500 words - You are the Chair of the Senate Finance Committee. Write a Position Memo to the President, including a summary of the issue, objectives, and three options with an analysis (pick one option you think is good and state why, pick two options you do not think are beneficial and state why)

The Issue: Since 2010, many European economies have struggled with high debt and low economic growth. The problem has been particularly acute in the eurozone, the group of nineteen European Union (EU) countries that use the euro as currency. (All eurozone countries are in the EU, but not all EU countries use the euro.) Many countries neighboring the eurozone have endured financial crises since 2010most notably Greece, but also Cyprus, Ireland, Italy, Portugal, and Spain. Although the height of the eurozone crisis has passed, indebted governments, banks, and corporations continue to be a feature of many eurozone countries, a situation that could lead to more crises in the future. The economic downturn spurred by the COVID-19 pandemic in 2020 and the vast government spending to combat it has further underscored these weaknesses.

One possible source of a reignited financial crisis in Europe is the banking sector. Banking crises can be particularly dangerous. Financial institutions and markets are built on confidence: if one bank fails, customers could panic and pull money out of other banks so that failure snowballs. Moreover, financial institutions and markets are global; a banking crisis in one country can quickly spread to others. The Great Recession of 2007-2009 began as a banking crisis when the U.S.-based investment firm Lehman Brothers went bankrupt. Banking crises are also destructive because they can lead to a vicious cycle of economic problems, also known as a doom loop: when banks need governments to bail them out (i.e., provide money and resources to save them from failing), governments (sometimes already over-indebted themselves) run into financial problems of their own, endangering confidence in the entire economy. Eurozone banks have now recovered from the worst period of weakness (between 2010 and 2015). A return to steady economic growth in the eurozone in 2017 strengthened the banks, as did cheap credit from the European Central Bank (ECB) and injections of money and resources from governments. Even so, Europe's banks are not out of danger. In an effort to increase confidence in financial institutions, organizations such as the ECB have begun work on protective measures to insure bank depositsbut these measures are incomplete. A banking crisis in a core country such as France, home to some of Europe's largest banks, could have catastrophic effects on neighboring economies and even spread to the United States and beyond.

option 1: Work through the IMF.

The United States has traditionally exercised significant influence within multilateral financial institutions such as the International Monetary Fund, to which France could soon apply for a bailout. Through the IMF, the United States could provide aid to endangered European governments. An IMF loan would allow for additional spending and help create a prompter and more aggressive rescue package for French banks. The risk is that the massive government debt could undermine public confidence in the government's financial health.

Even though the IMF could be part of an overall strategy to address the crisis, its assistance to the French government could cut two ways. IMF's help could strengthen Macron's government. However, IMF assistance could also come with conditions imposing additional austerity measures. These austerity measures could reinvigorate the FN's anti-American and anti-foreign rhetoric, even though the party was weakened by its presidential defeat in 2017.

option 2: Work bilaterally with France and other European countries.

The United States could decide to reach out to affected European countries to help them address problems in their financial systems before the crisis hits U.S. financial institutions. This could include the provision of direct financial support to France. The aid would get to France quickly and help firewall the French and European financial systems by providing enough money to end the crisis before contagion sets in and the crisis spreads to other parts of the highly interconnected global financial system. By working bilaterally, the United States could act without waiting to coordinate with other G20 or IMF members. This option would also allow the United States maximum flexibility in pursuing its policy goals.

This plan includes a number of risks. By working bilaterally, the United States risks alienating other countries that have resources to commit to the problem. (For example, China provided funds to European governments during the 2010 debt crisis.) Moreover, any bailout could cause political problems at home because Congress and the American people could regard any direct aid as unwarranted assistance to foreigners. Ever since the United States provided bilateral aid to Mexico in 1995 during an economic crisis, Congress has often opposed U.S. bailouts for foreign countries.

option 3: Do nothing.

The United States could decide to do nothing about the crisis in France. The U.S. economy is comparatively healthy, and U.S. banks are in a far better position to survive this crisis than they were in 2008, thanks to regulations introduced after the last crisis. Inaction would also save the United States from having to spend money and political resources. However, doing nothing could be harmful. The survival of U.S. banks through a crisis of this size is not guaranteed. Further, by leaving France to fend for itself, the United States could risk political contagion. France or other countries could abandon the euro and embrace protectionist policies, which would have costly side effects such as slower economic growth and higher unemployment. Moreover, a fractured Europe would have enormous political repercussions for the United States in terms of cooperation on a host of issues from counterterrorism to trade.