The European Debt Crisis
By Caroline Margiotta
Since 2008, the European Debt Crisis has remained at the forefront of international public policy concerns. As the economies of Europe and the United States hover on the precipice of stagnation and recession, world leaders are frantically attempting to reduce debts and restore growth in any way they can. Though most avid news-readers consider themselves fairly well-informed on the crisis, its causes go beyond the accumulation of debt in Portugal, Italy, Greece, and Spain, and it will affect many countries in Europe and around the world. Moreover, it has inspired and will continue to inspire highly varied public policy solutions, as well as many conflicts.
While many Americans believe that the European Debt Crisis only recently originated in Europe and will remain a strictly European issue, the crisis is neither new nor isolated to Europe. Rather, it results from irresponsibility on the part of both European governments and United States banks and other lenders. The crisis’s origins on the European front can be traced to 1997, when Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Slovenia, Spain, Cyprus, Malta, and Slovakia—countries linked together by their common currency, the Euro, as well as by their membership in the European Economic Community (EEC)— signed the Stability and Growth Pact . In signing this pact, European leaders hoped to establish a borrowing limit of 3 percent of a country’s nominal GDP to encourage each country’s government to spend its funds wisely and within its means. However, Germany, Italy, France, Greece, and Spain have not upheld the 3 percent borrowing rule. Although Germany and France are considered the most fiscally stable countries in Western Europe, they were among the first to break the rule, and were soon followed by Italy (the worst and most regular offender). Greece followed sometime shortly thereafter but its breach of the limit went largely unnoticed until Prime Minister George Papandreou revealed that the Greek government had been manipulating its borrowing data in an effort to escape the notice of European Central Bank (ECB) watchdogs. In 2007, when Spain broke the borrowing limit for the first time, the EEC’s concerns lay only with these countries’ open disobedience of the Pact. Because of abnormally low interest rates, Spanish corporations and mortgage borrowers joined their Italian counterparts in borrowing massive amounts of money from foreign lenders. With this extra money, Portuguese, Italians, Greeks, and Spaniards were able to import more German goods; this created massive profits for Germans, who soon extended loans to the same Portuguese, Italians, Greeks, and Spaniards (PIGS) who imported their goods. As a result of these loans, PIGS firms and borrowers have been forced to reallocate their funds towards the repayment of their massive debts, which has led to a significant decrease in spending and recessions in each country.
The portion of the financial crisis which began in the United States, meanwhile, took a fairly different turn, and had immediately far-reaching consequences. It began in 2006, when relators began to give out and resell large subprime loans as part of mortgage-backed securities to hedge funds and other financial institutions around the world. Because these mortgages were divided into many different types of assets, their derivatives were nearly impossible to price, so their value plummeted . After AIG failed honor the credit default swaps it sold, banks stopped lending to each other, so borrowing costs between banks increased. Although this subprime mortgage crisis led the Fed to initiate a round of quantitative easing (QE1) in 2008 to increase liquidity in the economy, several banks, such as Bear Stearns and Lehman Brothers, began failing because they held too many devalued assets, and the Treasury was forced to bail out Fannie Mae and Freddie Mac (mortgage corporations) as well as AIG3. The subprime mortgage crisis created slow growth in economies throughout the world, and thus exacerbated the debt issues developing simultaneously in Europe.
As a result of slow growth throughout the global economy, it has become increasingly more difficult for European countries to fulfill their debt obligations. In Greece, for example, continuously massive spending, lower tax revenues (which have resulted from slower growth), and investors’ continued demands that Greece pay a higher yield on its bonds have prevented the government from paying off its growing debt . Since the rest of the PIGS have similar debt issues, the European Union (EU) and International Monetary Fund (IMF) have cooperated in providing bailouts to the countries’ banks in an effort to lessen their debt burdens. While the bailouts have temporarily diminished the PIGS’s debt issues, they have often required the IMF to issue a set of “follow-up” bailouts, as Greece did in 2011 after it was given $163 billion in Spring 20104. Because the size of the debt has not decreased, furthermore, the European Central Bank has stepped in to (i) purchase bonds to reduce interest rates and decrease the price of yields, (ii) provide billions of Euros in credit to troubled banks via a Long Term Refinancing Operation, and (iii) increase bank balances to encourage loan growth (and therefore economic growth)4. Of course, because the EU, the ECB, and the IMF must focus on simultaneously aiding four large countries and advising their governments on means of preventing such issues in the future, it has become and will become increasingly difficult for them to put an end to the debt crisis.
