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.
http://rodgermmitchell.wordpress.com/2011/12/20/the-european-union-the-solution-for-too-much-debt-is-to-borrow-even-more/
Mitchell says
There continue to be two, and only two, long-term solutions for euro nations:
1. Return to Monetary Sovereignty by re-adopting their sovereign currencies or
2. The EU to give (NOT lend) euros to member nations as needed.
States in USA can't create money and are dependent on the federal govt for funding. They can get money by state taxes and can't deficit spend. They can set up gambling casinos at borders to take away money from adjoining states (like Nevada and Ca).They can sell municipal bonds and borrow private money. State banks can (if they exist and operate like too big to fail banks.) These restrictions apply to you and me and states and businesses except to the federal govt which can create money and banks which are too big to fail which also crate money. They depend on the congress to approve of tax-payer bailouts. Ordinary banks can and do go bankrupt.
The problem with Europe is there is no political unity. The best option for Greece is to go back to sovereign Drachmas and get democracy back and get used to a lower standard of living. And get suggestions from Argentina.
Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports
Time to cut government spending, reduce taxes, reduce wealth transfers and re-embrace free markets devoid of the individual and corporate welfare to which people have become addicted.
Kai
1. Greece, excepting debt payments, would have a budget surplus this year (http://businessetc.thejournal.ie/ambitious-greece-promises-to-turn-budget-surplus-for-2012-230412-Sep2011/).
2. Southern Europe's "emergency" was precipitated by manipulation of an American Wall Street company (http://www.presseurop.eu/en/content/article/1177241-our-friends-goldman-sachs).
Free market capitalism tends to abuse.
On Point 1) Of course, just like many debtors with big credit card debt debt would have savings if they had not run up so much credit in the first place by being fiscally imprudent. What is new? All you did was illustrate my point, which is that Greece is now forced by markets to act prudently since the Euro no longer lets them resort to gimmicks to get out of recognizing the real cost of socialism.
On Point 2). Hahahahaahaha. Goldman Sachs did not create their debt, their ruinous fiscal budgets did. All GS did was enable them to keep the charade going longer than it should have. The real cause of the debt problem is irresponsible spending, not those who enabled them to borrow. It is kinda like blaming the credit card company for giving you the credit card that allowed you to live above your means. It is a non-starter.
BTW, Greece was on an irresponsible budget trajectory BEFORE they ever met Goldman. Please lean to not conflate a symptom of their debt (GS helping them monetize future tax earnings) with the cause of their debt (Socialism and welfare-state nonsense).
Churchill said it best, ‘Socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy, its inherent virtue is the equal sharing of misery.’ -Winston Churchill
Kai
It you take away most people's house payment, car payment, credit card payments, tuition payments, and loan payments there would be a surplus. It is precisely the borrowing to spend today that is causing the problem. They and us need to stop spending.
http://pragcap.com/resources/understanding-modern-monetary-system
Stripping out your narrative and going right to your points:
You state, ‘No deficits means no growth!’
True deficits can increase growth artificially in the short-term, as you pull forward growth via borrowing. But in the long-run, expectations would balance it out. Besides, you are also ignoring the monetary side of this equation.
You state, ‘Every govt surplus is followed by depressions.’
Really? Possibly because much of the surplus was due to artificial economic growth caused by keeping central bank credit too cheap and too easy for too long, that causes misallocation in the economy and creates bubbles which have a tendency to pop…as was the case in 1999 and most recently in 2007/8/
I live in Hong Kong, we run surpluses all the time…the government simply rebates back my tax. Our last surplus was in 2008…we have had no recession…unemployment is 3%, 1.7% if you include part time work. Median salaries on a PPP basis are higher than in the US. And we run consistent trade deficits. How do you explain it? BTW, we are tied to the US dollar not the RMB so we inherit US monetary policy, not China’s.
Kai
It is much better to have real growth and live within our means.
Also imagine what it would be like if the US Senate had to have 100% agreement before anything could be passed.
Republicans do NOT want the US to be like Europe -- they generally want smaller government and less spending, not socialized federal programs such as Obamacare. You must not have good analytical skills.
He and his wife paid me a visit in NY last month and he finally admitted that I was right and that he had been wrong. Even Gemans recognize that the Eurozone, as presently designed, is ineffectual and unsustainable. 2012 will be the beginning of the end of the Eurozone as we know it and we will all be better off for it. I predict that many EU countries will leave the Eurozone or it will be tiered into different zones of differing values.
It's the end of the world as we know it and I feel fine...lalalala
Greece has been guilty of spending more than it takes in all along. But that's due in large part to Greek citizens not paying their taxes. There is an untaxed "shadow economy" in Greece that is estimated to be as large as 30 percent of the reported GDP. If taxes were collected from the Greece's "shadow economy", Greece's deficit would fall from 13% of their GDP to 4%.
http://www.forbes.com/2010/05/14/greece-taxes-debt-opinions-contributors-richard-murphy.html
And contrary to what conservatives would like people to believe, the other European countries with debt problems weren't profligate spenders. Spain and Ireland actually had budget surpluses before the global economic collapse in 2008, and much of their current deficits are due to bailing out their banks.
Italy has a high debt, but a relatively low deficit of 4.6 percent of GDP. And unlike other countries, Italy's debt is held mostly by Italians rather than foreign investors.
Like here in the U.S., European countries continues to suffer from the Republican Recession. Unemployment is up, so tax receipts are down. What the European Central Bank is insisting on is that countries with high debt take "austerity measures". In other words, ECB officials believe that adopting contractionary economic policies will do something other than cause economies to contract.
http://rodgermmitchell.wordpress.com/2011/12/25/italy-tries-to-grow-their-economy-by-taking-money-from-their-economy-huh/
ECB is lending Money to all the Losers in Europe, ECB will own much of the PIGS.
Write downs of PIGS Assets will be subsantial, 50 % for most of them.
It will take ten years to recover.
putin laughs all the way to the bank. the surprise will be when germany and france and italy will hold back from supporting obama until after election in taking out iran nuke sites. the election will be won and support for the euro will not be found.
Tick, tick, tick. . . .
Government overspending (particularly in the South) is cited at the villain. First, such overspending has not only occurred in the South and, secondly, that overspending was relatively manageable compared with the overspending of entire economies. The huge current account deficits only underline that value creation had moved to the North and value consumption to the South. And this was only possible because the re-allocators of capital (banks, etc.) did a lousy job at re-allocating capital: they wasted capital by lending it to people/economies that spent the funds on consumption.
If we know the causes of trouble, all we need to do is to reverse them if we want improvement. That means: value creation has to be moved to the South again and the North needs to consume more of that Southern value creation (and live with a little less value creation on its own). To move into that direction should be the policy goal of all policy makers!
http://klauskastner.blogspot.com/2011/12/closing-2011-with-minority-view.html