This is now the third time I've sat down to write something about Europe and the mess they're in. Each time I've gotten halfway done, and then the next day some new major development happens that makes a lot of what I've written obsolete. It's such a see-saw over there! Here's hoping this post is relevant for at least the next hour. Feel free to skip any section you're not interested in! :)
The Real Problem in Europe
The EU is in big trouble. The immediate problem is that Greece is essentially bankrupt and needs to be bailed out, but the real root of the problem is that all of its member nations use the same currency but each nation gets to set its own fiscal policy. Let's use a quick example to understand why that's a problem. Suppose there are two friends named Germany and Greece. They've gotten along well for a while, and so they decide to move in to the same 2-bedroom apartment. Germany is more of a natural leader, so he pays a bit more of the rent but also gets the bigger bedroom with the window. Things go well for a few years, but after a while Germany starts to worry about Greece. You see, Greece got laid off from his job, but rather than cutting back his living standards, he's just charged his expenses on a credit card. Germany is concerned that Greece isn't going to pay his portion of the rent, but he doesn't want to say anything because he doesn't want to hurt Greece's feelings. Unfortunately, things go from bad to worse for Greece, and in the end he sheepishly approaches Germany to tell him that he can't cover the rent, and that he's in debt up to his eyeballs.
What's Germany to do? He doesn't want to bail out Greece, but not doing so will get BOTH of them evicted from their apartment, and Germany will not only have to find a new apartment, but he'll lose his (large) security deposit on the apartment as well. But if he just bails him out, he's worried that Greece (or one of his other down-on-their-luck friends--Italy, Spain, and Portugal) will turn around and ask for another handout soon. In the end, he decides he'll bail out Greece (with the help of other friends--France, IMF, US, and others), but only under some strict conditions that will essentially force Greece to pay him back out of his future wages.
Greece doesn't like this deal, but he doesn't have many options. He could refuse it, and just move out of the apartment, but he'll never find a better apartment (in fact, he'd have to live in a pretty crumby one), and Germany buys expensive food that Greece really enjoys. But if he takes the deal he's not sure when he'll ever be able to get ahead, because all of his extra money will be going to Germany to pay him back. He wavers back and forth, undecided about what to do.
Okay, it's not a perfect example, but putting it in this context makes it easier to understand the main points, I think. The real problem going on here is that in the EU each country shares the same currency, but each country gets to decide individually how much it's going to borrow and how much it's going to tax, along with a host of other policies. This means that countries that are irresponsible can harm others in the EU, because any action they take affects the currency that they all share. In my story, that's like Greece just spending away after he lost his job--he knows that Germany will have to bail him out if it comes to that, so he has less incentive to cut back. Where my example breaks down is that it's a much bigger deal for Germany and other EU countries than just having to find a new apartment. If Greece really crashes and burns, it will likely have a large effect on all of the EU. Specifically, it could easily push Italy, Spain and Portugal over the edge as well, and if those much larger countries fall into a serious recession, all of Europe will almost surely follow suit.
The Solution for Greece and the EU
So, we have the immediate problem, which is that Greece is bankrupt, and the long-term problem, which is that the EU is set up in a way that is unsustainable. In my view, to fix the immediate problem Greece needs to take the bailout. They keep going back and forth on this. At first they accepted, then they said they'd put it to a referendum (which is equivalent to rejecting it), then they said they wouldn't do the referendum. Who knows what they'll choose tomorrow. But it's in everyone's interest that Greece doesn't completely crash and burn, and to avoid that we need to bail them out. The problem is that there are no bankruptcy courts for nations, so there's not an orderly way to deal with the process, and that's why it's so messy and uncertain. But, under whatever terms they finally decide, a bailout needs to happen.
Fixing the EU itself is even trickier. I really like the idea of the EU. A unified currency, free trade, and free labor markets between countries are all things that I fully support. I think the European Central Bank has done an outstanding job so far, as well. But to make it work they need to have a more unified government--especially in terms of fiscal policy. And doing that is going to be extremely difficult because each country has such a distinct culture, and no one country is going to be willing to bow to any of the others. We have distinct cultures in each state in the U.S. as well, but we have the benefit of having grown up together. We all think of ourselves as American first (well, maybe except Texans :) ), and so we are willing to have a centralized government for most things. Europeans have a much harder time doing that. The Germans HATE the idea of bailing out the Greeks. The Greeks HATE the idea of being bailed out by the Germans. The Italians are not about to cow to the whims of the French! And that's the problem: they think of themselves first as Italians, Greeks, Germans, and French, and not Europeans. I just think it's going to be pretty much impossible for them to agree to any sort of effective centralized government that can run fiscal policy. That makes the euro unsustainable. Which means that I predict that several nations, if not all of them, will stop using the euro over the coming years. I just think that's inevitable at this point. The goal, then, should be to make the transition as smooth as possible--which means bailing out Greece to put out the fire, and then finding an exit for them. I really hope that the EU survives with free trade and free movement between countries, and I think it will, but I think the euro is gone.
What this means for the U.S.
The good news is that this is happening in Europe and not here. Yeah! It wasn't us this time! Is there any other good news? Well, if Europe goes down the economic drain, that means that all of our companies here in the U.S. that compete with European companies will likely do a bit better because they'll have weaker competition. And, this solidifies the U.S. dollar as THE worldwide currency, which is a good thing for us overall. And, we'll likely be able to buy European goods for cheaper, I guess. And...uh...that's about it for the good news.
The bad news is that we do about 20% of our total trade with Europe. If Europe has a major recession, we will almost for sure fall back into recession as well. That's the real story. To get some sense of how this is affecting us, check out
this graph of the S&P 500 index. Really, click on it. See that big jump on October 27th? That's when the bailout deal for Greece was announced. The market rose like 2.5% on that news! That's huge! That means that the average large company in the U.S. was suddenly worth something like 1.75% more* just because Greece was going to be saved! Now look at what happened around Halloween--look for the big cliff. Stocks dropped about 1.3% over the weekend, and then another 2.8% on Monday night. What caused that? That's when Greece announced it was going to hold a referendum, which would likely kill the bailout. U.S. companies were suddenly worth substantially less because Europe was back in its pickle. Our economy is just very closely tied to Europe's. If they have problems, that means we're going to feel that, and vice versa. These days, our economy is pretty closely tied to almost everybody else, for that matter. If Europe falls into a major crisis, that means that suddenly they're not buying as many American goods and services (mostly services!), they're not sending as many tourists over here, and they're not hiring as many Americans to work for them. It also means that they won't be doing as much trade with China or Canada or South America, all of which are major trading partners for us as well. All of those things hurt us.
So, please, Greece, take the bailout, and please, EU, let's make these changes as calmly as possible. Pretty please?
Comments, suggestions, thoughts, or questions are always welcome! Also, please vote on what you want me to write about next: (1) Occupy Wall Street, (2) Education in America, (3) the Lewis and Clark Expedition and new frontiers, (4) How we mess up lots of decisions.
*The value of the average public company in the U.S. is made up of about 30% debt and 70% equity--so when the market goes up by 2.5%, the value of the company goes up by 2.5%*70%=1.75%.