of the crisis, there is little 

doubt in my mind that we have seen a substantial and very disturbing intensification of this crisis that is all too likely to create 

real problems for the U.S. economy in 2012. Among the indications 

of an intensification of the crisis are first, that Greece looks like it 

is on the cusp of defaulting. This would be the largest default, sovereign default, in history. It would involve something like $450 billion. 

22 

I think that one really has to dismiss the notion that Greece is 

a small economy. The fact that it is a small economy doesn’t mean 

that it is highly indebted. A lot of that debt is sitting on the banks 

of the core countries in Europe, which could really have serious 

concerns. We have already seen contagion to Portugal and Ireland. 

If we include Portugal, Ireland, and Greece, we are talking about 

$1 trillion of debt, a lot of that with the banks. 

What is of real concern in terms of the intensification is that this 

crisis has now spread to Italy and Spain. The Europeans are trying 

to create the narrative that Italy and Spain are innocent bystanders of the crisis, when, in fact, they have deep problems. Italy has 

serious budget problems. Spain is very exposed externally. 

We have seen strains in the European banking system that are 

of concern. If they get a big hit now, this is going to cause a real 

credit crunch. And the IMF is estimating that the shortage of capital of the European banks is around about 200 billion euros, 

whereas market estimates are about 300 billion euros. 

Finally, in terms of intensification, what we are seeing is France 

and Germany moving into a downturn. If we get intensification of 

the crisis, that is going to cause Germany and France to move into 

a meaningful recession, which will really complicate the issues for 

the Eurozone. 

Being brief on the implications for the United States, my two fellow panelists have touched well on the trade channels and the investment channels. I would emphasize the exposure that we have 

to the banking side through our banks. While the Administration 

is indicating that we don’t have too much in the way of direct exposure to the periphery, the exposure of our financial system to the 

European banking system, which does have enormous exposure to 

the periphery, is huge, and therefore I would say that our financial 

system has very big exposure. What I am referring to is our money 

market funds have something like $1 trillion lent to the European 

banks, the U.S. banks have about $1 trillion of exposure to Germany and France, and our banks have written a lot of CDS and 

other derivative products, which really expose us enormously if 

things go wrong. 

In terms of what is to be done, the agenda in Europe is to try 

to deal with the Greek situation in a definitive way, to try to ensure that banks are properly capitalized, and to erect a firewall 

around Italy and Spain. I have my doubts as to how effective they 

are going to be this time around. The whole of this crisis has been 

characterized by a ‘‘too little, too late’’ response, and I think that 

this is going to be another indication of that. 

There are indications that the banks are resisting the 50- to 60- 

cent writedown that the Europeans are proposing on them. It is not 

clear whether the Europeans are going to come up with $2 trillion 

that would erect a firewall around Italy and Spain, and that money 

is certainly not going to be nonconditional money.. 

And I have misgivings about the way in which the bank restructuring is being done in France and Germany and the core countries 

in the sense that this is all too likely to provoke a credit crunch. 

As banks are given time to raise capital on their own, what they 

are going to do is they are going to opt for deleveraging rather than 

raising the capital that will dilute their shareholdings. 

23 

Finally, in terms of the U.S. role, the United States has been 

providing support both through the Federal Reserve as well as 

through the IMF. It is not clear to me that the United States 

should be doing a whole lot more. The problems in Europe are ones 

of solvency rather than liquidity. I am not sure that throwing more 

money at this provides a solution. We would certainly be putting 

taxpayers’ money at risk, I am not sure that is a good idea. The 

Europeans did not help us in bailing out our banks in 2008–2009. 

I am not sure that I understand the logic of why the United States 

should now help them. 

Finally, I would say that relying on the IMF is not the most indicated course. They haven’t covered themselves with glory in the 

way in which they have dealt with this crisis. And I take issue 

with the fact that using the IMF to lend more to these countries 

doesn’t expose the U.S. taxpayer to risk. I would just note that in 

these countries the IMF has never lent as much money to a country as Greece. The lending to Portugal and Ireland has been huge 

to date, so I wouldn’t take much comfort in the track record that 

in the past, the IMF has always been repaid. When you have exposure of this size, you really are taking risks with U.S. taxpayers’ 

money. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Lachman can be found on page 

50 of the appendix.] 

Chairman MILLER OF CALIFORNIA. Thank you. 

Mr. Elliott, you are recognized for 5 minutes. 