Although, in America, we might believe that the European Debt Crisis cannot affect us, the crisis has already had a massive impact on our economy and our world. In the financial market, for example, European bank stocks have performed very poorly, and rising yields have led to higher bond prices. If Americans were to buy bonds from one of the PIGS, and if the country could not honor its debt obligations, a bond purchaser would lose money as the bond price fell below face value. The crisis also affects our entire economy because, since about 40 percent of the IMF’s capital comes from the US, US taxpayers might have to pay if the IMF gives out too much money in bailouts. Finally, the crisis affects global politics because it has enabled far-left and far-right parties, such as the French Socialist Party, to gain power; because many Americans oppose these parties’ extreme political positions, European politics has become a point of fear for many of our citizens. Above all, however, the European debt crisis can teach our government and our citizens an important lesson about the hazards associated with borrowing outside one’s means, and can cause us to rethink our borrowing habits.
Because the European Debt Crisis can adversely affect our economy and may forever change European politics and global trade, it has become a major concern of the American public and the US Government. The American public has perhaps taken greater interest in the fate of the PIGS, as it believes that the crisis could affect taxation as well as the national debt. According to Rasmussen Reports, as of November 2011, roughly 64 percent of Americans believed that at least one of the PIGS would default on its debt within the next 5 years, and as of May 2012, 61 percent of Americans believed that European leaders should cut spending to improve the economy . These Rasmussen polls illustrate that the majority of Americans followers of international news recognize the gravity of the European Debt Crisis as well as the ties between the European and American economies, and see that our country’s spending habits, which are unsettlingly similar to those of many European countries prior to the debt crisis, are unsustainable. In fact, as of December 2011, 76 percent of Americans said that they believed that the size of our national debt, which somewhat echoes the size of the debts of the PIGS, presents the greatest threat to our economy.
American politicians have similarly expressed great concern over the growing European debt. Mitt Romney and Barack Obama, for example, have come into conflict over what, if anything, they believe should be done about the Debt Crisis. President Obama has commendably recognized the dangers of allowing Europe to fall, as, “if there’s less demand for our products in places like Paris or Madrid it could mean less business for manufacturers in places like Pittsburgh or Milwaukee” . Though he recognizes that the United States can only give advice to the European Union, Barack Obama has also repeatedly spoken out against rapid-fire austerity, as it would drastically shrink government, hurting job growth and the middle class, and would make it more difficult for the PIGS to pay off their debts . He also recommends that European leaders inject capital into weak banks banking system to keep Greece in the Eurozone and to stabilize Europe’s financial system . This, President Obama alleges, would team with his domestic jobs bill to strengthen the US economy11. Republican Presidential Candidate Mitt Romney, in contrast, has stated that President Obama’s policies and spending will lead us into a situation similar to that of Europe9. He does not recommend that we help to bail out Italy, or that we become any more involved than we currently are; rather, he wants Europe to take care of the Euro itself . Like most Republicans, Mitt Romney has not taken a strong official stance on the Europe bailout, but does not believe that the US should be involved in European affairs (aside from giving occasional advice); he believes that we should, instead, focus on repairing our own deeply-flawed economy.
While both the Republicans and the Democrats’ stances have their flaws, there is some merit in each side’s plan to pull the United States through the European Debt Crisis. Although President Obama and the Democrats are correct to recognize that the collapse of European economies will adversely affect our exports, it is neither our place to advise or prod European leaders to carry out certain fiscal policies. Accordingly, we should not, by any means, contribute any money towards the bailouts of European banks. First of all, it is not our place to give money to the PIIGS because we have not been asked to fund the bailouts, and because these are not our banks to manage. Additionally, contributing funds to European bank bailouts would likely increase the US government’s already excessively-high budget deficit, would probably exacerbate Europe’s debt issues, and would distract our federal government from dealing with more pertinent domestic issues, such as the unemployment rate and national debt.
