Can the Euro survive? That is now a question being increasingly asked. As a Brit commentating here in the US, the query that I most often receive is: what would the collapse of the Euro mean for America?
The state of the Eurozone is an incredibly complex issue. No one knows what the outcome is going to be and this uncertainty is what makes the situation so terrifying. However, let’s strip it down to the basics.
The European Union is comprised of 27 countries, which when put together make the EU, with a population of around 500 million people, the largest economy in the world. 17 of those countries are members of the Eurozone, nations that use the Euro (thus the UK with its pound is a member of the EU but not of the Eurozone). The Eurozone is the world’s second largest economy, with a population of around 330 million.
Comparisons of what is going on with the Eurozone are being made with the economic meltdown of 2008. Greece has been called the new “Lehman Brothers”. We are told that there’s “déjà vu” with the sub-prime crisis – no one knows what Europe’s bad debt is worth or what exactly is exposed to it. However, the issues of Europe are on a much bigger scale and therefore much scarier. We are talking countries not companies here.
There are two main fundamental differences with the situation in America in 2008, both political and economic.
Politically, despite everything that has gone on in America recently, in the US you actually have a cohesive political system. You are one country that when it comes down to it, speaks the same language. In 2008 your politicians came together and made some decisions for the good, in their minds, of your nation. You are, in times of trouble, the United States Of America.
Europe is not the United States Of Europe. It is the Disunited States of Europe. In Europe, 17 leaders – and sometimes 27 – ALL have to come to an agreement on a decision. And then go home and sell that to 17 – and sometimes 27 – democracies. Europe literally and figuratively does not speak the same language. Thus these leaders have always been behind instead of ahead of the crisis curve. I maintain that there’s too much democracy in Europe for the Euro to survive in its present form. Disorderly (as opposed to orderly, which would be a nightmare but less of one) collapse is likely because politicians will be too late to do the right thing.
Economically, America has a key weapon at its disposal: not only is it the world’s reserve currency but the Fed can print as much money as is needed to finance its borrowing. The countries in the Eurozone do not have this power – those that have run into big trouble so far, the PIIGS (Portugal, Ireland, Italy, Greece and Spain) do not have their own individual central banks that they can rely on to print money and buy their debts. Why doesn’t the European Central Bank just print more money? Theoretically it could, but the Germans are VERY opposed to letting this happen for various historical and theoretical reasons that I shall return to another day. For the question posed in this piece is: why should any of this matter to America?
We live in a globalised economy. Therefore what happens in Europe doesn’t stay in Europe. Fundamentally, the collapse of the Euro means that contagion could trigger worldwide economic meltdown – and America will inevitably hurt.
The EU is America’s largest trading partner. In 2010 $239.8 billion of US goods went to the EU – if it is in deep recession, American companies will suffer and more American jobs will disappear. To compound the problem, the dollar, as the world’s reserve currency, will become extremely strong (people and countries will be trying to find “safe” places for their cash), making it harder for American companies to sell their goods abroad.
Meanwhile, it is estimated that American banks and market funds hold more than $2 trillion in European banks. Those European banks hold a lot of European sovereign debt that could go bad. We’re talking the possibility of banks, bankrupting. Of runs on banks. That means that American banks could suffer big losses – and stop lending to fellow Americans. Basically, what happened when Lehman Brothers fell but far worse. MF Global would be the tip of the iceberg. To add to all this misery, the financial markets – so your pension fund, money in shares – will likely nosedive.
You also cannot underestimate what the disintegration of the Euro would do to confidence. Companies will be even less likely to hire, consumers even more unlikely to spend.
So economically, the Eurozone collapses and America – which currently looks like it’s out of recession, will probably be in another one. Politically that could mean that Obama loses in 2012. Ironically, it would be because of a financial crisis not of his own making.
Legend has it that 2012 will be the end of the world. It won’t be that, but in 2012 we are highly liable to see the end of the world as we know it.