The stalemate between national political leaders and the European Central Bank over whether to and how much to increase the European Financial Stability Facility and its successor European Stability Mechanism (ESM) to bolster current commitments to Greece, Portugal and Ireland and the growing danger of even greater demands for Italy and Spain create a crisis of global proportions.
The failure to prevent a major sovereign debt default in any of the euro-zone nations could lead to major restructuring of the euro, an end to the monetary union and possibly the implosion of the European Union itself. Any of these occurrences threaten global economic stability and would have a major negative impact on U.S. efforts to restart growth.
The European crisis is not political in orientation. The differences between the national governments are primarily based on deep and important cultural differences. Whether compromise can be found among the very conservative views of the better-off countries to come to the rescue of their less fortunate partners is doubtful. The strong feelings of the taxpayers in Germany, Holland and the Scandinavian countries against bailouts weaken political positions toward compromise.
To really have a clear and objective understanding of what is going on in Europe you need to have lived there, experienced the culture and obtained an insider”™s viewpoint.
Over a recent weekend the vacationing European government leaders spent hours on the telephone to decide if the member states would agree to increasing their contributions to the safety net (EFST) and/or to changing the face of the EU to form a fiscal union capable of issuing eurobonds. Both options are aimed at having the more financially secure nations contribute into funds for saving the less fortunate from default on their sovereign debt ”“ thus resulting in huge problems for banks in the more fortunate countries that hold billions in the debt of the less fortunate. The consensus answer was “no.”
Most non-Europeans ”“ and many within the EU ”“ are confused as to why Germany, the richest nation, is unwilling to go further than it has already guaranteed. Why do the Dutch, Swedes and Danes, while criticizing the Germans for “excessive prudence,” choose to follow Berlin”™s lead? The U.K. and Norway sitting on their oil-drilling riches are not eurozone members or in the least interested in bailing out their southern European friends.
To understand the complex positions of the various countries it is helpful to have lived in some of these places, learned their languages, history, laws and especially their most important hang-ups.
German Chancellor Angela Merkel is in a really tough bind. Her junior coalition partners, the Free Democrats, have made known that in no way would they support a larger German contribution to the safety net and never agree to a transformation of the EU to create a fiscal authority capable of issuing eurobonds based on the financial integrity and liabilities of the individual EU member states. Their opposition, agreed to in many other nations, is that such a guarantee will lower the borrowing rates of the “profligate” and increase the costs of debt for the “prudent.” The political risks are great.
What other factors determine the great differences between the European nations? The views of capitalism, market economy, private enterprise and management decision-making are so disparate that it is amazing they could create a European Union.
What does this have to do with the current sovereign debt crisis? Everything. The cultural values of the northern nations emphasizing prudence and responsibility at every level of society will prevent them from agreeing to larger contributions for bailing out their less responsible neighbors.
Their political leaders face a major backlash if they suggest larger taxes or diminished growth “just to save the euro!” The consequences are enormous. Perhaps a stalemate based on differing political views has advantages after all.
John Alan James, a management consultant, is a professor of management and corporate governance at the Lubin School of Business at Pace University. Reach him at jjames@pace.edu.
Interesting & important. I’d like to know what Mr. James thinks about the implications, if any, for the U.S. Are the problems that our states have been facing comparable? What would be the consequences to us of an implosion of the E. U.? Seems to me the world economies are more interconnected than before.
An implosion of the EuroZone would create a global financial crises impacting the U.S. and every other nation. A bankruptcy of any Euro member country, for example, Greece, would hit the banks in every other Eurozone country as all are major holders of sovereign debt, including Greek. In addition, a bankruptcy would, if the Germans have their way, require and across the board “haircut” including non-governmental investors…mostly non-Eurozone banks, including U.S, hedge funds, mutual funds, etc. The impact could be a dramatic drop in Euro exchange rate (dollar up,US/Japan exports down) a continuing race to buy Swiss francs and Japanese yen impacting dollar exchange rates, all forex worldwide.
An American state cannot go bankrupt without approval of Congress to modify the relevant Federal bankruptcy code. States in deep debt, such as California, must be “SAVED” one way or another. States without mandatory budget limit laws, for example, CT and NY, have made major demands on state and local unit unions, raised taxes and fees in order to protect their credit ratings and continue to sell new debt.
A demand by a major state to get permission to default on its debt would be calamitous and shove the U.S. economy into a deeper recession, possibly a DEPRESSION.