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Hard questions from Europe

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European Commissioner for Economic Affairs Olli Rehn speaks during a media conference at EU headquarters in Brussels, Wednesday, May 5, 2010.

European Commissioner for Economic Affairs Olli Rehn speaks during a media conference at EU headquarters in Brussels, Wednesday, May 5, 2010.

Associated Press

Violent protests in Greece. General strikes throughout France. Nationwide protests in Ireland. In recent months we have seen how the European debt crisis has tested the mettle of European governments to reorder their fiscal houses and maintain a common currency. It may seem that the economic concerns that send up media images of unrest in Athens, Paris and Dublin are irrelevant to our daily lives in the United States.

But like it or not, the questions raised by Europe's ongoing sovereign debt and banking crisis have major implications for the United States' economic future. How U.S. policy makers answer those questions could affect the health of U.S. credit markets, the strength of the dollar and the latitude our government has to solve its fiscal mess.

Last week, the U.S. Federal Reserve accounted publicly on how it allocated its initial round of emergency credit during the 2008 credit crisis. The most interesting revelation was that a major slice of these emergency credit facilities went to bail out European banks. The European central bank simply did not have the tools or resources needed to ease the 2008 credit crunch. Consequently, the Fed played banker to Europe.

So here are just a few of the questions that concern us as we watch the European sovereign debt and banking crisis continue to roil through Greece, Ireland, Portugal and Spain.

Is it possible that European banks could come calling at the Fed for assistance yet again? If they come, will the Fed, which has all but announced that it has no more cards up its sleeve, be able to help? And if the Fed can't help, would the contagion of a European credit collapse be contained to Europe?

If the United States chose to stay out, would China choose to step in? Would the prospect of diversifying its portfolio of international reserves at a discount create a major strategic opportunity for China? Could a significant Chinese investment in the euro undermine the dollar's status as the world's reserve currency?

And if the dollar ever stumbled from its status as the world's reserve currency, who would help underwrite U.S. debt? Consider that according to the Organization for Economic Cooperation and Development and China's central bank, the fiscal condition of the United States is actually worse than that of any of the European nations currently forced to undertake emergency austerity measures — worse than Greece, Ireland, Portugal or Spain.

The crisis being played out in the streets of distant European capitals should not only raise significant questions about U.S. monetary policy; it should also stand as a cautionary tale about the gravity of the nation's broken fiscal policy.