U.S. to EU: Do as I say, not as I do

In what now seems to be a weekly rit­ual, U.S. finan­cial mar­kets fluc­tu­ated through­out the past week based upon antic­i­pated future eco­nomic and polit­i­cal devel­op­ments. But as has become more and more com­mon, it is not the poten­tial out­look for our coun­try that has mem­o­rized finan­cial mar­ket par­tic­i­pants, but rather that of the Euro­pean Union’s 27 coun­try con­fed­er­a­tion, or even more specif­i­cally, the euro-zone’s 17 mem­ber nations that uti­lize a com­mon cur­rency, the euro.

For bet­ter than two years this eco­nomic drama has unfolded, with Greece ini­tially being the epi­cen­ter of the cri­sis that now wraps it unwanted embrace around the entire euro-zone. And to demon­strate just how rapidly the finan­cial con­ta­gion is spread­ing, the rat­ings agency, Stan­dard & Poor’s, recently announced that the 15 nations which were not already under review for a pos­si­ble credit-downgrade are at risk of see­ing bor­row­ing costs rise as their sov­er­eign debt is pos­si­bly clas­si­fied as more default-prone. So seri­ous is the issue that the Ger­man gov­ern­ment, always a bas­tion of finan­cial health, recently saw an issue of its debt instru­ments unfilled (not enough buy­ers for what the gov­ern­ment wanted to sell), with yields ris­ing even as they remain fis­cally con­ser­v­a­tive in their spending/taxation decisions.

Over the past sev­eral months, a num­ber of plans have been floated to address the con­cerns that euro-zone coun­tries will be unable to meet their oblig­a­tions of repay­ing prin­ci­pal and inter­est in a timely fash­ion. Within the past three months, this col­umn described a plan to lever­age the Euro­pean Finan­cial Sta­bil­ity Facil­ity (EFSF) funds to help limit ini­tial losses of buy­ers of ques­tion­able sov­er­eign debt instru­ments from coun­tries such as Greece, Spain, Ire­land, Por­tu­gal, and Italy. At the time, I described a num­ber of poten­tial prob­lems with the plan, even as the euro-zone gov­ern­ments pro­claimed con­fi­dence in their plan. Since that time, world finan­cial mar­kets seem to have reacted unfa­vor­ably, with that plan now all but dead.

In its place, it now seems the euro-zone coun­tries have come to the con­clu­sion that a “financial-only” solu­tion is no longer pos­si­ble, that is, throw­ing money at a prob­lem cen­tered around fis­cal pol­icy issues is unlikely to be suc­cess­ful. So, last week the entire 27 coun­try EU exam­ined the pos­si­bil­ity of some sort of fis­cal union that would force fis­cally inse­cure mem­ber nations to move toward a bal­anced bud­get or face poten­tial sanctions/fines. Of the entire EU mem­ber­ship, only Britain indi­cated an unwill­ing­ness to even con­sider such a pos­si­bil­ity, with all 17 euro-zone mem­bers indi­cat­ing they will go-it-alone, if need be, to forge a mon­e­tary and fis­cal union largely pat­terned along the fis­cally con­ser­v­a­tive lines pro­posed by Germany.

In essence, the ten­ta­tive out­come — which may be many months or even years into the future before it can be suc­cess­fully imple­mented — would pro­vide that each coun­try sub­mit their bud­get to the Euro­pean Com­mis­sion for review, and should deficits/debts be too large (above 3 per­cent of GDP on deficits and gen­er­ally more than 60 per­cent on a debt-to-GDP ratio), changes would be required as a par­tic­i­pat­ing mem­ber nation. Required fis­cal aus­ter­ity, over time, would then bring non-compliant coun­tries into bal­ance and allow mem­ber nations and the euro to pros­per, and (hope­fully) bring the Euro­pean sov­er­eign debt cri­sis to an end.

And as all of this unfolded over the past few weeks, who was there to lec­ture the Euro­peans on their mon­e­tary and fis­cal pol­icy inad­e­qua­cies? Pres­i­dent Obama’s Trea­sury Sec­re­tary, Tim­o­thy Gei­th­ner. Basi­cally telling the EU nations to do more, do it big­ger, be bold. Lovely words and thoughts, but more than just a lit­tle hypocritical.

By EU stan­dards, the U.S. would be seri­ously non-compliant. For exam­ple, in the last fis­cal year the U.S. fed­eral bud­get deficit was just a touch under $1.3 tril­lion, or nearly 8.5 per­cent of GDP; approach­ing three times higher than the per­cent­age where the Euro­pean Com­mis­sion would require a sig­nif­i­cant bud­getary realign­ment. And with a debt level (includ­ing enti­tle­ments) that is fast approach­ing $15.1 tril­lion, the U.S. debt-to-GDP ratio is almost 100 per­cent, far above the 60 per­cent that is con­sid­ered sustainable.

So, were the U.S. a euro-zone coun­try, size­able changes would be required. Of course, keep in mind that within the past few weeks, Con­gress and the pres­i­dent could not agree on a measly $1.2 tril­lion in future deficit/debt cuts spread out over 10 years. So, one might rea­son­ably won­der if the U.S. is the coun­try that should be lec­tur­ing oth­ers on the impor­tance of fis­cal prudence.

Dr. James New­ton serves as chief eco­nomic advi­sor to Com­merce National Bank and is an aux­il­iary fac­ulty mem­ber in eco­nom­ics and sta­tis­tics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not nec­es­sar­ily reflect those of Com­merce National Bank or OSU-Marion/Newark.

Posted by Jim Newton on Dec 14 2011. You can follow any responses to this entry through the RSS Feed. Comments can be made below.