The Euro, Retrospective Account
Europe’s single currency – the euro – made its official debut on January 1, 1999 with 11 member states to create what is now known today as the euro zone. By January 1, 2002, the first notes and coins began circulating throughout 12 nations in the European Union (EU), including its newest member Greece. Four years later 15 European nations joined the euro zone and ratified the EU’s Constitutional Treaty drafted two years prior, although, with some initial resistance from France and the Netherlands. The flight to euro appeared to be comparable to that of the Phoenix, attracting money from all over the world. Its global appeal led to stability in the EU and steady growth from 2002-2008.
Many who supported the idea of a shared currency asserted that the common currency was a good idea. The general feeling was that it created a better environment for trade and financial integration throughout the region. Held together with a centralized monetary policy making institution – European Central Bank (ECB) – which provided the EU with stable footing for future economic growth and prosperity, the euro zone became a power currency to be reckoned with, rivaling that of the U.S. dollar as a safe haven for investors. Yet, one main factor had remained unquestioned. While the euro zone shared many of the same monetary policy and trade interests, the question was "could the region provide the necessary political unity to avoid a crisis?" and "could U.S. lawmakers learn from the mistakes that followed?" The euro zone would be put to the test just two years after the ratification of its constitution when global markets were confronted with the U.S. financial turmoil in September of 08 and Greece’s staggering debt crisis in 2009. A European crisis seemed inexorable, and the euro zone doomed.
Black Clouds: Italy Spain and Greece – To Name a Few
One can’t help but notice the daily headlines regarding the EU’s difficulties with its financial system, the effects on U.S. economic growth, and tensions between the ECB and various European governments. Instability in Spain, Greece, Italy and others has created barriers to economic growth in the United States and the global economy. Uncertainty stemming from increased debt levels, unemployment, decreased demand, and economic decline in Europe has eroded market confidence and has weighed down America’s modest economic recovery.
Financial markets have played a substantial role in helping shape monetary and fiscal policy in the euro zone during its period of uncertainty. By pushing its constituents to make massive cuts in government expenditures and impose highly controversial austerity measures, the ECB was able to reassure investors that the main focus of the central bank was debt, not stimulus. In order to mitigate the loss of confidence and avert another run by bond traders, there were efforts to decrease debt/GDP ratios in the weaker European economies. The ECB leveraged its position and used budget-cut/austerity preconditions as a way to justify the several rounds of bailouts that followed, with the hope of market reassurance. With their hands to the flames, nations seeking a bailout followed suit and sought to satisfy these preconditions by increasing revenues through taxation, cutting government programs, reducing public sector salaries and pensions, and implementing highly unpopular cuts to the states’ workforces. These measures ultimately led to increased unemployment and further losses in GDP in countries such as Italy, Spain, and Greece. As the world would soon find out, the cure was worse than the disease.
A Case Study
At the onset of the euro zone crisis in 2009, Greece was faced with 9.5% unemployment, and in February of 2010 Greece began to implement its largely unpopular fiscal austerity measures. Based on the most recent data from the United States Bureau of Labor Statistics, as of June 2012, Greece’s unemployment rate has sky-rocketed to 24.6% as a result of these measures. GDP contracted by more than 7.1% in 2011 and is forecasted to shrink by another 4.7% by the end of the year. These numbers greatly understate the irreparable harm left in the wake of across-the-board job cuts and reductions in pay/pensions for state workers.
The United States could learn a valuable lesson from this turn of events. When European countries worked to reduce their debt during the middle of an economic decline by instituting massive cuts in government programs and increasing taxes on middle and high-wage earners, the result was predictably Keynesian: increased unemployment, a drop in domestic demand and falling GDP. Washington may be able to use the euro zone crisis as a model of what not to do.
It’s no secret that we are in an election year. Have you seen the attack ads and political mudslinging over the past few months? Both candidates have made it clear that nothing is off the cutting block, including Medicare, subsidies for large green and brown energy companies, and even Sesame Street. The real question is "which candidate capable of uniting Washington in time to stave off our economy’s potential plummet off of the cliff?" As seen in Europe, we cannot afford gridlock in the most trying of times.
We mustn’t forget that it was only two years ago when the U.S. was downgraded by the S&P rating agency for Washington’s rhetorical pussyfooting and political brinksmanship during the debt ceiling debacle in August of last year. The excerpt below is from the Standard & Poor’s press release after agency downgraded the U.S.’s credit rating to a AA+ rating, first downgrade in the nation’s history:
“More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating … ”
The view expressed by the S&P describes a lack confidence on the part of the agency in the ability of Washington to effectively craft and implement public policy. In order words, legislators were failing to do the very job they were elected to do: govern.
As the election inches closer and closer, voters must consider who will be the candidate least likely to make the same mistakes as the euro zone has and the most likely to unite policymakers on both sides of the isle.
The Take Away
As result of conditions set forth in the Budget Control Act of 2011, massive cuts in government funded programs like Medicare and Defense are set to go into effect at the end of the year along with the expiration of the Bush era tax cuts which were extended by President Obama. In addition, the expiration of last year's 2% middle class payroll tax cut, as well as tax increases associated with the Affordable Care Act, are set to take effect early next year. Unless something is done by lawmakers, these tax increases and spending cuts will devastate our economy, increasing unemployment and slowing U.S. growth, just as they did to the euro zone.
Both candidates have made vague economic policy proposals outlining their political differences, failing to fuly acknowledge the looming risks to the American economy. As candidate spend upwards near $1 billion in the aggregate on TV ads, voter outreach, polling and other campaign junkets, Americans wait cautiously on the sidelines hoping for a new direction. As alarming as it sounds, if Washington continues to operate under the "business as usual" credo, neither candidate will have enough political will to inch the nation back from the edge of the so-called “fiscal cliff” (however, one candidate might have the lackluster opportunity of blaming it on the “other guy”).
We should learn from Europe’s mistakes, or more specifically, Greece’s: Immediate cuts in spending and state employment while concurrently raising taxes is a dangerous combination during periods of low exonomic growth and high unemployment. Without a unified political system effectively developing and implementing fiscal policy, our future economic prospects will remain in doubt.