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