The European Muddle

Like many great issues of the day, the euro mess is difficult to conceptualize.  Why not take a stab at it, though, since it’s something that could cause the US economy to collapse?

Here are links to a few graphics encapsulating different aspects of the European problem.  A few insights can be gained by interpreting them with our own 2008 financial crisis as a point of comparison.

The European Union faces at least two complex interrelated problems.  The first has to do with the condition of banks; the second has to do with the indebtedness of member countries.  There is also a third problem, which is more political.  It has to do with the structure of the EU itself and the poor tools it has for redressing “state-level” problems (critical weaknesses within member-nations like Greece and Spain) that threaten the euro’s value and stability.

Credit imbalances within the euro zone
The integration of nations within the eurozone encouraged capital flows within the community, while creating imbalances that threaten it, should the banks within one of the weaker countries fail.

This wonderful set of graphs published by the New York Times shows the interrelation among creditors and borrowers by country.  Done in late 2011, the graphs offer a general idea of how the stronger European economies—France’s in particular—would be affected if the banks of Greece and Italy were to go down.  French banks have many loans outstanding there and would incur grave losses, possibly fatal ones, were their weaker counterparts to fold.

Unlike in the US, the euro-zone lacks a mechanism like the Federal Reserve, which capably intervenes to stabilize and close or sell ailing US banks if necessary.  In 2008, the Treasury and Federal Reserve averted a general financial meltdown in the US this way.  They intervened directly in the affairs of troubled banks in the interest of keeping the whole banking system operating.  The panic of failing banks was mitigated;  otherwise, it would have spread like a contagion.  Our banking system was supported, and the problem was treated as a matter quite separate from that of the federal government’s own indebtedness or patterns of borrowing.

Until recently, the European Union could not behave similarly: it could not act to help banks, it could only give money to sovereignties.  On June 28th, however, the EU’s member-nations agreed to begin lending money to banks directly, a measure that untethers these two problems and allows a more flexible approach aimed specifically helping banks that might fail.  Nonetheless, it remains to be seen whether this will be much help, as the level of capital needed to stabilize the banks is very large.

Rising sovereign debt
Which leaves the other big problem: the rampant government spending in many EU countries, illustrated in this set of maps, also published by the New York Times.  The maps indicate the significant variation in the spending habits of the governments that make up the European Union.  In many of the EU countries, however, including some of the strongest—such as France and Germany—sovereign debt as a portion of GDP has been growing dramatically.  The difficulty of reining in spending and bringing the most profligate governments in line has led to popular unrest as well as political conflict over austerity measures and proposals for stringent fiscal reform.

It’s not clear, though, whether these disproportionately high debt burdens pose a threat to the long-term health of many of the stronger EU countries.  The more that the elements of the crisis can be differentiated and handled pragmatically on a case-by-case basis, the better the prospects for amelioration will be.  This is definitely a case where what’s good for the goose is NOT good for the gander–or in this case, more fitly, for the PIIGS (the acronym for Portugal, Italy, Ireland, Greece, and Spain).  Helping the most distressed banks may at least buy the EU time to address the more politically fractious issue of how to restore fiscal balance—a very different proposition in Greece than it is in France or Germany, and a more sensitive issue still for the euro zone as a whole.

The Sovereign Debt Exposure of the EU’s 10 Strongest Banks
, Forbes.
Paul Taylor, Euro Zone Fragmenting Faster Than the EU Can Act, The Independent (Dublin).

8 responses

  1. The problem with the EU is that it is a currency union w/o political union. Europe will never be “united” in the sense of the U.S. Too much history and most of it bad…….


    • It certainly is a wild experiment that the Europeans have embarked on. The norms of economics and finance create a pressure for uniformity, and all the transnational mechanisms we have today work to undermine nation states and their sovereignty. It’s a complex topic. What we are seeing with Greece and the other Mediterranean countries is an instance of that. I have vivid memories of a devaluation of the drachma that resulted in the ruination of my father’s firm. It taught me that the Greeks have their own ways of doing things. How would Americans feel if we were expected to use money that we didn’t control?

      We look at these monetary things as though they must be one way. Yet the paper we used during periods of US history were actually pretty funky. Maybe the Greeks should be allowed to use two currencies! SB


    • The EU reminds me of America under the Articles of Confederation (1781-1787). That didn’t work and the EU will not either……..


    • Well, the fledgling states had a strong motive to band together–they knew they didn’t have much to fall back on. It’s more difficult when the entities in question have long (VERY long) histories and mature cultures.

      Money’s value depends on confidence, and credit relationships depend on trust. The crucial elements needed to keep the euro zone functioning may well be intangible. Are they there? I can’t call it.


    • The EU will not survive as it is…..either states give up some sovereignty (they probably will not) or it will fail……they make major structural changes or it will be all over…….for starters I think Greece is doomed as far as the EU is concerned…….


    • Remember how the IMF and World Bank went through a period when they were constantly intervening in Latin American countries? Those economies were perpetually on the verge of collapse; for years and years we would hear of proposed debt re-structurings, moratoria, etc, etc. In the end, the countries and their economies stabilized. My hunch is that Europe will too.
      The EU is a larger political entity than the eurozone, and older too. It has helped some of its member countries reconceptualize themselves in the wake of WWII and later the collapse of the Soviet Union. It might not last forever, yet I doubt that its usefulness has been exhausted yet.


    • Yes the IMF and World Bank imposed strict austerity measures in various Latin American countries……actually they did the same in Asia (Thailand, Philippines, etc……these were all “developing countries” and they really had no choice or the Bond Market would not invest.) The situation with the EU is not the same at all. With the exception of Greece and a few other minor players these countries are fully developed and more or less functioning. The problem I see in Europe and the EU is they have a monetary “union” with no corresponding political authority (like the U.S. under the Articles of Confederation 1781-1787)……so in the end I think one of two things will happen: there will be a United States of Europe (extremely unlikely) or Germany, France, U.K. and other solvent members will call the shots. The EU is a useful monetary-trading bloc, but politically it is limited. So, when I say it will not survive as it is, this is what I mean. Will Germany, etc., continue to enforce austerity in Greece, Spain, etc., or just let them exit the EU?


  2. There were times when i voted for [the] euro . . . but today i would like to have our old money, cause with the euro everything is much more expensive + Greece is not the only one . . our country is long gone there also if you ask me but the government is denying it.