It’s been a long time since I wrote about Europe. How many ways can a humble blogger say, “Nothing has really changed”? Nothing has. Currency union has turned into a straightjacket of austerity and the European Union is plunging into a deep recession. The only true news has been a day of protest across Europe, fueled in part by the now 25% unemployment rate in Spain and other nations. It has become a full meltdown.
But so far, no banks have failed. Isn’t that wonderful?
There are several potential problems for the US as this continues, but the most important is its effect on our trade. Yet, for all the trouble in Europe, it may not affect us at all. Can Europe burn while the US stands by? The short answer is sure, why not. Here’s why:
What Europe represents to us, economically, is a market. About 1.6% of our GDP is sold to Europe and a bit more comes back. We run a small trade deficit with Europe, overall, of just under $9B a month off of exports of around $21B per month. If Europe absolutely collapsed we would definitely miss the production that they take up, but it would hardly kill us.
Then again, our exports to Mexico are rather similar, around $19B per month. Any money we might spend propping up Europe might just as well be spent curbing violence and generally helping our neighbor to the south get themselves going more strongly. It is simply a matter of perspective.
What ties us to Europe is far more than trade, of course. Our banking systems are very closely linked, with many Credit Default Swaps issued in the US “insuring” European sovereign debt that everyone is trying to not have fail. That’s what started the waves of austerity in the first place – more or less protecting the international banking system ahead of the people of Europe.
In other words, what’s been happening so far is clearly in our best interests. Should we ignore it?
I think it is best for us to not ignore Europe, but to learn from it. We are playing with a largely fictitious “Fiscal Cliff” at the end of this year – a series of nasty things that are about to happen if we do not balance the US budget. The most likely result is a delay of some kind in the budget balancing process, ideally a search for a long-term solution using the Simpson-Bowles framework. So far, the US has consistently chosen growth over austerity, spending rather freely with large budget deficits and rounds of “Quantitative Easing”. It angers many conservatives, but our path is one of growth – and the economy is slowly rebounding.
What Europe represents to us, above all else, is an example of what not to do. The deepening chaos caused by rigid austerity should make everyone pause. It gives the news an incredible allegory to talk about, if only they can grab this story and run with it.
Of course, we can manage our spending much better and be much more efficient at economic transformation and real growth. I’m all for that. But austerity has been shown to be a terrible failure by any measure.
And if JP Morgan collapses in a wave of European default? I won’t cry a single tear for them, and I don’t think their influence on the economy matters one bit anymore. If we lose the exports to a Europe deep in a second wave of Depression? Better to invest in Mexico – or Columbia, Brasil, and so on.
The great thing about the story out of Europe is that increasingly we have no reason to worry about it at all, except as an example of why pure austerity is exactly the wrong thing in a Depression / Kondratieff Winter. The suffering is terrible and completely avoidable, yes, but there’s a good chance that their austerity is not going to last forever. It’s clearly not working at all.
With you on this 100% – sick to death of articles on Europe’s inability to solve its problems. We have our own right now and they are enough trouble.
We are closely connected with Europe, however, so a plunge into a serious 1929 style Depression would hurt us. Then again, as I pointed out, we are as close to Mexico when it comes to trade and we have been largely ignoring the mafia violence that has ripped that nation apart.
If we can’t fix out problems why should they? I fear what is next.
We are doing much better than they are, so I wouldn’t sweat it too much. Just look at our unemployment rate and compare it to the now-labeled “Club Med” nations – 8% or so versus welll over 20%.
I think it is a stretch to say we don’t have to worry about Europe at all. But your point is well taken. If we wind up having to bail them out it will be a big mistake because they have the resources to do this themselves. I feel bad for the people of Spain and Greece but there is no reason that Germany and France can not solve this working with them. Are they all together or not?
I think that is a good way to look at it. My heart may bleed for the undeveloped world (and cheer the developing world at times!) but problems in Europe have to be theirs to fix (short of third war in a century). Perhaps we should also think about “firewalls” and things like that – something which I believe is very much necessary in general in this new global system.
Forget them, they will either figure it out or they won’t. Either way it’s their problem.
I admit austerity is not the right way to go but some fiscal sanity is still important. The New Deal did not rack up debt like we are now.
A good point on the New Deal! The budget deficit never exceeded 6% of the total budget or quite a bit less than 1% of GDP during the entire New Deal – an impressive feat, really. That is important to remember.
Good post Erik! Glad to see some plausible information being offered, instead of the ‘smoke and mirror’ jobs that we are offered most of the time! Keep up the good work!
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