" It is hard to think of a time when both the U.S. and the E.U., the two biggest players in the international economy, were in such miserable shape"
The editor of the German weekly Die Zeit, Josef Joffe, describes the economic mess in which both the US and the EU find themselves right now. This is what he thinks about the current euro crisis:
As many economists cried out in the run-up to the euro 15 years ago, in monetary policy, one size won’t fit all—certainly not a bunch of diverging economies untrammeled by common governance. And, indeed, the euro, instead of forcing member states into fiscal convergence, has only accentuated the bad habits of the PIIGS. These countries had always lived beyond their means. With the euro, however, they could suddenly spend like Italians, but borrow like Germans, at low rates. Bond spreads converged between the spendthrifts and the tightwads, but not basic policies. Indeed, cheap money encouraged even more profligacy—worst of all in Greece (which also managed to cheat on its financial statistics before and after entering the euro).
This is where we are now: With Greek two-year bonds fetching almost 30 percent, the markets are growling that Hellas is doomed. Both Merkel and Sarkozy dread the looming default as “Lehman squared“—and so, by the way, does Washington. So, too, does the IMF, which wants to withhold a critical $12 billion pay-out to the Greeks unless the E.U. swears a holy oath on bailing out Athens, come what may.
Europe will inevitably buy time by handing over a few more slices of bail-out money to Greece, even though, one day, the country will default. With 50 cents of the euro, it will halve its debt as well as its repayments and thus buy more time. The E.U., meanwhile, still won’t have any idea where it’s going or how to handle the crisis long-term. But what else is new? Twenty-seven governments do not a “more perfect union” make. Certainly not when the natural leader, which is Germany by dint of wealth and weight, sounds such an uncertain trumpet as it has under Chancellor Merkel. Yet what, exactly, is she supposed to do when the chickens of an ill-designed monetary union have finally come home to roost? Neither she nor Sarkozy can undo the mismanagement of the PIIGS in one fell swoop.
Meanwhile, back to the United States—to its still-sinking dollar and rising unemployment. It is hard to think of a time when both the U.S. and the E.U., the two biggest players in the international economy, were in such miserable shape. We are talking about two giants with a total of 50 percent of global GDP. Who will save them?
Read the entire article in the New Republic here
Joffe´s questions is, of course, rethorical, at least with regard to the EU. What he means, is that the political leaders do not have a clue about how to get out of the mess that they themselves and their immediate predecessors have created. The European house of cards is inevitably beginning to crumble. Merkel, Sarkozy and the others are scared stiff. - their cosy club is not anymore what it used to be. That´s why they are warning about a coming chaos and catastrophy. And the other day, the Fed´s Ben Bernanke joined the doomsday chorus:
Ben Bernanke, the US Federal Reserve chief, reminded them that "a failure to resolve that situation (in Greece) would pose threats" to the entire European and global financial system.
The truth is, that a breakdown of the present euro system is not going to be the kind of catastrophic event that the politicians are talking about. On the contrary, it will lead to a smaller, much better functioning euro group - or whatever you would like to call it - or even to the return of the German D-Mark. Of course, there will be a lot of problems and difficulties in the beginning, but the end result will without doubt be much better than the present unstable system. And a scaling down of the present, badly working European Union in general, would probably be a welcome added bonus.
The fact of the matter is, that politicians, pundits and other "experts" always tell us that a breakdown of any major system, country or institution, will have unheard of, catastrophic consequenses. You may e.g. remember the doomsday scenarios about what would happen, if the Soviet Union were to crumble. The experts where wrong then - and they are wrong now.