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The European debt crisis

How might Europe's spiraling debt crisis affect the U.S. and its stalled economic recovery? To understand the potential impact, here are five things to know. 




The European debt crisis

This week, a dramatic series of events unfurled across Europe, which threatened to push the European debt crisis to new heights. As Greece ushers in a new interim prime minister and Italy battles spiraling borrowing costs, the eurozone’s economic outlook continues to worsenagainst a backdrop of European leaders dithering at a seemingly endless procession of summits. Some have even begun to think the previously unthinkable by asking if this is the “finito” for the euro.

But how might the problems in Europe affect the U.S. and its stalled recovery? To understand the potential impact, here are five things to know:

1. A united Europe


The European Union, as it’s currently configured, consists of 27 member states. Seventeen member states of the EU, including Germany, France, Italy and Greece, belong to the eurozone; they share the euro currency and a common monetary policy set by theEuropean Central Bank (ECB).

The first offshoot of European integration came in 1952, in the form of the European Coal and Steel Community (ECSC), which established a common market in coal and steel for member countries: France, Germany, Italy, Belgium, the Netherlands and Luxembourg. In the wake of two devastating world wars, the ECSC’s architect, Robert Schuman, sought to create a single market for these two essential wartime materials as a safeguard against further conflict.

Fast forward to November 1989, after the fall of the Berlin Wall, when the specter of a rootless Germany spurred many previously skeptical states to fast track planning for a monetary union. The culmination of these efforts can be seen in the 1992 Maastricht Treaty, sometimes called the Treaty of Europe. A turning point in the history of European integration, the treaty formally established the European Union and set a timeframe for the rollout of the euro currency, which was introduced in 1999 and put into circulation in 2002.

After weeks of political turmoil, Lucas Papademos was named as the prime minister of the new Greek interim government on Nov. 10, 2011. Photo: AP Photo/Thanassis Stavrakis

2. Ground zero: Greece

Greece was granted eurozone membership in January 2001 after implementing a series of economic reforms — on paper, at least. With its admittance into the eurozone, Greece gained access to virtually unlimited credit at low interest rates. Greece’s continued access to artificially cheap credit — even after officials confessed to fabricating figures — enabled the government to ignore surging domestic costs (for a large public administration and generous pension programs, among other expenses) and corruption (including widespread tax evasion) for far too long.

By 2009, many national economies started to buckle under the strain of the global financial crisis, and Greece was no exception. In additional to the global downturn, Greece also faced widening bond spreads. The news only got worse that October, when the newly elected Socialist Prime Minister George Papandreou released a new government budget for 2009, which revealed an existing deficit of 12.7 percent of GDP, three times the EU limit. (In April 2010, the EU’s statistical office revised Greece’s debt estimate once again to 13.6 percent.)

In May 2010, Greece received a $152 billion bailout from the “troika” of the ECB, EU and the International Monetary Fund in exchange for rolling out deep cuts to public spending programs. This past June, the Greek government passed another round of public spending cuts in order to qualify for a second bailout package of $157 billion.

These measures have not been without their detractors. Some economists like Nobelist Paul Krugman question the efficacy of these austerity measures as a way of restoring market confidence. Critics of austerity argue that when people lose their jobs, they stop paying taxes and start claiming unemployment benefits, thereby worsening the economic slump and creating a vicious cycle that necessitates steeper cuts and more bailouts.

3. The euro: Flawed by design

The lax enforcement of the EU’s budget rules points to the eurozone’s critical design flaw as it is presently conceived. The EU – unlike the United States – is not a federation. Eurozone countries share the euro and a common monetary policy, but each member state sets its own fiscal policy (i.e., decisions about tax collection and expenditure). Understood this way, it’s not surprising then that Greece’s sovereign debt crisis struck at the very heart of the eurozone: It exposed the structural weaknesses of a single monetary policy that must work in coordination with 17 separate fiscal policies.

While a growing number of European leaders, including German Chancellor Angela Merkel, have called for greater fiscal and political integration among member states as a way out of the crisis, some critics question whether there is enough popular support among the citizens of member states to form “an ever closer union.” Gideon Rachman of The Financial Times observed that, “The fact that national loyalties are much stronger than any common European loyalty means leaders are constrained in the solutions they can feasibly consider.”

