Is the Eurozone crisis a Euro crisis?

Too many voices are pointing at the imperfections of the Euro as a monetary union, and blaming the Euro for the lingering recession across the continet, but it seems that the currency is not the root cause of problems. The real crisis is fiscal imbalance: Greek pensions, Spanish welfare, Italian debt/GDP ratio.  Contrast those nations’ fiscal policies with Germany, the Netherlands, and others.

So the question isn’t what transmission mechanism might bring the interest rate spike to U.S. bonds, it is whether the Senate can pass a budget. If America has another 5 years of trillion dollar annual budget deficits, our debt/GDP ratio surpasses Spain’s.  In fact, as AEI President Arthur Brooks recently noted in the Wall Street Journal, America is already more European than many European nations: “[O]ur debt-to-GDP ratio is 103%; Spain’s is 68%.” To be sure, if we don’t count debt America owes America, the ratio is only 73%, but CBO predicts it will rise to 200% in 25 years.

3 responses to “Is the Eurozone crisis a Euro crisis?

  1. I think the Eurozone crisis is as much about the failures of federalism within the EU as it is about monetary or fiscal policy. Without rehashing recent history, the basic question facing Brussels was whether to allow certain countries to default or bail them out with EU funding. The impacts on the Euro of default by any individual nation would have been similar to the impact on the dollar of default by any given state. ie. It would depand on the size of the state and the vagaries of the markets. Brussels might have been willing to take this risk given the relatively small size of the nations involved. But Greece upped the anti when it began seriously considering leaving the Euro zone which would have likely been quickly followed by an exit from the EU itself. It was not unreasonable to believe other southern european nations would follow this example. Brussels was now facing an unraveling of 60 years of efforts to unify Europe. Given the almost religious belief among europhiles that such unraveling would quickly return Europe to the hostile national competitiveness which led to WWI and WWII, Brussels had no choice but to develop a bailout package.

    It will be interesting to see how Washington reacts when various states face similar prospects of default. Will decisions be based on the ability of the dollar to withstand the negative impacts of default by states as large as California? Unlike Europe succession would not be an option. Nevertheless, pressure on Washington to act could be irresistable. The resulting bailout would likely be about as popular in Texas as the current EU bailout is in Germany.

  2. If you admit that US debt to GDP is already higher than Spain, and yet we can borrow at zero % real rates while Spain is over 7%, perhaps Debt/GDO isn’t a very important measure. Most people are expecting $1T deficits in the near term, so the fear that we get to 100% Debt/GDP is already out there isn’t it? This doesn’t even mention Japan’s 200% Debt/GDP or the US’s 250% after WWII. You seem to blame Spainish welfare, but Spain was running a budget surplus in 2007 before the financial crisis, so obviously it was the crisis, and not the welfare state that caused Spain’s issues, no? To me, it seems as though there’s a massive advantage to borrowing in your own currency, and those that can are much better off than those that aren’t, regardless of Debt/GPD or social welfare (Norway/Sweeden both huge welfare states yet low borrowing costs).

    • Remember that while the USA can borrow at AAA/AA rates, individual state/local governments can not. That would explain why Spain has higher borrowing costs than Germany. Those “countries” are the equivalent of “states”. At the moment I would be inclined to rate North Dakota higher than California if I worked for Moody’s.

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