STATEMENT OF DOUGLAS J. ELLIOTT, FELLOW, ECONOMIC 

STUDIES, BROOKINGS INSTITUTION 

Mr. ELLIOTT. Thank you, Chairman Miller, Ranking Member 

McCarthy, and members of the subcommittee. 

The euro crisis is deeply concerning, in part because the path it 

follows is likely to be the main determinant of whether we go back 

into recession. If Europe were to be shaken by a series of nations 

defaulting on their government debt, I am convinced that the continent would plunge into a severe recession. Their recession would 

trigger a recession here because of a number of links across the Atlantic. I think everyone before me has done a great job of talking 

about these links, so I am going to just touch on them very briefly 

and then move on to other parts of this. 

Trade: We export about $400 billion to Europe. We have about 

$1 trillion of foreign—of direct investment of things we own in Europe. The financial flows, we have about $5 trillion of lending and 

other commitments to Europe as a whole. A good chunk of that is 

the U.K., but the U.K. is also very closely tied to the Eurozone. 

And then, as we have talked about, there are the effects on business and consumer confidence partly that come through the financial markets. We saw in August how badly we could be hit once 

people get scared about Europe. 

Now, let me be clear, I believe Europe will probably muddle 

through, ugly as the process has been and will continue to be, and 

frightening as it has been; however, the problem is there is perhaps 

a 1 in 4 chance that something really bad will happen that would 

lead to a series of national defaults that run from Greece, Portugal, 

24 

Ireland, Spain, and take Italy as well. There is also a small chance 

of an even worse outcome in which one or more countries leave the 

euro. 

Now, my 1 in 4 probability estimate is very rough. There are 

many different ways that things can go wrong, because we have 17 

different countries, each with their own political, social, and economic systems. So there are a lot of ways things can go wrong. 

Each of them has a low probability, but there are just so many of 

them that they add up to give me certainly very serious concern. 

I think the actions that are going to be announced this week in 

Europe are generally positive, but I agree with Desmond that it is 

once more a case of saying they are going to do a lot more than 

they actually are. I have serious concerns about what has been proposed so far. The three steps they are taking are interlinked, and 

because they have political constraints that are really very binding, 

they are not doing enough on any of them. For instance, they are 

going to try to lever up the EFSF so they have something closer 

to 1 trillion or 2 trillion of euros to deal with the potential problems; however, because they are not willing to commit the base 

amount of money that they put in, they are not willing to increase 

that, it makes it hard for them to do anything terribly effective 

with the EFSF. 

They are talking about providing insurance so that if you own, 

say, a new Italian bond, you know at least 20 percent of it will be 

paid. Given that Greece is about to have a 50 percent hit, that is 

not going to bring substantial new investors in, so I think it is an 

ineffective way of doing it that is being forced by not being willing 

to increase the 440 billion euros of base commitment of real money. 

This also means they don’t have a lot to do for the banks, so they 

are trying to shoot for about 100 billion euro recapitalization. The 

IMF thinks the losses on the sovereigns on market terms is 200 or 

300 billion euros. There is $1 trillion of capital already there, so 

$100 billion is only a 10 percent increase. And there is a staggering 

$27 trillion of assets in the European banking system. So you are 

talking about the 100 billion euros is less than half a percent of 

the total amount of assets. Now, the assets are generally pretty 

safe, but there is just a lot of them if they go wrong. 

So all these things tie together, and they are not, I think, going 

to be doing enough to deal with them. So whatever happens this 

week, I think we need to be prepared in case the crisis worsens. 

We should continue to encourage the Europeans to do what they 

need to do, and I think they need to do a lot more. We should continue to provide the U.S. dollar swaps through the European Central Bank that will allow them to provide banks with dollar funding. And our regulatory agencies should continue to monitor very 

closely our financial exposures, but not do it in a way that causes 

a panic reaction that makes the Europe situation worse. 

And I do think that we ought to be prepared, if needed, to have 

the IMF provide substantial further assistance. The Eurozone has 

the joint resources to do what they need to do, but it is very helpful 

to have the IMF. It shows the markets there is more funding available; it brings the ability to place conditions, which, as a third 

party, the IMF can more easily do; and the technical aid they can 

25 

provide, which is substantial, gets listened to much more readily if 

they provided money as part of it. 

