Is Greece too big to fail?
Europe's economic problems could cause more trouble for us
Wednesday, February 10, 2010
By Dan Simpson, Pittsburgh Post-Gazette
The current pickle that the European Union finds itself in -- as Greece, Ireland, Italy, Portugal and Spain stagger with debt and with the EU having few means to deal with the problem -- has negative implications for the United States.
The first is, with the United States trying to dig its way out of the triple snowstorm of continuing high unemployment, accumulating national debt and a Congress and White House seemingly incapable of clearing the road to measures that might alleviate America's situation, having Western Europe in difficult economic straits as well is not to America's advantage.
For the health of the global economy, it is better that America's European allies are solid -- in the pink -- especially when the U.S. economy is looking peaked. Even though the United States owes most of its overseas debt to the Chinese, Japanese and Arabs, it is comforting still to be able to borrow from the Europeans.
The second, probably worse European-related problem for the United States is the weakening of the euro against the dollar, which means European exports gain an advantage over America's. This is especially unfortunate when one of President Barack Obama's prescriptions for a return to U.S. economic health is an increase in U.S. exports.
The third difficulty for the United States is that the developments that have plunged some of Europe's members into perilous straits are similar to the developments that have the United States stalled, tires spinning, the temperature dropping and the comfort of the home fires far from view.
Greece is probably in the worst shape, but its situation is not unique. In spite of rules that dictate otherwise, it has indulged in deficit spending that, for its size, is terrifying in terms of the country ever being able to pay back the loans it has incurred. The Greek government also has systematically lied to EU authorities about the extent of its deficits and level of debt. Now, observers talk about the possibility of Greece defaulting on its loans. The world normally thinks of the possibility of defaults with respect to failing states, usually in places like Latin America or Africa, not in Western Europe.
The fault for Greece's plight, magnified by the global recession, lies in various places.
The first, obviously, is in Athens. Any government that borrows too much is asking for disaster. The second place for blame is Brussels, the headquarters of the EU. Just about everyone in Europe saw this coming. What was missing was the courage to blow the whistle on the Greeks and put the heat on them to be responsible. The third guilty parties are those who loaned the Greeks money, knowing their creditworthiness was low but believing, perhaps correctly, that someone would bail them out if they couldn't pay.
Now, let's think for a second. We don't know, do we, of any other country that runs big budget deficits, cloaks its true financial situation in promises to cut deficits and national debt a decade in the future, while in the meantime members of its legislature in the name of party politics and with a taste for campaign contributions refuse to pass measures that might put the country's finances on more solid ground? I must be thinking of Eritrea.
The economic and debt situations of Ireland, Portugal, Spain and even Italy, also EU members, are not very different from that of Greece.
Where the situation in Europe differs from that of the United States is that, for better or worse, the federal government in America has at its disposal the Federal Reserve Bank and other instruments to rescue the government, banks and financial houses if they get into trouble. Leaving aside the question of whether this is good or bad, the European Central Bank has virtually no such tools at its command. The political structure of the European Union is weak. It is in no position to crack the whip on national governments whose fiscal policies are irresponsible.
The bank's president, Jean-Claude Trichet, can lecture, exhort and even criticize governments mildly. He can neither lend them money nor punish them. Unlike the U.S. Federal Reserve, the European bank cannot buy government bonds nor provide money to banks. Mr. Trichet likes to say the relationship between his bank and the governments of the 16 euro-zone member states is comparable to that between the Fed and the U.S. states. (Let's hope the parallel holds, unless one would like to undertake a federal government bailout of feckless California.)
Just as there is a decent argument that says that if the big fat American financial houses had managed their assets so badly that they risked failing in 2008, the federal government should have let them go down with a thump, with the French kiss-off line, "to encourage the others," rather than deeming them "too big to fail" and saving them with billions of taxpayer dollars, it might be that the best way for the EU to deal with crooked, leaky governments like Greece's at this point in time is let them sink like a stone.
Even though it might be unpleasant to watch, such crashes can be educative. Salvation from their own folly by France, Germany, the Netherlands and other more responsible European governments at this point might encourage these states not to change their ways. On the other hand, there was the unsaved bankrupt Weimar Republic which preceded Nazi Germany.