If we are to maintain strong relationships with each country in the European Union, and if we expect to repair and stabilize the global economy, we must let European leaders know that, should they want advice from the United States, we would be happy to try to advise them. However, we should remember that the US economy is not perfect, either. As French Foreign Minister Laurent Fabius stated on June 5th, “the [European debt] crisis did not start in Europe… [It began with the collapse of Lehman Brothers, which was [an American, rather than] a European bank” . Since Lehman Brothers did play a significant role in exacerbating the debt crisis, because our debt has exceeded 101.5 percent of our GDP since May, and because the true unemployment rate, which includes discouraged workers, has hovered around 15.6 percent for several years, according the American Enterprise Institute, Monsieur Fabius was correct in reminding world leaders that “we’re all in the same boat” 13. As Mitt Romney and the Republicans have stated time and again, and as French Foreign Minister Laurent Fabius has agreed, it would neither be wise nor appropriate for the United States to help the European Union fix its debt issues. Thus, Mitt Romney (R-MA)’s non-interventionist approach to the Eurozone crisis holds far more promise for the future of Euro-American relations and global economies than President Obama’s fundamentally interventionist approach. Although the American public as a whole may not approve of such a non-interventionist approach, given the severity of Southern European recessions, the United States must focus primarily on repairing its own economy before venturing to intervene in other economies.
In sum, given the importance of international trade and the interconnectedness of global economies, the European Debt Crisis has understandably gained prominence and will certainly remain prominent in discussions of global fiscal policy until the United States and the European Union can manage to drastically cut their debts, balance their budgets, and restore growth to their economies. Because the debt crisis arose because of foolish actions by American banks and European governments, and because the crisis will significantly affect American business if allowed to run its course, both the American public and American politicians believe that dangerous economic situation in Europe cannot be allowed to continue without some intervention, either on the part of the United States or on the part of more prosperous European nations. While both Democrats and Republicans recognize that the United States cannot feasibly intervene with legislation or by giving additional funds to European banks, Democrats feel that the United States should take a more active, advisory role than do Republicans. In any case, whether or not Americans believe we should intervene in Europe’s recovery, we all must recognize that the future of our global economy depends largely on the fate of Europe.
1 “Economic and Monetary Union and the Euro.” EU 4 Journalists. European Journalism Centre, n.d. Web. 10 June 2012. http://www.eu4journalists.eu/index.php/dossiers/english/C23 .
2 “What Really Caused the Eurozone Crisis?” BBC News. BBC, 22 Dec. 2011. Web. 10 June 2012. http://www.bbc.co.uk/news/business-16301630 .
3 Amadeo, Kimberly. “What Was the Global Financial Crisis Of 2008?” About.com US Economy. About.com–The New York Times Company, n.d. Web. 10 June 2012. http://useconomy.about.com/od/criticalssues/f/What-Is-the-Global-Financial-Crisis-of-2008.htm
4 Kenny, Thomas. “What Is the European Debt Crisis?” About.com Bonds. About.com– The New York Times Company, n.d. Web. 10 June 2012. http://bonds.about.com/od/advancedbonds/a/What-Is-The-European-Debt-Crisis.htm .
5 “81% Express Concern That Europe’s Financial Problems Will Drag Down U.S. Economy – Rasmussen Reports.” 81% Express Concern That Europe’s Financial Problems Will Drag Down U.S. Economy. Rasmussen Reports, Nov. 2011. Web. 10 June 2012. http://www.rasmussenreports.com/public_content/business/general_business/november_2011/81_express_concern_that_europe_s_financial_problems_will_drag_down_u_s_economy .
6 “61% Believe Europe Needs to Cut Government Spending to Save Economy – Rasmussen Reports.” 61% Believe Europe Needs to Cut Government Spending to Save Economy. Rasmussen Reports, May 2012. Web. 10 June 2012. http://www.rasmussenreports.com/public_content/business/general_business/may_2012/61_believe_europe_needs_to_cut_government_spending_to_save_economy .
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8 Feller, Ben. “Obama: Congress, Europe Must Stem Economic Crisis.” ABC News. ABC News Network, 08 June 2012. Web. 10 June 2012. http://abcnews.go.com/Politics/wireStory/obama-speak-state-us-economy-16523825 .