So this is a European problem. They need to provide the backbone of the solutions, but it is strongly in our interest to help in 

any reasonable way that we can. 

Thank you. I look forward to your questions. 

[The prepared statement of Mr. Elliott can be found on page 40 

of the appendix.] 

Chairman MILLER OF CALIFORNIA. Thank you. 

In my previous statement. I wasn’t trying to underestimate the 

impact of Greece. My comment was associated with the fact that 

they are approximately maybe 2 percent of the EU, yet if it is not 

handled properly, it can be a significant impact; and that the EU 

has to somehow move rapidly to capitalize, whether the joint financing, resources, or however they do it, to make sure there is liquidity in the banks so the banks, if that is not done beforehand, 

and they take the hit on Greece, they might be very reluctant 

based on their own interests to not get further involved, especially 

with a situation that might occur with Italy and Spain. 

That was my concern. If they do not hit rapidly and Greece hits 

first, there might not be motivation on the part of the banks to 

move rapidly to help others if they know they are going to take a 

further hit on that. 

And I guess my question would be to all of you, what would happen to the U.S. recovery if European countries simultaneously implement all of the austerity programs, and what can we do to protect the U.S. economy and U.S. exports if that occurs? We will start 

with Mr. Rashish, and work right across. 

Mr. RASHISH. Thank you, Mr. Chairman. 

I think that one thing we can make sure to do is keep our markets open to trade and investment. It is certainly not the time, if 

there ever is a time, to close them when our major partner is going 

through the challenges we see right now. We want to encourage 

companies from Europe and around the world to invest in the 

United States. We want to pursue an export-oriented policy of our 

own. 

But I think what is attractive about trade policy in this context 

is that it is something we can do together, in fact we need to do 

together, with the European Union. The European Commission negotiates trade policy at the European level for all of the 27 member 

states, including all of the 17 euros and member states. And if you 

look at our trade policy agenda, I think that we have now—the 

good news is we have passed the three free trade agreements, we 

have the Trans-Pacific Partnership which is still on the table, but 

I think that there should be some room for us to think about some 

additional trade policy initiatives, and I think that one with the 

European Union recommends it. 

So I would say, why not look at the policy tools we have at our 

immediate disposal which don’t have any implication for the taxpayer, don’t have any implication for budgets, but which instead 

would liberate growth in the United States and Europe? And that 

is why we put forward this idea of a zero tariff initiative. 

Chairman MILLER OF CALIFORNIA. Thank you. 

Mr. Lachman? 

26 

Mr. LACHMAN. I think your question really goes to the heart of 

the problem in Europe, which is that the IMF is imposing a massive amount of austerity on countries in a fixed exchange rate system. When you do that amount of austerity, and I am thinking 

about countries like Greece, Portugal, Ireland, and Spain, what you 

have to expect is deep recessions in those countries. We have seen 

that already in Greece, we have seen it in Ireland, we are going 

to see it in Portugal, and we will see it in Spain. That has a material impact on those countries’ growth prospects, and it also has a 

material impact on the European banking system, and through 

that, we get recessions in France and Germany. 

I think the implications for the United States should be that 

there is a sense of realism in making our policy decisions, that we 

shouldn’t be making our policy decisions on the basis of a rosy global scenario that is going to help the United States get out of its difficulties. I think that rather this, in my mind, would have a bearing on how quickly one does the withdrawal of stimulus from the 

U.S. economy. That would be one aspect that one would have to 

look at. 

But the other aspect is when one does one’s budget projections, 

one should be basing this not on the rosy scenarios that the CBO 

is doing, but rather on what is likely to happen in terms of growth 

over the next year or two because of the European crisis. What 

that would argue for is a much more serious effort at medium-term 

budget consolidation, because what this is going to do is to cause 

our budgets to really blow out. 

Chairman MILLER OF CALIFORNIA. What my concern is, and it is 

not being talked about much, is we looked at what happened to 

U.S. banks in 2008. When they lost trust, when they lost faith, 

they quit lending to each other. A similar situation could occur in 

the EU if Greece takes a huge hit first before they capitalize improperly. And I guess I will let you try to respond, Mr. Elliott. You 

are the one who is left, and I am out of time. 

Mr. ELLIOTT. Actually, it works out because I am principally a 

financial sector expert, so you have asked me something that I do 

focus a lot on. 

