The crisis within the European Union, involving its banks, interconnected economies, and loan structures to bail out the 'peripheral' Eurozone nations [the so-called PIIGS: Portugal; Ireland and Italy; Greece, and Spain], continues.
The difference between the U.S.'s financial problems and the EU's, is that shared currency, the Euro, which is the financial prop behind the political structure of the Union. The EU is a realization of the dream of European political cooperation, and to organize as an economic bloc to compete with Asia, Russia, and the United States.
Having a single currency in the Eurozone not only makes it possible to sell goods and services between member EU countries, but to negotiate trade or industrial agreements -- with China, or Brazil, say -- around import-export, or the price of steel, cotton and foodstuffs, that benefit all the members equally: Italy doesn't receive a better deal than Poland when buying raw Indonesian rubber.
Another difference between the financial crisis Here, and There, is that Europe's crisis involves a series of interdependent, failed national economies. In the PIIGS nations, their governments stepped in and paid taxpayer monies to pay to bail out their failed banks -- what we did here in the U.S. But, their economies aren't as diverse and large as ours.
By taking on more debt to bail out their own banks and keep paying for social services for their populations, Greece ended up running a national (i.e., public) debt equal to nearly 150 per cent of their GDP. Germany's debt-to-GDP ratio is nearly 75%; France is at 84%; Italy and Ireland are at 118 and 94 per cent respectively. The world's most indebted nation is Japan, with a national debt equal to 225% of its annual economic output (These figures are for 2010, via the International Monetary Fund; the full list is here). By contrast, the United States' national debt is equal to roughly 92% of our GDP, which is bad enough.
Piggie, Piggie, Piggie
The PIIGS received loan packages from the European Central Bank (ECB), primarily from French and German banks. But, they have had to agree to enact 'New Austerity' principles -- cuts in government spending, even the sale of national assets, resulting in a radical downward shift in the quality of living. Services provided by governments would continue only at reduced rates, if at all. Budgets would be slashed. The PIIGS governments would have to shrink their payrolls -- and in Europe, a government job is more common than in America, and that would mean immediate higher unemployment rates.
Another complication is the vicious cycle of national bonds: The PIIGS nations issue government securities, like any other country, to generate revenue (We've done it with China for almost twenty years, and it's paid the interest on our National Debt). The amount of interest charged on those bonds indicaes how other governments and institutions feel the PIIGS are creditworthy, good investments. The higher the interest rate on those bonds means there's less confidence among investors that they'll be being repaid.
It also means the PIIGS will have to make good on those bonds, down the road when they come due. The interest rate on a five- or ten-year bond can go up or down, of course, which means as a government becomes more solvent, the less they'll have to pay in future -- but the focus now is on the short term. Can Greece, for example, make its ECB loan repayments on time, and pay back its treasury bonds at whatever interest rates?
Meanwhile, the citizens in the PIIGS countries don't agree with a lopsided bailing out of the rich, and many have been angry enough to participate in large and widespread demonstrations against the New Austerity, with strikes by unions, civil disobedience and even rioting.
'New Austerity' has been insisted upon by Angela Merkel of Germany and Andre Sarkozy of France -- principally because the risk for the ECB loans to the PIIGS is being borne by German and French banks. Unfortunately, Austerity kills any possibility of government job creation, or future private-sector growth -- private business can't grow in countries where The People can't afford to buy anything. And if the ECB loans are to be repaid on time, jobs and growth are critical.
Scrood, Tattood: We Will All Go Together When We Go
Greece has already missed one deadline this year, and the EU had to scramble to put a second loan package together, which didn't seem to work either. It's pump-and-shore belowdecks on the Good Ship S.S. Grecia -- and chained to the Greek economy are the French and German banks. They are chained to American, British and Asian banks; the European stock market; and the American and Asian markets. The Greek ship of state is also chained to the S.S. Italia, the Lisbon, the Eire and the Espania.
The Greeks can abide by the terms of New Austerity, and make good their government's decision to spend like crazed weasels when times were good, and to prop up Bad Zombie Banks with taxpayer money when things got bad for them. This would require the Greek people to live at lower standards of living, paying for the salvation of the rich, and selling the Parthenon to Russian Oligarchs. This is unlikely.
