To give a complete review of the European situation would take at least a novella. Instead, we’ve tried to highlight some of the financial and non-financial issues that interweave money, infrastructure, and social systems.
Post World War II
Financial aid flowed overseas to rebuild Europe. Many European countries grew rapidly as they set up health care, pensions, lengthy unemployment insurance, job guarantees, etc., for their populations. By U.S. standards, these benefits were generous.
These and other benefits eventually became institutionalized in the labor force. The work rules made it difficult for companies to close unproductive businesses in favor of funding newer and more productive ones.
A unique characteristic of our American culture is to acknowledge the right to fail and try again. Steve Jobs, for example, had several companies that did not succeed before Apple’s recent run. Flexibility is required to grow and weather crises. One of the reasons the U.S. economy tends to bounce back sooner after a crisis (like the Great Recession) and adapt more readily is part of our national consciousness. Businesses were destroyed, workers displaced, but slowly we are making our way back.
It is a hardship when individuals lose their job. But frequently with re-training, employees find a job in a new type of business (as in the move from manufacturing to service industry employment). If companies can’t cease to exist and workers can’t be laid off, this flexibility and competitive advantage is lost.
In Europe, such a scenario is unknown. At a conference in October, Jill heard an international mutual fund manager say that the “joke” was let’s get a job in Belgium and get fired. If you are fired in Belgium, your severance package includes wages for several years!
This union of countries was launched in 1999 to improve trade and strengthen economies—to be more competitive as a trading block. The sum of the whole was to exceed its parts. Countries were required to follow specific financial guidelines (i.e., maximum 3% deficit of GDP) that were never enforced.
Most countries gave up their currencies in favor of the euro, with the European Central Bank as the equivalent to our Fed.
The southern European countries with the new currency were able to borrow at lower interest rates than their previous sovereign currency (think of Greece, Italy, Spain).
Northern Europe (think of Germany and France) could export its surplus to southern Europe, and its banks could lend southern Europe the money to buy the exports. (See link to NY Times graph “Europe’s Web of Debt”)
This plan worked until the debt became so large that it collapsed the system. The Global Financial Crisis of 2008 was the beginning of the end, and the Greek crisis serves as the most recent catalyst.
Response to the crisis
Northern European banks lent large amounts of money to southern banks and governments. With the value of the bonds declining, banks’ financial positions are precarious.
Many experts believe the European Central Bank (ECB) should be doing what the Fed did; buy the debt and keep the banks solvent. The Fed’s action is given a large share of the credit for bringing the U.S. back from the brink of the Great Recession. The ECB has not done as much to alleviate the situation.
The political response has been just as dismal. Germany has the strongest economy and a trade surplus. German editorials question why the Germans should work longer to pay for Greek retirements and “lavish” benefits while the Greeks don’t even pay their taxes. Conversely, Greek political cartoons depict Germany saying they finally won WW II.
There is no clear resolution to the crisis in Europe. Recession, dissolution of the Eurozone, expulsion of certain members, and bank failures are just a few potential outcomes.
For the countries in trouble, leaving the European Union would be no panacea. They would likely see a collapse of the banking system in a depression-style run on the banks. Their sovereign debt would be devalued substantially. Greeks are already being arrested with suitcases of cash. Athens is out of safety deposit boxes.
Germany, on the other side, would be the strongest. But its currency could be so strong as to inhibit exports. Its banking system would also be suspect, since it holds large loans of other countries’ banks.
The ECB has been dragging its feet throughout the crisis. As U.S. banks and money market funds refuse to take the risk of owning European debt, the ECB might finally be forced to be a more active participant. There is some consensus that at a minimum, the ECB has to absorb government debt.
Former German Chancellor Gerhard Schroeder (1998-2005) recently called for the creation of the “United States of Europe.” In an interview with Der Spiegel, he said, “The current crisis makes it relentlessly clear that we cannot have a common currency zone without a common fiscal economic and social policy. We will have to give up national sovereignty.”