Europe's Debt Problems

by John M. Curtis
(310) 204-8700

Copyright Feb.10, 2010
All Rights Reserved.                    

            Rising debt in Europe, especially financial woes in Greece, Portugal, Spain and possibly Italy, place more pressure on the Frankfurt-based European Central Bank headed by former French central bank president Jean-Claude Tricet.  When the Treaty of Amsterdam was signed in 1998, it established the euro as the common currency.  Built off the mighty Deutsch mark, it was never clear how Europe’s less industrialized countries would deal with the overvalued euro.  European Central Bank raised a high bar for member-states, requiring that a country’s debt burden could not exceed 3% of Gross Domestic Product.  Asked to join the euro party in 1999, the British government rejected turning over coinage authority to the European Central Bank.  Having fought bloody wars with Europe’s many disparate regimes over a thousand years, the U.K. said a resounding no to the euro.

            Translating currencies from member-states into euros favored the stronger economies, especially Germany, France, Netherlands and Belgium.  Poorer countries like Greece, Portugal, Spain and Italy got unfavorable exchange rates, leaving the countries strapped for euros in government coffers and public pension systems.  Greece finds itself under water with a debt burden nearing 13% of GDP.  With recent bailouts by the U.S. Federal Reserve, the U.S. debt-burden stands at 10.6%, hammering its currency against the euro since 2007.  Telling Greece that they should not expect a bailout by the European Central Bank, they inquired about a loan from the International Monetary Fund.  Loud criticism forced the European Central Bank to reconsider, prompting an appropriate drop in the euro.  European Central Bankers are forced to retire Greek’s debt or face a possible split from the euro.

            Threatening to shut down Greece’s economy, unions rejected proposed austerity plans designed to reduce the country’s debt-burden.  Nationwide protests signaled to the European Union that the Greek people wouldn’t tolerate a cold shoulder from the European Central Bank.  When the EU enticed countries to join in 1998, there was great reluctance to go to a common currency.  That ended, in effect, coinage rights of individual countries to manage their debts.  If the U.S. depended on an independent central bank—like in Europe—major financial institutions would have gone broke.  It’s up to the European Central Bank—largely controlled by Germany and France—to pony up the cash for Greece.  Without bailing out Greece the Belgium-based European Union faces potential disintegration.   There’s no advantage to member states if the EU won’t provides a financial safety net.

            European Union can’t have it both ways:  Expecting financial supremacy without bailing out economically-stressed member-states.  Whatever arbitrary value international foreign currency exchanges place on the euro, its dependent, like in the United States, on the perceived strength of collective member-states.  Greece’s growing debt presents PR problems for the EU, once seen by currency exchanges to be the world’s strongest currency.  It wasn’t that long ago that some EU members proposed dumping the U.S. dollar as the world’s reserve currency.  Now that there’s a crack in the EU, there’s growing doubt about the euro’s value.  Recent Obama administration proposals to freeze government spending and cut the U.S. budget deficit has helped reassure foreign currency exchanges, helping the U.S. dollar.  Credit-rating services, like Moodys, responded positively to Obama’s belt-tightening.

            Rising European debt hurts the euro’s value but helps the EU make its exports more competitive.  While it’s generally good to see the U.S. dollar make gains against the euro, it also makes exports less desirable.  “The euro is seriously under pressure,” said Simon Johnson, a former economist at the International Monetary Fund and current economics professor at Massachusetts Institute of Technology.  China, India and Dubai, all major holders of U.S. debt, specifically T-bills, like dollar investments to increase in value.  Stronger dollars cause the foreign T-bill investments to rise, since there an appreciation in dollar-denominated investments.  “It means we will be able to run up more debt, markets will let us do that at lower interest rates, than they would have otherwise,” said Johnson, explaining that Europe’s problems give U.S. more time to get  its economic house in order.

            Europe’s economic weakness involves more that a global recession but rather the failure of the European Central Bank to manage the Eurozone’s economic problems.  German and France may feel that Greece’s economic woes are not their own.  For the first time since launching the euro in 1999, the EU must manage it own financial crisis.  U.S. and U.K. central banks have tried to manage their recessions with more stimulus.  European Central Bankers rejected the U.S. and U.K.’s approach of lowering interest rates and making credit more available.  European Central Bankers can’t rely on the IMF or World Bank to retire toxic foreign debt.  They must respond to Greece and other stressed economies or face unavoidable cracks in the European Union.  While following the U.S. and U.K.’s lead will devalue the euro, the EU has no choice but to bail out cash-strapped member-states.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He’s editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.