First of all, I want to echo something Desmond said. I am quite 

worried that the banks may be pushed to restore their capital ratios by shrinking at a time when we don’t want them to be shrinking. So your concern about austerity measures and private sector 

initiatives that all move in the same direction of slowing the economy down is a very valid one. 

Chairman MILLER OF CALIFORNIA. And they are not moving rapidly to solve the problem. That is my concern. 

Mr. ELLIOTT. No, they really are not. I would like to see a significantly larger fund available to infuse capital because this would 

give them an incentive to keep doing the business and the ability 

to do it. 

In terms of the United States, it is difficult to be 100 percent 

sure, but I do think our financial system is a lot stronger than it 

was a couple of years ago. I do think we are much better prepared 

to handle the shocks that will come out of this, but certainly we 

ought to do everything we can to keep ourselves with a stable financial system. 

27 

Chairman MILLER OF CALIFORNIA. Thank you very much. 

The ranking member is recognized for 5 minutes. 

Mrs. MCCARTHY OF NEW YORK. Thank you. 

Mr. Elliott, just going back to something that you said a little bit 

earlier, with the factors that are going on with the euro on a zone 

agreement, that measures a country’s credit worth, what it is 

worth. If not, should there be something in place so that the 17 

countries that are coming together—so that everybody actually 

knows? Like we have the Federal Reserve system. Some people disagree with that. But when you are trying to deal with 17 countries 

and the solvency of those individual countries, how can they all 

come together when you basically only have 1 or 2 countries that 

possibly might be able to help them out? 

Mr. ELLIOTT. That is a really central question. My belief is that 

because the governments have not moved fast enough to show the 

markets that they will take this seriously, they have blown several 

chances now by doing the minimum to get past the immediate crisis, that the market is going to force a great deal of fiscal integration where they act more like one country. There are multiple ways 

that can be done. There are so-called euro bonds that would be 

backed by joint and several guarantees of all the countries. If the 

European Central Bank could simply step up very considerably its 

purchases of government bonds in the secondary market, you 

would come to the same effect. Or you could make this stabilization 

fund a lot bigger so that it could provide that. So there are various 

mechanisms. 

What I believe will have to happen is that the European leaders 

will have to come to the edge of the abyss. Things will have to get 

considerably worse than they are now so that they see that they 

can either lose the next election by doing something their public is 

reluctant to do, or they can lose the next election by letting Europe 

fall apart. So they might as well at least do the right thing. 

Mrs. MCCARTHY OF NEW YORK. But when you talk about that, 

and I am sure there are many Members here in Congress saying 

the same thing, but our country also, in my opinion, is in trouble, 

and yet we don’t seem to be really doing a lot. To me, I thought 

when you came to Congress, you made the tough votes to do what 

is best for the country, and if that means losing an election, so be 

it. 

Mr. ELLIOTT. I think the good and the bad thing is that the U.S. 

situation has a longer fuse. I think the European fuse is very short 

right now. 

Mrs. MCCARTHY OF NEW YORK. Mr. Rashish, with the significant 

saddling of the Eurozone countries and the urgent need to recapitalize the European banking system, how do you think this will impact the U.S. trade relationship with Europe in the near future? 

And just one other thing. I asked this question before. Do you also 

see the underdeveloped countries filling that gap at that particular 

time? 

Mr. RASHISH. Thank you, Ranking Member McCarthy. Let me, if 

I might, just quickly add something to what Mr. Elliott said. I 

think one distinction to the United States and the European Union 

is that we are institutionally mature, whereas the European Union 

is still building its institutions. It started out with the coal and 

28 

steel community in the early 1950s, so the common market, they 

moved to the single market, then they passed the euro. 

And I think that one of the distinguishing features is that in Europe, you still have a large number of people both at the level of 

the public and the level of the leadership who are very strongly 

committed to creating a stronger European cooperation for the good 

of all, and I think that motivates a lot of the decisions that are 

being made, it motivates a number of the leaders, and it motivates 

the public. And I think that impetus to create more cooperation at 

the European level for the good of all is something that shouldn’t 

be underestimated as a driving force. 

I think that if things go well, historians may look back at this 

time as one of those sort of crucibles where the European Union 

tested itself, and it came up—found that it had the strength to do 

what it needed to move to that next level of European cooperation. 

So let me just say I think that is one thing that distinguishes the 

United States from the European Union. 

