Just Blame Europe

Published by Filipe R. Costa on Wed, 28/09/2011 - 16:38
blame the others

During the last few days I have watched and heard several comments pressuring the EU to do something concrete to contain the Greek debt problem and avoid the risk of contagion. According to several sources, Europe is responsible for the volatility haunting financial markets and for the downfall we have been assisting.

When I hear such comments, mixed feelings grow inside me.  By one side I become disgruntled on how politicians and policy makers could let the world went to such a state when they had ways of avoiding it. By other side these blames on Europe make me laugh.

As we all remember, the subprime crisis started in the US before expanding all over the world. Many assets were sold and repacked as something they weren’t. When everyone realised those assets are almost worth nothing, a crisis started. Several banks went into bankruptcy, others had to be nationalised, and all others at least went into several problems. The financial crisis expanded and the world entered a recession. Unemployment rose, GDP decreased, consumer confidence collapsed to very low levels.

To fight the crisis, governments increased spending and central banks started a period of monetary easing. While the ECB used its monetary policy cautiously (sometimes wrongly), its US counterpart – the FED - started a never-ending policy of printing money. Crude prices start to rise before the real economy picked up, jobs were not created, prices increased all over the world, consumers and investors were hurt, and many effects will only come in the future. Quantitative easing was a failure with several negative repercussions in Europe.

Two years after the bottom of the crisis, the US economy is still struggling to create jobs, oil prices are higher, consumer spending is at very low levels, GDP is growing at a very modest pace, and the US economy is full of debt.

Blaming EU officials for the current world situation is certainly easy but a distortion of the reality. Is Europe responsible for the sluggish US economic recovery? I don’t think so. The financial crisis started in the US, and the sluggish growth experienced is just a matter of wrong policies. Fiscal policies have been inadequate to create jobs and the monetary policy is not only ineffective but it also creates damage outside the US.

Just as a final note, I would like to add that the US public debt amounts to almost 70% of GDP. That is a huge value certainly not compatible with an AA+ rated nation. The country can raise more debt than other poor European countries because the US Dollar is the safe-heaven investors look for when economic prospects are bad. Just look at what happened when S&P downgraded the US sovereign debt. US treasuries just got higher and the US Dollar rose.

If the US Dollar were to lose its statute of currency number one, then at this time the country could have been looking to be bailed out with treasury yields rising and rising.

It’s time for Europe to get serious on a solution for the debt that is not just a Greek problem and it is also time for the US to try to concentrate in creating real jobs, a task that won’t be easy.