Friday, December 2, 2011

Seven Days to Defuse European Financial Bomb Before It Hits U.S.

Global American Series

Seven Days to Defuse European Financial Bomb Before It Hits U.S.

Just as the U.S. economy gets some good news with unemployment dropping from 9% to 8.6%, all our hard-won economic gains could be lost in coming days if Europe’s economy implodes –and according to experts that is exactly where it is headed. No one in the world has enough money to fix Europe if it happens.

If Europe goes down it will take down the U.S. economy with it, throwing us back into recession. In other words we could be a week away from a European Financial Bomb Hitting the US Economy.

The United States is at risk because the 27-member European Union (EU), a region with 500 million citizens, produces an economy almost as large as the United States and China combined It is one of our largest export markets – exports that create jobs here in the USA that could be lost if Europe does not get its problems solved.
In 2010, 22.5 percent, or $412 billion worth, of U.S. exports in goods and services went to the European Union. Since the Department of Commerce estimates that each $1 billion in exports creates 20,000 U.S. jobs, that means over 8 million American jobs are in the line if Europe goes down!

What is their problem? Europe is caught in a trap of their own making when it went from a Eurozone in which each country had its own currency to a Eurozone that has a single currency, the Euro, the common currency of 16 EU members.

Why is that a problem? Because under the old European system if a country spent too much and got into trouble, its country currency could be devalued against other currencies and that would fix it. For example, if Greece spent too much (as it did) the Drachma would be devalued, and because it was suddenly cheaper, it could attract a flood of tourists and its exports would be cheaper and more competitive. You can’t do that when everyone has the same currency, the Euro, so Greece and Germany can’t adjust their currency value as needed. It’s a currency trap.

For example, in the U.S. if Texas gets it budget out of whack (which it has) and runs a deficit, it cannot devalue its “dollar” currency and benefit. Instead, it has relied on U.S. stimulus money to cover its deficit – just as Greece has had Euro loans to cover its Euro deficits. So, what happens if Texas and Greece refuse to put their budget house in order? Texas is finding it has to deal with its structural deficit now that the federal stimulus funds are no longer available to cover its shortfall. Greece is in the same boat.

There is agreement between the two biggest European players, France and Germany, that the flaws in the single currency system are systemic. They require a major redesign of institutions and agreements. Secondly, there is an acceptance that the Eurozone is moving beyond a monetary union to a fiscal union, with much greater central control over taxing and spending.

The problem is that “fixing” these problems requires agreements among dozens of countries and their voters. Worse yet, time is not on their side. Who would control each nation’s budget and spending? In America we have one Congress and President doing that, not 27 different legislatures and heads of state, each with their own idea ofwha t to do.

Now what happens?

As Nobel winning economist, Paul Krugman, has pointed out, “Although Europe’s leaders continue to insist that the problem is too much spending in debtor nations, the real problem is too little spending in Europe as a whole. And their efforts to fix matters by demanding ever harsher austerity have played a major role in making the situation worse.” In other words budget cuts have cut jobs not created them, leading to riots and unrest.

Krugman points out that the Europeans responded to the inevitable, recession-driven rise in deficits by demanding that all governments — not just those of the debtor nations — slash spending and raise taxes. Warnings that this would deepen the slump were waved away. “The idea that austerity measures could trigger stagnation is incorrect,” declared Jean-Claude Trichet, then the president of the European Central Bank.

“The combination of austerity-for-all and a central bank morbidly obsessed with inflation makes it essentially impossible for indebted countries to escape from their debt trap and is, therefore, a recipe for widespread debt defaults, bank runs and general financial collapse.”

Krugman states that the U.S. “ we desperately need expansionary fiscal and monetary policies to support the economy as these debtors struggle back to financial health. Yet, as in Europe, public discourse is dominated by deficit scolds and inflation obsessives.”

In other words both Europe and the U.S. have been repeating the mistakes of 1937 under FDR, when the government worried about rising deficits caused by government work programs to get the economy moving out of the depression -- and embarked on cutting budgets in an austerity move and tried to balance the budget. The result? Premature austerity cuts put the U.S. right back into a recession. We didn’t recover from the downturn until we embarked on the major spending required to support WWII.

The bottom line? Europe made a huge mistake with the single currency, but it can’t ditch it without causing major disaster. We can do little to keep Europe from stumbling as it goes back to the drawing board to create a 21st Century system that stabilizes the European Union. The only thing we can do is to avoid falling into the same austerity trap ourselves.

Either way it points out how vulnerable all of us are in a global economy when bad decisions made thousands of miles from our borders can impact the job you have today and tomorrow. Let’s not make things worse by making the same mistakes that history has taught us to avoid.

But from the sound of the Presidential candidates, it appears that we are heading for the same economic cliff as the Europeans…

Michael Fjetland
Global American Series
Click "Subsribe" or "Follow" to get future updates

Sponsored by Armor Glass International, Inc.
Don’t Leave Home Without It

No comments:

Post a Comment

Comments from real people welcome. The only comment rule is "BE CIVIL." Let's discuss SOLUTIONS based on real FACTS.

Thanks for your feedback! Click "Subscribe" or "Follow" for notification of future posts. Feel free to Share with your friends.