Behind the Greek Crisis: American Risk
Published in La Tribune
(France) on 19 May 2010
by Federico Rampini (link to original)
Barack Obama did not expect to have to play savior to the European monetary union. And yet, there he was, compelled to call Angela Merkel right in the middle of the European summit to attempt dissuading her from resistance to the rescue plan for indebted member nations. Again, it was Obama calling Spain's José Luis Zapatero to encourage him to make drastic cuts in public spending. In the past, someone would have spoken out against American "interference." But, now, Europe is almost thankful.
The Obama administration is not acting through generosity. It is merely nervous when the Eurozone shows itself to be weak, as America likewise risks undergoing heavy consequences. The euro is tumbling toward a rate of 1.20 in relation to the dollar, already a hard hit for the American export industry. Part of the economic growth of the United States these last three quarters has been tied to a rebound in U.S. exports thanks to a weak dollar. Now, it is European industry's turn to profit from a favorable exchange rate.
Furthermore, the fall of the euro offers an ideal alibi to the Chinese government, the one who forever promises, it could be said, gradual re-valuation of the yuan. American industry loses its margin of competitiveness over its European rivals but gains no ground as it comes face-to-face with China.
However, trade exports are not a huge concern for Obama. Though the European Union is their second market at 15.3 percent of their exports, the United States runs a relatively closed economy. U.S. exports constitute a mere 7.4 percent of the American GDP. Consequently, the sale of "made in the USA" products in the Eurozone constitutes only 1.1 percent of its GDP. Thus, a decline in American exports to Europe will by no means be catastrophic.
What scares Washington most is a growing crisis of confidence in respect to the debts of sovereign states. If Greece is abandoned to its natural fate (bankruptcy), Spain and Portugal will not be able to hold out for long. Next, it will surely be Italy and Great Britain. Will the moment come when Asian investors lose confidence in the solvency of the U.S. Treasury? Now, America's national debt is rapidly increasing, such that it could reach a "mediterranean" rate within a decade. It is better not to test the faith of the markets in U.S. Treasury Bonds.
Just a slight drop in confidence may suffice to force the U.S. Treasury to offer higher returns. The Federal Reserve would likewise be obligated to increase rates. A scary scenario, since the United States still has 15 million unemployed. It is therefore necessary to avoid having Greece, as a country, to become what Lehman Brothers was for banks: the beginning of a cascade effect. That is exactly why Washington is ready to pay a high price. Behind the "generosity" of the International Monetary Fund's in participation in the European plan is the most important player: the United States.
For the American taxpayer, this is all difficult to understand. In the United States, one could conceive of a bankruptcy for California or New York (both are already deeply in debt), without the federal government being obligated to devise a rescue plan. However the U.S. has other means of stabilization. Its central budget makes significant transfers to the States, notably through unemployment benefits and the retirement system (Social Security), a portion of health care (Medicare and Medicaid), the Defense budget, and certain transfers for public education. The fact that a tiny economy such as Greece has a destabilizing force superior to that of California, this is a paradox which, to American eyes, does not reinforce the credibility of the European Union.
The Obama administration is not acting through generosity. It is merely nervous when the Eurozone shows itself to be weak, as America likewise risks undergoing heavy consequences. The euro is tumbling toward a rate of 1.20 in relation to the dollar, already a hard hit for the American export industry. Part of the economic growth of the United States these last three quarters has been tied to a rebound in U.S. exports thanks to a weak dollar. Now, it is European industry's turn to profit from a favorable exchange rate.
Furthermore, the fall of the euro offers an ideal alibi to the Chinese government, the one who forever promises, it could be said, gradual re-valuation of the yuan. American industry loses its margin of competitiveness over its European rivals but gains no ground as it comes face-to-face with China.
However, trade exports are not a huge concern for Obama. Though the European Union is their second market at 15.3 percent of their exports, the United States runs a relatively closed economy. U.S. exports constitute a mere 7.4 percent of the American GDP. Consequently, the sale of "made in the USA" products in the Eurozone constitutes only 1.1 percent of its GDP. Thus, a decline in American exports to Europe will by no means be catastrophic.
What scares Washington most is a growing crisis of confidence in respect to the debts of sovereign states. If Greece is abandoned to its natural fate (bankruptcy), Spain and Portugal will not be able to hold out for long. Next, it will surely be Italy and Great Britain. Will the moment come when Asian investors lose confidence in the solvency of the U.S. Treasury? Now, America's national debt is rapidly increasing, such that it could reach a "mediterranean" rate within a decade. It is better not to test the faith of the markets in U.S. Treasury Bonds.
Just a slight drop in confidence may suffice to force the U.S. Treasury to offer higher returns. The Federal Reserve would likewise be obligated to increase rates. A scary scenario, since the United States still has 15 million unemployed. It is therefore necessary to avoid having Greece, as a country, to become what Lehman Brothers was for banks: the beginning of a cascade effect. That is exactly why Washington is ready to pay a high price. Behind the "generosity" of the International Monetary Fund's in participation in the European plan is the most important player: the United States.
For the American taxpayer, this is all difficult to understand. In the United States, one could conceive of a bankruptcy for California or New York (both are already deeply in debt), without the federal government being obligated to devise a rescue plan. However the U.S. has other means of stabilization. Its central budget makes significant transfers to the States, notably through unemployment benefits and the retirement system (Social Security), a portion of health care (Medicare and Medicaid), the Defense budget, and certain transfers for public education. The fact that a tiny economy such as Greece has a destabilizing force superior to that of California, this is a paradox which, to American eyes, does not reinforce the credibility of the European Union.
lose confidence in the solvency of the U.S. Treasury?…what solvency?…they’re already loaning money they print up, to themselves…
We have been cutting taxes drastically on the wealthy classes in the U.S., ever since Ronald Reagan, and they hold almost all of our GDP.
At the same time, we have devastated our middle class by allowing our manufacturing to be outsourced to other countries, & dropping our tariffs so they could still sell in the U.S. domestic markets, further eroding any industries attempting to stay and employ here in the U.S.
The end result?…our federal government refuses to reinstate the pre-Reagan tax structure on the rich, so no dough there…the middle class is hanging on by it’s fingernails, and as you can’t squeeze blood from a stone, no tax revenue left there…
…and our federal government has been running on borrowed money for about 30 years, due to this “Ayn Rand” stupidity…which only goes to show you shouldn’t mistake a poorly written & verbose science fiction story for an economics textbook.
The states are in debt from the loss of middle class taxes, and the feds have no discretionary money to prop them up with. The feds are already cutting back on Social Security, and the wealthy are making “don’t pay it back at all” noises, because they know where the money would have to come from.
This thing’s going to let loose, and I don’t think anyone can stop it…and it was all due to greed & rampant, unregulated self-interest.
Thinking that the U.S. can help build a solid foundation for a world-wide economic recovery is just building your house on sand.