A nation at risk of Bipolar Economic Disorder
Over the past few years the euro-zone — a 17 nation monetary union — has been subject to widely divergent economic realities from one country to another. In a very general way, many of the countries in the southern portion of the euro-zone have been described as economically at-risk. The nations most at-risk have been lumped into the unflattering PIIGS-category, composed of the countries of Portugal, Italy, Ireland, Greece and Spain.
For these five countries, their indebtedness has grown tremendously over the past several years, and they find it more and more difficult to service their debt based upon the very poor economic performance now exhibited. The worst is Greece, which continues to work with the European Commission, the European Central Bank and the International Monetary Fund — often called the troika — to cut expenditures and increase revenues sufficiently to receive the bailout funds from others needed to meet their debt obligations. The fear is that in the not-too-distant-future, Spain and Italy may join Greece in this unenviable position. Making matters worse, the euro-zone’s weakest members have generally fallen into recession, which worsens the fiscal challenge of putting together a viable plan to restore such nations to economic health. In the meantime, living standards of citizens in the adversely impacted countries are under severe downward pressure.
In contrast to these at-risk member nations, those in the northern portions of the monetary union are performing more favorably, with Germany generally being the most economically vibrant, as well as the largest euro-zone member nation. Given its role of economic-Goliath (both in terms of size and strength) Germany has been crucial in helping to finance the bailout funds for the weaker euro-zone member countries, in effect, allowing a partial redistribution of income/wealth now and into the future between themselves and those nations requiring financial assistance.
The primary mechanisms of the transfer process are two bailout funds known as the European Financial Stability Facility (EFSF) and the about-to-be-implemented European Stability Mechanism (ESM), both of which have at their disposal the equivalent (in euros) of several hundred billion dollars. Given the relative health and size of the German economy, they are the largest contributors to these funds among the member nations. In effect, the Germans are pledging some portion of their present and/or future income streams (and potentially their standards of living) to keep alive the hope of a common currency and the associated economic union.
This week — in fact today — a court in Germany will determine if a temporary injunction should be granted to keep Germany from becoming a contributing member of the ESM. Should this occur, it could call into question the ability of the euro-zone to continue supporting, most urgently, the Greek economy, as well as the other PIIGS should they become more heavily reliant upon financial assistance.
And why is this temporary injunction being sought to halt Germany’s participation in the ESM? Clearly, because some in Germany see this as rewarding those nations which have been unable or unwilling to exhibit fiscal discipline; where (from the German perspective) a belief exists that a nation’s citizens (such as in Greece) can have government guarantees of prosperity-for-all via government expenditures on various entitlement programs without having to pay for those entitlements through high tax rates. With the monetary union now at risk of dissolving due to the financial market chaos of weaker nations being unable to meet their obligations, the Germans (and other northern countries) feel pressured to support the standards of living in other countries which have been wildly extravagant in their past fiscal behavior.
As an overall economic entity, the euro-zone has fallen into a sort of bipolar economic disorder. In the classic case of bipolar disorder (and here, please forgive the vast simplification an economist is putting into a matter better left to those in the field of psychology), an individual can move back-and-forth between maniac and depressive states over time. In this instance, what I am calling “bipolar economic disorder” exhibits both manic (overly exuberant growth) and depressive (recessionary-like) states among nations at the same time. If left untreated, bipolar economic disorder can eventually have a debilitating effect on the living standards in all countries.
So, why bring this up, beyond just as a point of information as to worldwide economic developments? Very simply, because the U.S. may now find itself on cruise control; moving ever closer to a serious case of bipolar economic disorder.
More about that next week.
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.