The questions that I most often receive as a Brit commentating in America are: why is the Euro a mess, will it survive 2012 and if it doesn't, how does it impact America? This is normally accompanied by a complaint that most explanations are high on jargon, low on clarity.
So let's strip it down to the basics. The European Union is comprised of 27 countries, which when put together make the EU, with a population of around 500 million people, the largest economy in the world. Seventeen of those countries are members of the Eurozone, nations that use the Euro (thus the UK with its pound is a member of the EU but not of the Eurozone). The Euro has been in general circulation for ten years and the Eurozone is the world's second largest economy, with a population of around 330 million.
Comparisons of what is going on with the Eurozone have been made with the economic meltdown of 2008. Greece has been called the new "Lehman Brothers". We are told that there's "déjà vu" with the sub-prime crisis -- no one knows what Europe's bad debt is worth or what exactly is exposed to it. However, as George Soros, the billionaire investor, just said, the Eurozone situation is "more serious and more threatening than the crash of 2008."
There are two main fundamental differences with the situation in America in 2008, both political and economic.
Politically, despite everything that has gone on in America recently, in the US there is actually a cohesive political system. America is one country that when it comes down to it, speaks the same language. In 2008 America's politicians came together and made some decisions for the good, in their minds, of your nation. America is, in times of trouble, the United States Of America.
Europe is not the United States Of Europe. It is the Disunited States of Europe. It is not one nation -- the monuments on Euro notes are fictional so no country's national pride is offended. In Europe, seventeen leaders -- and sometimes 27 -- ALL have to come to an agreement on a decision. And then go home and sell that to seventeen -- and sometimes 27 -- democracies. Europe literally and figuratively does not speak the same language. Thus these leaders have always been behind instead of ahead of the crisis curve.
Economically, America has a key weapon at its disposal: not only is it the world's reserve currency but the Fed can print as much money as is needed to finance its borrowing. The countries in the Eurozone do not have this power -- those that have run into big trouble so far, the PIIGS (Portugal, Ireland, Italy, Greece and Spain) do not have their own individual central banks that they can rely on to print money and buy their debts.
Why doesn't the European Central Bank just print more money? Theoretically it could, but the Germans are very opposed to letting this happen. There are a multitude of reasons for this, from the historical -- Weimer hyper-inflation contributed to the rise of Hitler -- to the belief that countries should not be bailed out for living beyond their means.
The irony is, that if you take the Eurozone as one entity, it does not lack for resources. The problem is political -- member states are reluctant to finance each other. It could well prove that there's too much democracy in Europe for the Eurozone to survive in its present form. In all of this the human impact should not be forgotten. Three years ago Greece had the lowest suicide rate in Europe. Now it has the highest.
The Euro was the world's worst performing currency in 2011 -- can it survive 2012?
I recently posed the question to one of the people charged with running the UK's financial system. My source gave the Euro a twenty percent chance of failure, although did not rule out a country such as Greece departing the Eurozone. However, he was swift to point out that Germany was determined the Euro survived and that the German economy was incredibly strong. The figures bear this out. Germany has just reported unemployment is at a twenty year low.
What Germany wants, Germany will probably get. But the only certainty is that 2012 will be the trickiest year in the Euro's history. Hedge funds increased bets against the Euro to a record level in 2011's final week.
So if the one in five chance happens and the Euro collapses, how could this impact America?
We live in a globalized economy. There would be contagion -- what happens in Europe doesn't stay in Europe. Soros called the consequences of the Euro's failure to the global financial system, "catastrophic". America will inevitably hurt.
The EU is America's largest trading partner. If it is in deep recession, American companies will suffer and more American jobs will disappear. To compound the problem, the dollar, as the world's reserve currency, will become extremely strong (people and countries will be trying to find "safe" places for their cash), making it harder for American companies to sell their goods abroad.
Meanwhile, some estimates have put American banks and market funds as holding more than $2 trillion in European banks. Those European banks hold a lot of European sovereign debt that could go bad. We're talking the possibility of banks, bankrupting. Of runs on banks. That means that American banks could suffer big losses -- and stop lending to fellow Americans. Basically, what happened when Lehman Brothers fell but far worse. MF Global would be the tip of the iceberg. To add to all this misery, the financial markets -- so your pension fund, money in equities -- will likely nosedive.
You also cannot underestimate what the disintegration of the Euro would do to confidence. Companies will be even less likely to hire, consumers even more unlikely to spend.
So economically, the Eurozone collapses and America -- which currently looks like it's out of recession, will probably be in another one. Politically that could mean that Obama loses in 2012 because of a financial crisis he had nocontrol over.
Legend has it that 2012 will be the end of the world. It won't be that, but in 2012 there would seem to be a twenty percent chance that we are likely to see the end of the world as we know it.
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