Debt Crisis in Europe Far Worse Than in US


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.

The real problems for the US are long-term and specifically in the area of health-care, says Johnson. The current crisis isn’t because of “Greek-style profligacy” at all, but an “Irish-style banking disaster”:

When credit collapses, so does revenue. As the economy recovers, revenue comes back.

The single most interesting point about today’s debt ceiling debate is that over the 10-year forecast horizon that frames for the entire discussion, by any conventional definition no fiscal problem exists. In 2021, the United States is likely to have a small primary surplus at the federal level — meaning that the budget, before interest payments, will no longer be in deficit…..

The really bad budget numbers for the United States come after 2021, but these are not the focus of anyone’s current proposals on Capitol Hill. Compared with other countries, the increase in health-care spending from 2010 to 2030 is most troublesome and what will ruin us (see Statistical Table 9 in the International Monetary Fund’s Spring 2011 Fiscal Monitor; or, if you prefer a single picture that cuts to the chase, look at where the United States falls in Figure 1 on page 9 of the I.M.F.’s recent report on how to handle “fiscal consolidation” in the Group of 20 developed economies.) [my emphasis in boldface]

The debate in Washington is both heated and off course, because no one is grappling with the difficult issue of how to control health-care costs. The Tea Party enthusiasts are intent on near-term government spending cuts as a condition of supporting any increase in the debt ceiling.

In other words, the US is on track to be in serious trouble (come 2021, writes Johnson) because of its inefficient, over-complicated health care system, with its crazy maze of private insurance company for those who can afford it, and Medicare and Medicaid (if those survive) for senior citizens, those with low incomes and those with disabilities.

The US needs to get its house in order, raise the debt-ceiling and get on its position as being — remember? — a leader in the world economy. At the moment, we’re looking more like a rather petulant teenager demanding its rights to this and that while  far more crucial concerns are pushed to the back burner. As Johnson says,

If this version of a libertarian tax revolt carries the day, the resulting fiscal contraction will slow the economy and fewer jobs will be created. It does nothing directly to address the looming budget issues beyond 2021.

Related Care2 Coverage

Daily Debt: Back and Forth

EU Bails Out Greece For $157 Billion: A Marshall Plan with Haircuts

Financial Crisis Leads to Soaring Suicide Rates in Europe

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


W. C
W. C10 months ago


William C
William C12 months ago

Thank you for caring.

Zoe B.
Zoe B7 years ago

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.

Nathalie Le Maire

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?!

Zoe B.
Zoe B7 years ago

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.

Mary B.
Mary B7 years ago

Stop tracking

Philip S.
Philip S7 years ago

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.

Tom Sullivan
Tom C Sullivan7 years ago

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

Dominic C.
Dominic C7 years ago

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

Linda T.
Linda T7 years ago

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