They could walk away; the Greeks could simply say, "No We Can't!" to the New Austerity, and default on it's ECB loans. French and German banks would suddenly be unable to borrow short-term money (as all banks do from each other); their stocks sink in the market, and stock exchanges all over the world would take a broad nose-dive.
As capitalization disappears, corporate businesses spend less and lay off more employees, or engage in more ruthless offshoring and outsourcing to remain competitive. Unemployment rises. Prices overall rise. Our economy, large as it is, becomes more vulnerable to the ripple effects of individual commodity price increases -- especially oil, but nearly all raw materials.
This is essentially the part where all of We, The People are, as my father used to say, screwed and tattooed.
That Sinking Feeling
There's a variant on this, where the Greeks pull their economy out of the Eurozone, and re-adopt the Drachma as their currency. Their economy would be quickly hit with massive inflation; on international markets, it could take hundreds or thousands of Drachma to equal a Euro -- but paying back loans with inflated currency is simpler at the macro level, and less painful, than before.
However, this might be the beginning of the end for the Euro, and the Eurozone; in which case the French and German banks end up taking it in the shorts, again. And, after a few months, 90% of America's population finds itself waking up to discover it had been forced to, uh, 'Do Things' the night before, and finds We all have a brand-new tattoo we don't remember getting.
The third possibility for the European debt crisis is the rapid implementation of a new financial structure for the EU -- something that would more tightly bind the EU economies and political structures together, and insist on the New Austerity, on making The Peoples of Europe pay for the greed-driven errors of Bad Politicians and Bad Banksters.
Putting a new, über-finance structure in place over the EU could preserve both the Euro (the financial structure of the EU), and the political Union. This is possible, but remember that not all EU member nations use the Euro (the UK is the largest, still using the Pound), and at this point it would take a tremendous effort of united political will. I'm not sure the Europeans have it. We certainly don't -- our government is about to be shut down, again, by the same Brownshirts who nearly did it a few weeks ago.
When Little Timmeh! Geithner went to Europe earlier this month and lectured the G20 finance ministers and central bankers on the need to fix Europe's economic issues or everything would blow up, he wasn't wrong. However, they felt insulted at being spoken to by Timmeh this way -- given that the global financial real estate and derivatives market which created this crisis was a Made-In-USA product from top to bottom, and exported around the globe.
One way or another, whatever happens There will come to live with us, Here; and that right soon, if any one of a dozen things goes wrong before the end of the year -- and the Bad News will all play out in a matter of weeks, not years, if it happens.
The international financial and economic structure is so tightly interwoven that the basic issues which created the crisis -- greed, a lack of transparency and regulation; more greed, and the general spinelessness of a political structure in service to wealth -- almost guarantees failure.
Since the Crash in October of 2008, government and finance efforts on both sides of the Atlantic have been an attempt to slow the rate of fall for the major economies. That was accomplished with a lot of free money being given to incompetent and greedy men, and with little or no cooperation on the part of the financial or corporate business structure -- banks won't lend; corporations are piling up as much cash reserves as they can.
Panic has started to set in, a bit; it's Every Man For Himself, abovedecks, on the U.S.S. Columbia. The speed of our fall since the end of 2008 has diminished; some days you don't even know you're still heading for the ground -- and, there's still plenty of teevee, plenty of Little Rupert's entertainments to watch that will keep your mind off that constant, sinking feeling.
But we're still falling. And, if you fall from fifty thousand feet going 150 MPH, or from one thousand feet at 50MPH, it doesn't matter. When you land, you'll still be dead.
Buy your popcorn now, while you can afford it, and before the stores selling it close. And, I say; more deck chairs from Port to Starboard!
MEHR: Paul Krugman, one of the smartest humans on Earth, mentioned in his New York Times Opinion Page column this Monday morning:
On one side, Europe’s situation is really, really scary: with countries that account for a third of the euro area’s economy now under speculative attack, the single currency’s very existence is being threatened — and a euro collapse could inflict vast damage on the world.
On the other side, European policy makers seem set to deliver more of the same. They’ll probably find a way to provide more credit to countries in trouble, which may or may not stave off imminent disaster. But they don’t seem at all ready to acknowledge a crucial fact — namely, that without more expansionary fiscal and monetary policies in Europe’s stronger economies, all of their rescue attempts will fail.