9 Goldman, Julianna, and Margaret Talev. “Obama and Romney Use Europe’s Debt Crisis as Point of Attack.” Washington Post. The Washington Post, 06 June 2012. Web. 10 June 2012. http://www.washingtonpost.com/business/obama-and-romney-use-europes-debt-crisis-as-point-of-attack/2012/06/06/gJQALb9WIV_story.html .
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15 Prasad, Bhaskar. “Real U.S. Unemployment Rate Is 15.6 Percent, Says AEI.”International Business Times. International Business Times, 7 Jan. 2012. Web. 10 June 2012. http://www.ibtimes.com/articles/278036/20120107/real-u-s-unemployment-rate-15-6.htm .
By Caroline Margiotta
For the first time since former President Hosni Mubarak resigned last February, Egypt – the most populous Arab country – seems to have finally taken great strides in recovering from over three decades of autocratic rule; however, Egypt’s success as a democratic nation seems fragile at best given the civil unrest which was sparked by military rule.
In a monumental action which followed a long period of National Democratic Party dominance, Egyptian civilians voted to elect 498 members of the People’s Assembly over six weeks, with the remaining ten Assembly members yet to be elected by the military . According to the BBC, Islamist parties saw an overwhelming victory in the parliamentary elections, with the Muslim Brotherhood’s Freedom and Justice Party (FJP) followed closely by the ultra-conservative Salafist Nour Party in having gained an overwhelming majority— approximately 73 percent– of seats.
Despite the promise of a fair democracy presented by these elections, however, Egypt has remained under military rule since Mubarak resigned on February the 11th of last year, and the period of unrest in Egypt is far from over. Ironically, many Egyptians had hoped that a system of temporary martial law would be an excellent means of transforming Egypt’s government into a democracy. Islamists believed that the military would pave the way for their domination in new parliamentary elections, while Liberals believed that the military would prevent Islamists from gaining excessive power.
While the Islamists were indeed victorious in the recent Parliamentary elections, the military has surprised all parties concerned in expanding its power over the troubled nation. At this point, despite the FJP’s victory, the military council is set to remain the highest authority in Egypt until at least the end of June, and it has recently drafted a document which would exempt the military from any civilian management. Additionally, although many senior generals have promised the Egyptian people that the council’s rule has a time limit, the military has failed to put forth a date for presidential elections.
Given the seemingly indefinite end of military rule, waves of protest have continued across Egypt. On January 25th, for example, approximately 100,000 Egyptians from across the country gathered in Tahrir Square to protest the rule of the military council and to observe the first anniversary of the protests which led to Mubarak’s ouster. In this particular demonstration, the previously-outlawed Muslim Brotherhood also celebrated its victory in the Parliamentary elections, demonstrated its support for the military’s decision to end martial rule by the end of June, and proclaimed that “the people want the end to the military trials of civilians… [and] the handover of power. ” However, because members of the Muslim Brotherhood linked arms in Tahrir Square to prevent protestors from reaching Parliament to demand the military’s previous surrender of power during the January 25th protest, liberal demonstrators struck out against the Muslim Brotherhood on January 31st, demanding an end to rule by both the military and the Muslim Brotherhood.
In the midst of these political protests, protests against the police, the Interior Ministry, and the military council have continued in Egypt as a result of a February 1st brawl in Port Said between rival soccer fans which left over 70 casualties. Thousands of Egyptian soccer fans (often called “ultras”) have gathered in Cairo and other cities across the country to protest against what they perceive as the police’s inaction in preventing these deaths . Many protestorsbelieve that the police aided in the violence at the soccer match on Wednesday, and have suggested that the police either failed to seize weapons from fans or turned off the field lights to aid Port Said fans in their attacks; they have also blamed the military council and Interior Ministry for failing to prevent the violence.
Given the fragility of a newly-formed democracy, the irrefutable difficulty of a complete power transition, and the historical difficulty of putting an end to military rule, Egypt’s chances of success were slim to begin with. However, because the Middle East as a whole has been plagued by unrest over the past two years, and because Egypt’s military has had a history of political corruption, the next few months will certainly have the Western world watching with anxiety and anticipation in equal parts as the new Egyptian government attempts to restore peace and stability to the tumultuous nation.