Behind the Greek Crisis: American Risk

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.