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.

Posted by Jim Newton on Sep 11 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.