Tuesday, June 12, 2012

The Euro Mess: Enfermo y cansado

While there are still plenty of political issues to deal with inside the U.S., we're taking a look abroad today at one of the biggest issues that could affect - or possibly infect - everything from this year's U.S. Presidential election to the cost of every consumer good or service in America. Of course, we're talking about the Eurozone mess.

To start with, the financial troubles of the Eurozone are a bit more complex than most Americans are used to.

The Eurozone is an economic and monetary union, that has seventeen member countries, who all share a single currency - but don't share the same political leadership. The biggest economic hindrance to each country solving its own economic problems is that no Euro member country has its own currency. So combined economic and political strategies like those used by the Fed in the U.S., or the PBOC (People's Bank Of China) in China - strategies to control inflation and help spur employment - are tricks the individual political leaders of Euro nations simply don't have at their immediate disposal.

Some Euro nations - Greece in particular - have never learned how to budget and govern with this strange lack of control over their currency. The Greek tradition of giving heavily socialized benefits, with the plan to pay them off on the second Hemera Areos (Tuesday) of never, many long years down the road, has been discussed many other places, almost to death - so we won't linger on it here. Suffice it to say, the people of Greece have some tough decisions to make this month.

Some of the problems Eurozone countries share, however, are the same as the problems that collapsed the U.S. economy during the end of George W. Bush's presidency in 2008. We outlined some of those failures last November, when we looked at Iceland last year.

The single biggest economic problem Euro nations and America share involves the Wall Street tycoons who hyper-inflated the real estate market in the U.S. during the early 2000s. They did the same thing to many other European nations too, like Spain. When the real estate bubble began to burst in Spain, its size - and its restrictions as a Euro nation - meant Spain's economic depression was far worse than the recession in the U.S.

"All of this is great background," you're probably thinking. "But what I really want to know is, if the Eurozone collapses, will the U.S. economy also get sick and die?"

The simple explanation is, if the economy across Europe collapses, yes - it will have a negative impact here in the U.S. But no, our economy won't likely "die." As more than one political pundit in the U.S. has noted, in some ways, President Obama's reelection hinges far more on what happens in Europe over the next six months, than what will happen in Congress (which will probably be nothing).

Economist Paul Krugman - who has consulted on some of these issues in Europe - is still very pessimistic that those controlling the Eurozone will get their act together in time, before at least some of the negative effects of Europe's issues hit American markets. To some degree, they already have, so he's already at least a little bit correct..

All is not doom and gloom from Europe, however.

As economics journalist Matthew Yglesias noted last weekend, when the European Central Bank agreed to lend Spanish banks the money they needed, the ECB loaned the money without draconian political strings attached - which may be a first for the ECB.

For one thing, it means the ECB does have some level of trust in the Spanish banking and political systems, however meager that trust may be.

For another, it may mean some of the forces behind the ECB and the Euro are ready to take some of the measures necessary to truly make the Euro a real workable concept - like a true banking union, or Eurobonds. If nothing else, it does make the likelihood that stimulus funding to Euro nations, like that being proposed by the new French government, will be authorized.

All that may be good news, but as the latest warnings surrounding Italy confirm, until those controlling the Eurozone contain some of their problems, we'd strongly advise staying away from European investments.

And if you have any Euros in your wallet, you may want to put on gloves before you exchange them at the bank... just in case.

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