The U.S. Bailout of Europe
When speaking of the European financial crisis, Republican presidential candidate Mitt Romney is in error when he said:
“We’re not going to send checks to Europe. We are not going to bailout the European banks“
– Mitt Romney, Face the Nation with Bob Schieffer, 6/17/2012
Contrary to popular belief, the United States is already sending bailout checks to Europe. It has been for several years.
The real question is, should we continue to do so?
IMF Bailouts and The United States
The International Monetary Fund (IMF) is committed to about €250 billion euros ($314 billion) to bailouts for Greece, Ireland and Portugal. It’s not contributing to the €100 billion euro bailout of Spain.
The United States is the largest contributor to the IMF. The U.S. share is 17.69% of IMF total funding.
That makes the U.S. share toward the European bailouts, so far, $55.5 billion.
The IMF has a complicated formula for determining a nation’s financial commitment. It is called a Special Drawing Right (SDR). Today, 1 SDR = $1.52 in U.S. currency.
From a U.S. perspective the IMF cannot spend much more of its money. The top end U.S. quota is set at 42,122.4 SDRs or $64 billion. That only leaves $8.5 billion left that the U.S. could spend on European bailouts. It is likely the IMF has already committed that $8.5 billion elsewhere.
The IMF is tapped out. The total amount the IMF is allowed from its 188 member nations is $361.9 billion. It already has $314 billion committed to Europe’s bailouts alone. Most of the rest is probably committed elsewhere.
Europe Only Bailout Funding
The EU’s own bailout funding sources are:
- EFSF – European Financial Stability Facility (€420 billion)
- ESM – European Stability Mechanism (€500 billion)
- ECB – European Central Bank
All of these funding sources have contributed to European bailouts for Greece, Ireland, Portugal and now Spain. The biggest bailout so far, though, is for Greece. That bailout comes from the EFSF, ECB and IMF. Combined they are called “The Troika”.
Ultimately, the intent is to make the ESM the one stop shopping center for all future EU bailouts when it comes online next month. More bailouts are likely in the future.
Many economists feel EU total bailout funding is woefully inadequate and that further “stimulus” without austerity preconditions is needed.
The United States already has $55.5 billion at stake in European bailouts through the IMF. Given the IMF is tapped out, the U.S. will not be drawn further into European bailouts by it.
Compared to the total amount spent so far, the United States is not a large contributor.
According to Romney and others, Europe has the means to fix its own financial crisis and does not need further U.S. help. Be that true or not, Romney’s argument that the United States should put its own financial house in order first before considering helping others is reasonable.
But what if there is a doomsday scenario with total financial collapse in Europe… what should we do? That was Bob Schieffer’s question of Romney on Sunday.
The Fed and others believe that U.S. financial institutions have minimal direct exposure to European sovereign debt, but some to European banks that do. Further, it is believed that even in a full European recession its effect on U.S. exports will only be mild.
Coupled with Romney’s, those are the reasons why the United States should stay out of the European bailout game. U.S. exposure to Europe is less than Bob Schieffer and many Americans fear.
However, should things change and the U.S. economy is seriously jeopardized by an apocalyptic European financial collapse then the U.S. may need to consider more EU bailouts for its own self-preservation.