And my colleagues have spoken eloquently about the nature of 

the banking and financial interrelationships. Clearly, if you are 

going to increase trade, you are going to have to make sure the financial sector is enabling and there is going to be liquidity for our 

companies to take advantage of that. But I think that we need to 

be able to do more than one thing at a time. 

I think that the Europeans need to find the solutions to their 

problems that are outlined here today, and at the same time, I 

think that in terms of what the United States can contribute, I 

think certainly, and I am not sure ‘‘contribute’’ is the word, but in 

terms of the U.S. role, I think that at the same time as the Europeans are doing things on their level of financial policy and institution building, one of our roles can be in trade policy and to take 

initiative, a joint initiative, with the Europeans in our common interest to liberate economic growth through trade. 

Mrs. MCCARTHY OF NEW YORK. With that I yield back. 

Chairman MILLER OF CALIFORNIA. Vice Chairman Dold, you are 

recognized for 5 minutes. 

Mr. DOLD. Thank you, Mr. Chairman. 

Dr. Lachman, if short-term loans by the U.S. money market funds to the European banking system exceed $1 trillion, or more 

than 40 percent of their overall assets, how could a European meltdown affect the average American? 

Mr. LACHMAN. Basically, what we could get if there were to be 

defaults in European banks if they didn’t honor their loan commitments to the money market funds, we could be back into the situation that we were in 2008–2009 where money market funds were 

to break the buck, so the consequences would be extremely serious, 

to say the least. So hopefully, the Europeans aren’t going to allow 

that to happen. But the fact that money market funds have as 

much as 40 percent of their assets loaned out to Europe is not a 

very comforting thought. 

Mr. DOLD. Okay. I would agree. 

Mr. Elliott, we talk about a plan about how to get out of the 

mess that Europe is in right now, and they are trying to solve this 

issue. You mentioned that a badly designed plan could do more 

harm. And so what types of provisions do you think should be inVerDate Nov 24 2008 18:12 Apr 20, 2012 Jkt 072617 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\72617.TXT TERRIE
29 

cluded in any final plan? But more importantly, what serious considerations are being given right now to things that should not be 

part of a plan? 

Mr. ELLIOTT. Sure. Let me start with the latter since that seems 

to be the core of your question. 

I do worry, as I know Desmond has also mentioned, that the way 

that the bank recapitalization is being designed is likely to send 

very strong incentives, very strong messages that you are better off 

shrinking, because right now it is very expensive to raise new equity capital in Europe. If you are a bank, and their system again 

has $27 trillion of assets, they have a lot of assets there, it is going 

to be a fairly compelling argument to say, well, let us just be 10 

percent smaller, and then maybe we don’t need the additional capital. Because again, the $100 billion is about 1/10th of the current 

capital. So shrinking by 10 percent would be a very bad outcome. 

That is one thing. 

I mentioned in passing this idea of providing insurance from the 

fund for, say, 20 percent of the value of the new government debt. 

I just don’t think that is going to do any good, so it will tie up the 

funds that could be better employed in other ways without really 

solving that problem. 

In terms of what should be there, I think they need to bite the 

bullet and just say that they have failed to this point to do what 

has to be done, this is maybe their fourth try, and they have to 

really show that the Eurozone is standing together, and multiple 

mechanisms, as I mentioned a minute ago, to do that, but they just 

have to bite the bullet. 

Mr. DOLD. What can we do here in the United States, what can 

the Administration do, in order to try to help facilitate that? 

Mr. ELLIOTT. It is really limited. It is like watching a family 

member who is about to marry somebody they really shouldn’t 

marry. You can provide advice, but there is not a lot more you can 

do. 

Mr. DOLD. Let me just take that another step further, and, Dr. 

Lachman or Mr. Rashish, please chime in if you would like. But 

what can we do in the United States—recognizing the issues that 

are over in Europe right now and how potentially disastrous they 

could be, what can we be doing here in Congress to try to help insulate that crisis for the American taxpayer? 

Mr. LACHMAN. I think that what one can do is base one’s policy 

on realistic assumptions. I would agree with Mr. Elliott that there 

is not much one can do about a dysfunctional political union where 

the problems, the political problems, are huge; that I don’t think 

that it is a question of dithering leadership, I think that it is a 

question that you have electorates that really don’t have their 

heart in wanting to bail out countries, you have really very deep 

divisions on how the burden should be shared politically, that the 

Germans have a different view of the world than the French do. 

