I received some very positive responses to my last missive debunking the recent unfounded hysteria about the Federal deficit and the national debt. This has made me foolish enough to take on the much more complicated problem of debunking the common misconceptions many people have about the current economic problems in Europe.
Let me start with the common misconception that Europe's current problems are caused by the 'fact' that it spends too much on social programs it can't afford, and has therefore piled up a prodigious debt it cannot manage, all the while killing its economy with punitive taxation. In other words, Europe is supposedly a textbook case for the 'failure' of 'socialism', which we in America should avoid at costs by slashing spending and taxes and deficits and debt... well, you know the drill!
Actually, all this turns out to be remarkably easy to dismiss. In fact, the economies in Europe that have some of the highest rates of taxation and social spending - and even sovereign debt - are in the North - Germany and Scandinavia. These are doing the best economically and fiscally in nearly all regards - case basically closed.
To help further nail it shut tight, consider this: Germany has a far heavier debt load that Spain - 83% of GDP for Deutschland, 60% for Espana. But investors are screaming to buy Germany bonds at near-zero interest rates, while Spain now has to finance its new debt at 6+%! There plenty of other such 'counter-intuitive' examples. In fact, of all the many countries in Europe, Greece is pretty much the only one close to fitting the common misconception I cited above, and it represents a measly 3% of the Eurozone economy.
So if none of the usual talking-head-babble is the real problem, what is? It turns out that (surprise, surprise!) the real problem stems from bad bank lending - especially real estate lending - just like in the US. This bad lending, and its terrible consequences for many countries, are an indirect result of the introduction of the Euro. Really? Wasn't the Euro a good thing for business? Didn't it make it much easier to trade and to move around, the supposed virtues of globalization?
Yes, indeed, but in this case to a fault. The introduction of the Euro released a tidal wave of financing for infrastructural projects, both private and public in countries like Greece, Spain, Portugal, Ireland, Iceland, etc. (sometimes unflatteringly called the 'PIIGS'). These countries were never able to attract such debt before based on their own weak currencies.
Not surprisingly, many of these projects were financially dubious, especially in real estate - just like in Nevada, Florida, and Arizona! When the global recession hit in 2008, lots of them failed, leaving many European banks on the hook, just like what happened in the US.
But unlike the US, there was no obvious bullet-proof government-backed central bank, like our Federal Reserve, to provide a firm financial backstop. The weak European Central Bank (ECB) provided some help, but its statutory mandate and financial capabilities are a mere shadow of the US Fed. In the absence of a Euro-wide Fed-like agency, individual country governments did what they could to keep their banks treading water, staving off the problem for a couple of years.
But meanwhile the recession was reducing tax receipts, requiring more and more sovereign borrowing. Eventually the patience and nerves of sovereign bond buyers wore then, and countries that were previously considered quite low risk - like Spain - suddenly became high risk. Bond interest rates went up sharply in these countries, which made their budget problems even worse, and so on. To this day, the healthy countries are still providing only piecemeal help, and have not yet decided to provide a full backstop to their struggling Euro-cousins. So the beat goes on....
Where will it end? Well, in a weird way, the Euro experiment has actually been a success. That is, assuming that the current crisis does not totally tear apart the European Union or the Eurozone, it will force Europe farther in the direction of political and economic integration, just as the creators of the Euro intended. And, of course, this will almost certainly include a lot more Euro-wide bank scrutiny and regulation, as well as a full-fledged ECB much like the Fed.
Oddly enough, this is pretty parallels what happened during the crisis in the US as well, albeit more under-the-radar. During the financial crisis and the recession, the Fed has quietly but massively expanded its role in the economy and particularly the financial industry by providing almost unlimited, nearly-free lines of credit to the banks. Some conservative ideologues have complained - even calling for Bernanke's head - but most politicians have silently heaved a sigh of relief, since the Fed's actions have staved off disaster without forcing them to make much tougher decisions and then have to explain all that to their voters - much like the current crop of Euro-politicians.
And to that last point, let me add just one more. Guess who is backing up the ECB and the big banks in Europe while the Eurozone gets its act together? Surprise again - it's our very own Fed! That's right - right under the noses of the supposed deficit/debt hawks in Congress, Mr. Bernanke is single-handed providing near-limitless lines of credit to 'socialist' Europe, and almost nobody is complaining. Why? Because everyone know that this is by far the cheapest and easiest way to prevent another world-wide recession and financial crisis, AND THAT'S HIS JOB!!
No comments:
Post a Comment