Euro Zone: It's been clear for some time that the European Union is in deep trouble. But now even its own leaders admit something shocking: The EU, and its currency the euro, may soon be a thing of the past.
The EU has had a troubled existence since the euro was first rolled out on Jan. 1, 1999. Sure, the EU has advantages — a single currency, one giant market, freedom of movement for a well-educated workforce, all benefits. Still, it's impossible to have an economic union based on rules no one follows. And that's exactly what's happened in the EU.
Under the 1993 Maastricht Treaty, no EU country was allowed to run a budget deficit of more than 3% of GDP or issue public debt in excess of 60% of GDP. This was to be the bedrock of the EU's financial stability.
In recent years, Greece, Ireland and Portugal have all run deficits over 10% of GDP. Worse, the debts of Greece, Italy, Ireland, Portugal and Spain average 112% of GDP. In short, the countries on the EU's periphery have used membership as a way to redistribute wealth from Europe's rich north to its poorer south.
For a while it worked. But now the debts are enormous, and the amounts needed to bail out the peripherals from their profligacy are so large that citizens in countries such as Germany are saying "no more." By some estimates, as much as $4 trillion will be needed — a number that would bankrupt the EU.
Europe’s Disaster Is Headed Our Way - Niall Ferguson
But the third reason Americans should care about Europe is more important even than the risk of a renewed financial crisis. It is the danger that what is happening in Europe today could ultimately happen here. Just a few months ago, almost nobody was worried about Italy’s vast debt, which amounts to 121 percent of GDP. Then suddenly panic set in, and Italy’s borrowing costs exploded from 3.5 percent to 7.5 percent.
Today the U.S. gross federal debt stands at around 100 percent of GDP. Four years ago it was 62 percent. By 2016 the International Monetary Fund forecasts it will be 115 percent. Economists who should know better insist that this is not a problem because, unlike Italy, the United States can print its own money at will. All that means is that the U.S. reserves the right to inflate or depreciate away its debt. If I were a foreign investor—and half the debt in public hands is held by foreigners—I would not find that terribly reassuring. At some point I might demand some compensation for that risk in the form of ... higher rates.