These are very deep differences that I am not sure that there is 

a whole lot that we can do to resolve them. 

The point is they have gotten themselves into a currency arrangement that made very little sense. They didn’t play by the 

rules for 10 years. I don’t think that you can expect a very easy 

solution. These problems have been building for a long, long time. 

30 

And in my career at the International Monetary Fund, I have 

never seen such huge public financing, balances and external imbalances, in a fixed currency arrangement than we have in Europe, 

which doesn’t give me much hope that this is going to have a 

happy outcome. 

Mr. RASHISH. The one thing I would add to that is that the 

United States can in various fora, the G20 and bilaterally with the 

European Union, make the case that it is in our economic interest, 

the U.S. economic interest, and frankly in the Europeans’ own economic interest, that, in addition to austerity measures to consolidate budgets, that the European Union member states and the 

Union as a whole need to take steps to liberate economic growth 

by, for example, getting rid of a number of barriers in the services 

sector by liberalizing labor markets and the professions. There are 

a number of steps that individual member states can take and that 

the European Union can take across its single market which would 

be growth- friendly, and I think that is certainly a point we should 

be making. 

Mr. DOLD. Thank you so much, Mr. Chairman. My time has expired. 

Chairman MILLER OF CALIFORNIA. Mr. Carson, you are recognized for 5 minutes. 

Mr. CARSON. Thank you, Mr. Chairman. 

This question is for the entire panel. What is it about the nature 

of the Eurozone institution that makes this crisis especially difficult to manage? 

Mr. ELLIOTT. If I may, what they did is they agreed to merge 

their monetary policy and to have a common currency, but they 

didn’t do what you have to have to create the preconditions for it, 

which is you either have to have a group of countries that are very 

similar so that the right policies will be right for everyone, or you 

have to agree to operate in a much more closely integrated manner. 

So they set up a system in which each country could manage its 

own fiscal policy, decide what its budgets were, and, within very 

loose limits, follow divergent policies. And that simply doesn’t work 

within one’s zone. That is now recognized. 

So the real question will be, can they overcome the political limitations to come to an approach in which they have much more commonality? I want to say briefly, remember, the Constitution we are 

on, which is so beautifully designed, is our second Constitution. We 

had the Articles of Confederacy for a few years with the same problems. A bunch of States didn’t want to be one Federal Union. So 

it doesn’t surprise me they are dealing with this now, but they 

have to make some hard decisions. 

Mr. LACHMAN. I would agree that initially the mistake was to get 

into a currency union without having the political union right there 

to start to support it. That was the original sin, but then they 

spent 10 years flouting their own internal rules. They had a 

Maastricht Treaty that required countries not to run budget deficits in excess of 3 percent of GDP. That didn’t stop Greece having 

a budget deficit of 15 percent of GDP, Ireland 14 percent of GDP, 

Portugal and Spain close to 10 percent of GDP. Once you build up 

those imbalances in a fixed exchange rate system, it is too late to 

31 

be talking about how we should have more political union and a 

better structure. 

You really have to address those imbalances, and it is very difficult to do that without having the benefit of a devalued currency 

that promotes export growth as an offset to the kind of fiscal adjustment. These countries are having to do 4 or 5 percentage points 

of fiscal adjustment in a year right in the middle of a recession. 

This just doesn’t work. 

Mr. RASHISH. If I may pick up on the history lesson Mr. Elliott 

was recounting, if you look at the United States, I believe I am correct that we didn’t have our Federal Reserve until the second decade of the 20th Century, so it was over 100 years after our founding. It has only been about 60 years that the European Union in 

any shape as it has been around. So while there is no question that 

the current challenges they face are enormous, I think if we look 

at it in that perspective, I think that they have made a lot of 

progress and that their record is that they have always met the 

challenges they face, although this is the most serious one that 

they are facing, that they have ever faced. 

Mr. CARSON. Thank you all. Thank you, Mr. Chairman. I yield 

back. 

Chairman MILLER OF CALIFORNIA. I want to thank the—oh, Mr. 

Lynch, I was going to ignore you, wasn’t I? I will cut you a reasonable deal. How about 5 minutes? 

Mr. LYNCH. That is great. Thank you, Mr. Chairman. I appreciate that. Thanks for your kindness again, and I also thank the 

ranking member for your courtesy in allowing me to participate. 

