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Debt Crisis in Europe Far Worse Than in US

Debt Crisis in Europe Far Worse Than in US
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The world is watching as the US sweats out another weekend without a deal to raise the federal debt ceiling and fears of the US defaulting and losing its AAA credit seem less like speculations and more a harsh reality. The International Monetary Fund has warned the US that the ongoing down-to-the-wire stalemate risks setting off Europe’s debt crisis, says the Guardian. The US has the world’s largest economy, and conservative House Republicans are in essence holding the world economy hostage as they keep insisting they can’t raise taxes.

Some US politicians have compared the US debt crisis to that in a country far away and with a far smaller economy, Greece. Through earlier part of this summer, international attention was focused on Athens as the Greek Prime Minister, George Papandreou, faced a crisis in his government over passing a set of harsh austerity measures demanded by European finance ministers in order to give Greece a second multi-billion euro bailout. The Greek Vouli (Parliament) passed the measures by a very thin margin; the opposition New Democracy party argued to the end that lowering taxes, not raising them, is necessary to get Greece’s slugging economy (in its third year of a recession) back on its feet.

The fight over raising taxes and austerity measures that involve not only cutting pensions and jobs for state workers and selling off assets like the ports of Piraeus and of Thessaloniki might seem parallel to the ongoing battle between Republicans and Democrats. But the comparison is superficial, with Greece in far worse shape than the US.

Writing on the New York Times Economix blog, Simon Johnson, the former chief economist at the International Monetary Fund, explains why it’s really Europe who’s in much more of a crisis than the US. A “lack of effective governance within the euro zone” has made it possible for some countries (Greece with its budget deficits, Ireland with its “out-of-control” banks, Portugal which refused “to create an economic structure that would support growth”) to get into very bad economic straits, only to be bailed out by other euro zone members:

These policies were financed by loans from other countries, particularly within the euro zone, creating and sustaining the widely shared perception that if any country were to get into trouble, it would be bailed out by deep-pocketed neighbors (a phrase that in this context always means Germany).

At the heart of this system was a great deal of “moral hazard”; investors stopped doing meaningful credit analysis, so Greek or Spanish or Italian governments could borrow at just a few basis points above the rate for the German government (one basis point is a hundredth of a percentage point, 0.01 percent).

What has shocked investors’ thinking over the last three years are the realizations that Greece and some other “peripheral” countries have so much debt they may not be able to make all the contracted payments by themselves and that Germany and other northern countries have become convinced that foolish investors should suffer some losses.

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Photo of Greek taxi drivers on strike on July 18 on the Egnatia Highway in Komotini by PIAZZA del POPOLO

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67 comments

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6:17AM PDT on Oct 5, 2011

Nathalie, I don't know how old you are, but, honey, you cannot spend a foreign currency in a sotre in ANY country. If I took US dollars, the euro, swizz francs, or baht to any canadian city, it would be refused.. so, "caller, what's your point?"

Also, be proud of who you are, and what you achieve, not your nationality. FFS.

9:17AM PDT on Oct 3, 2011

I remember years ago ( i'm a proud Canadian btw) my husband and i were in the US. We were in Chicago, and we had given the man at the store our Canadian money, he refused it because it was Canadian! This happened not only in Chicago, but in many other states as well, in one particular state, the cashier replied 'oh look, funny money',,,and here you are America, about to lose your shirt! So just how 'funny' is my money now?! You bloody well deserve what you get! In my opinion, Americans have laughed at every country out there and always made other countries the butt-end of their prejudiced-fueled jokes,,,So, who's laughing now?!

8:11AM PDT on Aug 23, 2011

Wow, people are so small minded, and also out of the loop. Germany won't quit Europe, Merkel, and Sarkozy run the sohw, and dictate to the others what they think should happen.

Also, yes, as was said, apart from two or three countries dragging their heels, most of Europe is enjoying a good recovery.

the problem is that Europe keeps admitting new member states, and most are poor areas that broke away from the eastern bloc. They then send their young to other better off countries, where they either claim benefits, or work,and send the money home. This is how the UK, and Ireland are losing millions every year to Poland, Czech republic, and slovakia.

7:56PM PDT on Aug 1, 2011

Stop tracking

9:55AM PDT on Aug 1, 2011

Our debt crisis has been fueled by big banks and the Federal Reserve. It's a big banker's paradise. We have already defaulted we're just not being told we have by the media. If we freeze spending at the current level we will cut more than the current plan presented to congress.

10:22PM PDT on Jul 31, 2011

looks like none of the worlds leaders have any common sence, So are they smarter than a fifth grader, hell no

7:28PM PDT on Jul 31, 2011

Pooling resources and be introvert in spending are the best measures.

7:13PM PDT on Jul 31, 2011

WHAT!

6:01PM PDT on Jul 31, 2011

I wonder with the behavior of our lawmakers. You have been told over and over again over the course of several weeks that the longer the political parties fight over who's plan gets passed the more likely our countries credit raating is to go down. Don't be surprised to see a credit melt down the likes we have not seen sice the late seventies early eighties. 12 percent interest on mortgage rates, 20 percent interest rates on car loans, and over 30 percent interest on credit cards. Remember this all could of been avoided if not for the republican games. And we all know who they will blame. Everyone but themselves

5:47PM PDT on Jul 31, 2011

I still say the US has more to lose than Greece! Greece's output is maybe 2% of the total output of all of Europe. As far as Germany bailing out Greece, PM Merkl, told the banks to back off, and since they created the problem they should fix it! Even she has the backing of the public because if you go against the Unions you are dead meat! In the US we have the Tea Party and the Republicans who could care less about the public in SSI and Medicare being lost to the corporates and a weak president who won't fix the problem. Instead, he empowered the Republicans and the mess that may destroy the ability of the public to survive. Of course, Americans aren't like the Europeans who are smart enough to know when they are being had. We just take the punishment as well as the bad propaganda handed to us. Really, it's not about "big government", it's about a crooked government and those that cater to the corporations and of a weakened country without strong unions!

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