[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                  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


                  U.S. GOVERNMENT PRINTING OFFICE
72-617                    WASHINGTON : 2012
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
20402-0001




                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
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

                   Larry C. Lavender, Chief of Staff
        Subcommittee on International Monetary Policy and Trade

                  GARY G. MILLER, California, Chairman

ROBERT J. DOLD, Illinois, Vice       CAROLYN McCARTHY, New York, 
    Chairman                             Ranking Member
RON PAUL, Texas                      GWEN MOORE, Wisconsin
DONALD A. MANZULLO, Illinois         ANDRE CARSON, Indiana
JOHN CAMPBELL, California            DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota          ED PERLMUTTER, Colorado
THADDEUS G. McCOTTER, Michigan       JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan


                            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


                  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 
address 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 members 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. Long-term 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.
    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 
American 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 European 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 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 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 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 important 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 context 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 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 
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?
    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.
    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 write-down of Greek sovereign debt in the amount of 
about $500 billion highly probable within the next few months. 
So in many analysts' 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 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 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.
    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 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.
    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.
    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.
    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, 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 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?
    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.
    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 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 included 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. 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 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 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 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 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.]


                            A P P E N D I X



                            October 25, 2011
[GRAPHIC] [TIFF OMITTED] T2617.001

[GRAPHIC] [TIFF OMITTED] T2617.002

[GRAPHIC] [TIFF OMITTED] T2617.003

[GRAPHIC] [TIFF OMITTED] T2617.004

[GRAPHIC] [TIFF OMITTED] T2617.005

[GRAPHIC] [TIFF OMITTED] T2617.006

[GRAPHIC] [TIFF OMITTED] T2617.007

[GRAPHIC] [TIFF OMITTED] T2617.008

[GRAPHIC] [TIFF OMITTED] T2617.009

[GRAPHIC] [TIFF OMITTED] T2617.010

[GRAPHIC] [TIFF OMITTED] T2617.011

[GRAPHIC] [TIFF OMITTED] T2617.012

[GRAPHIC] [TIFF OMITTED] T2617.013

[GRAPHIC] [TIFF OMITTED] T2617.014

[GRAPHIC] [TIFF OMITTED] T2617.015

[GRAPHIC] [TIFF OMITTED] T2617.016

[GRAPHIC] [TIFF OMITTED] T2617.017

[GRAPHIC] [TIFF OMITTED] T2617.018

[GRAPHIC] [TIFF OMITTED] T2617.019

[GRAPHIC] [TIFF OMITTED] T2617.020

[GRAPHIC] [TIFF OMITTED] T2617.021

[GRAPHIC] [TIFF OMITTED] T2617.022

[GRAPHIC] [TIFF OMITTED] T2617.023

[GRAPHIC] [TIFF OMITTED] T2617.024

[GRAPHIC] [TIFF OMITTED] T2617.025