I want to thank all the witnesses. This is all very thoughtful testimony that you have offered here today and very helpful. I am not 

always in agreement, but I think very thoughtful and extremely 

helpful. 

Mr. Lachman, in your—Dr. Lachman, I am sorry, in your testimony you point out, I think very astutely, that if what we think 

is going to happen here, if we do have a Greek default, then I think 

immediately Portugal and probably Ireland would be destabilized 

to a certain extent. And if we had a further contagion, we worry 

about Spain and Italy. The end result for us is that we would see 

a destabilized currency there. I don’t know how they reconcile that, 

but it would certainly undermine the euro. And some have written, 

I think you have all written at some point, about the euro as we 

know it would no longer be sustainable if you had all these peripheral countries and then the core countries also impacted. 

I am looking at the U.S. interest here, and in that environment 

with defaults going on, the European economy is going to retrench 

somewhat. That is going to affect us as an exporting Nation, but 

it is also going to affect us, as Dr. Lachman has pointed out, from 

a currency standpoint. We are going to have a very strong dollar 

by doing nothing; by just not defaulting, we are going to have a 

very strong dollar. They are going to have a very weak currency. 

It is going to put our producers at a strong disadvantage. And I 

think then it is going to have a real impact on jobs here in the 

United States as those facts play out. 

What is it that we could do to try to adopt provisions that might 

mitigate some of those circumstances in such a short amount of 

32 

time, because that is the problem that Greece has—I think that is 

the problem that the EU has—is this has to turn around in a fairly 

short period of time. Even the austerity measures that have been 

adopted or at least are being debated, those measures will take a 

long time. Right now I think, as Dr. Lachman has pointed out, the 

Greek public debt is about 180 percent of GDP, or growing to 180 

percent of Greek GDP. That is simply unsustainable, and it is 

going to take them a while to bring that down. Just like in our 

country we are struggling with this supercommittee, and we are 

going to drop some reductions, but it is going to take us a while 

to do that. But are there steps that we might take to cushion that 

impact in the face of these defaults in Europe if they do occur? Dr. 

Lachman? 

Mr. LACHMAN. I am pretty sure that the defaults do occur just 

given the very size of the ratio of their public debt to GDP has 

reached. IMF is putting this at 180 percent. We know that the safe 

level, prudent level of public debt is below 80 percent. So a debt 

writedown in Greece of something like 60 percent is almost a certainty. 

If you get that default in Greece, what that is going to do is have 

huge damage on the Greek banking system, which has to get nationalized. You are going to get capital flight. You will then get the 

contagion to Portugal and Ireland, which will then have a material 

impact on the European banking system that it is very likely to 

weaken the euro against the dollar. I think that is very likely an 

economic area. Having a banking crisis, very weak growth, is almost certain to have a weak currency. 

I am not sure that the United States can do much in terms of 

that currency arrangement, but I would think that what it does is 

it heightens the concern about other countries in Asia that are manipulating their currency. We should really be putting pressure on 

those current countries to help this adjustment program. But I am 

not sure that we can do very much about the bilateral United 

States-euro exchange rate. The United States is very much likely 

in those sort of circumstances to become the safe haven that it was 

in 2008–2009. All of the money would pour into the United States. 

Certainly, it would not be going to Europe. 

But I think that what should be done is pressure should be— 

greater pressure should be exerted on China to play a constructive 

role in the international adjustment process. That would be my 

suggestion. 

Mr. LYNCH. Thank you very much. 

Thank you, Mr. Chairman. 

Chairman MILLER OF CALIFORNIA. Thank you. 

Mr. Manzullo, you are recognized for 5 minutes. 

Mr. MANZULLO. I am sorry that I could not be here until just now 

to glean the rest of your testimony, but I have an intriguing question. Perhaps it is more philosophical than financial or practical. 

But early, maybe in the past year, there were talks or at least 

thoughts that Greece would get out of the Eurozone and go back 

to the drachma. I would like your thoughts on that. I don’t think 

that is going to happen, but I think that it could pinpoint some of 

the problems that are going on that would be an alternative. But 

33 

whomever would like to handle it? Maybe none of you would like 

to handle it. 

Mr. LACHMAN. No, I should mention that I wrote a Financial 

Times piece 2 years ago indicating the reasons why Greece would 

exit the euro; and, sadly, events have already borne that out. 

Basically, the problem is that Greece, having as large a public 

sector deficit problem as they have, you can’t reduce that in a fixed 

exchange rate system without promoting an enormous recession. 

Greece’s economy has already contracted by 12 percent. They still 

have a budget deficit that is 10 percent of GDP. If they persist in 

the IMF approach of not devaluing their currency, not writing 

down the debt, but simply engaging in savage fiscal austerity, they 

are going to drive that economy totally into the ground. It is creating political unrest. It is making it very difficult for them to meet 

the budget targets. 

The logical thing for Greece to do would be to write down its debt 

by 50, 60 percent, but they would also be well advised to exit the 

euro. That would at least give the economy a chance to grow 

through exports, through improving the tourist sector. Otherwise, 

I am afraid that Greece is condemned to a decade of not only deep 

recession, but this is more like a depression. 

Mr. MANZULLO. Anybody else? 

Mr. ELLIOTT. Yes, if I may—and I am a financial sector expert 

more than an economist. So let me just say, Dr. Lachman is in a 

minority among the economists I have spoken with, as I think he 

would admit. That doesn’t mean he is wrong. 

Mr. MANZULLO. He seems like a nice guy. 

Mr. ELLIOTT. No, he is, and a tremendously smart guy. I just 

wanted to try to provide a little balance in the sense that most 

economists that I speak with and read think that the transitional 

cost would be really awful. Because there are so many things you 

have to get exactly right in making that change, it is extremely unlikely to work out quite that way. You also have political constraints. 

The damage of them coming out of the euro to the rest of the 

Eurozone is quite considerable partly because of contagion issues. 

The people then have to start worrying in Portugal, etc., as to 

whether they will find themselves with escudos again instead of 

euros, and that can create a lot of flight. 

In addition to the direct effect of that, it has a political issue, 

which is right now something like 4 percent of Greece’s GDP comes 

from regional aid from the rest of the EU. If the rest of the EU 

is really annoyed with Greece because they have just broken out 

of the euro and caused all these other problems, that regional aid 

may or may not continue. There is a whole series of reasons to be 

concerned about the change in addition to the potential benefits 

that Dr. Lachman has mentioned. 

Mr. RASHISH. I would also add that it is key whether it is Greece 

alone. Because if it does lead to several countries leaving the 

Eurozone, then what you are going to have is a kind of very hard 

currency area, in fact, dominated by Germany and the Netherlands 

and Austria and Finland, who have very strong economies; and the 

lower exchange rates and interest rates, let alone the purchasing 

power that you had in the south of Europe because they had the 

34 

euro, is going to go away. And so, the ability of a country like Germany to be the export superpower, which has really been the main 

fuel for its growth, is unlikely to continue. And I think that would 

have a very serious impact on the performance of the European 

economy as a whole. So I think we need to think about how it 

would impact all the different members of the Eurozone and what 

it could do to the competitiveness of the main drivers of growth 

right now. 

Mr. MANZULLO. Dr. Lachman? 

Mr. LACHMAN. If I may say, I heard these arguments in December 2000, just before Argentina broke from the convertibility plan. 

I heard similar arguments about the time of the ERM in 1992 

when that broke up. I wasn’t around during the gold standard, but 

those were the kind of arguments that ran around before countries 

left gold in the 1930s. So I think that there are political dynamics. 

It is not necessarily going to be the most rational choice for the 

country, but when countries are in as dire straits as Greece does 

when its politics gets very polarized, when we see the kind of street 

action that you get in Greece, you have to expect politicians to be 

suggesting alternatives to the hair shirt kind of approach that is 

being offered to them by the IMF and EU. 

We have just seen 2 years GDP has literally imploded. Offering 

that—if that is the future you are offering, people are going to 

want to take chances with a different kind of policies, and I think 

that that is the reason why I see them both defaulting and, in 

time, leaving the euro. 

Mr. MANZULLO. Thank you. 

That was an interesting question, wasn’t it? 

Chairman MILLER OF CALIFORNIA. Very good. 

I want to thank our witnesses. You have all been very excited 

about answering the questions, which is very rewarding from our 

perspective, and you are a wealth of knowledge. I appreciate your 

talents, and your time that you have given us today. 

The Chair notes that some members may have additional questions for this panel which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses and to 

place their responses in the record. 

This hearing is adjourned. Thank you. 

[Whereupon, at 12:04 p.m., the hearing was adjourned.] 

(35) 

A P P E N D I X 

October 25, 2011 

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