The mounting frustration with harsh austerity measures and high unemployment rates, highlighted by the ever-more frequent protests in cities across the continent, also point to the growing — and dangerous — chasm between economic governance and democratic principles in beleaguered eurozone countries like Greece and the EU as a whole. The outrage expressed by Merkozy at former Greek Prime Minister Papandreaou’s hasty proposal for a referendum on the October 26 bailout deal — which was just as hastily withdrawn — recently drew fire from critics for its political hypocrisy.

4. Contagion

Some continue to ask how the political machinations of a country the size of Greece (population: 11 million people) can have such a big impact on the European and global economy. The simple answer is that a Greek default (once thought unlikely but now a very real possibility in light of recent political upheavals), would spur panic about other imperiled countries like Portugal and Ireland, which also received bailouts once the cost of borrowing money on the open markets became too expensive.

But the elephant in the room (or on the life raft) is Italy. As the eurozone’s third largest economy (and the world’s eighth), the country is both too big to fail and too big to rescue with its $2.6 trillion debt. This week, Italy’s scandal-ridden Prime Minister Silvio Berlusconi (Bunga Bunga to close friends) agreed to step down and interest rates on Italian bonds soared tounsustainable levels, making Italian debt prohibitively expensive to finance. Many economists now believe that Italy will default unless it can reduce the cost of borrowing money by regaining investor confidence through the implementation of unpopular austerity measures. However, it remains unclear if Berlusconi’s successor will be able to muster the popular support needed to push through such programs quickly enough to satisfy the markets.

5. How this affects the U.S.

Put simply by Robert Reich, “A Greek (or Irish or Spanish or Italian or Portuguese) default would have roughly the same effect on our financial system as the implosion of Lehman Brothers in 2008. That is, financial chaos.”

The collapse of Lehman Brothers in 2008 — and its harrowing aftermath — revealed just how interconnected the world’s financial system had become. Many believe that a European state default, and its ripple effects, would produce another “Lehman moment,” possibly on the order of several magnitudes.

What this means on a practical level is that the financial system would freeze up: banks would be less willing to lend to each other, and as a consequence, would be less willing to extend lines of credit to businesses and individual households.









"I'm just trying to make a way out of no way, for my people" -Modejeska Monteith Simpkins









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Originally Posted by EbonyRose:

It seems this article leaves out the most important aspect of these countries .... that being that all of them are currently being governed under a CONSERVATIVE form of political ideology.


Our version of "Republicans."


And they are not only ruining our country and economy ... but seemingly that of the entire world. 


Amen, ER.  Now if you could only get Americans, the 99%, the Occupy Wall Street protesters, and the rest of the West to see that truth.

It’s really unfortunate that people cannot get past their bias to see their own hypocrisy. Ok….so the US is currently being run by a liberal President while our nation is in crisis. Yet, does either of you two blame the party in control for our crisis? You have no qualms about noting the “inheritance” of the office when Democrats took over control in 2008. The crisis situation, you argued, was not born from the policies of the liberals but rather, the inheritance of the failures of the conservatives the previous years. Now, you hypocritically ignore THE PAST or evolution of the crisis in European economies and place blame on the current leadership who has the task of trying to fix the problems.


My bias is truth and knowledge. The truth of the matter is that everything evolves into what it is. You cannot explain the present by simply looking at what is present. In other words, one can only explain the present by what has past. Indeed, the past should be prolog of any pros concerning that state of being of any entity. I get so sick of hypocrisy from both sides and people who choose to selectively and subjectively reason then not apply those same deductions and inductions equally to all situations.  There is nothing that discredits a person more, in my eyes, than biases.

OK, let's apply NAZInomic analysis to this.


First of all MONEY and WEALTH are two different things.  Our economic theory depends on EVERYBODY BELIEVING that money is more important than wealth.  The majority of people are not supposed to have any wealth.  They are supposed to show up at jobs to make money to pay rent and buy junk that depreciates so they can go back to work to run on the treadmill and indoctrinate their children to run on the treadmill all of their lives too.  YEAH, go to college and take on a big debt.




So NAZInomics does not want EVERYBODY to understand accounting.


The trouble is that a CASH FLOW ECONOMY with everybody playing money games and mostly hiding information is INHERENTLY UNSTABLE.  Even the economists don't know who is lying about what and when.  So these White people who insist on believing they are smart want everyone to believe they can control a system built on lies where the technology is constantly changing and the people producing the technology are often lying too.


So in 1900 there were 8000 cars in the United States.  In 1995 there were 200,000,000 cars in the United States.  Somewhere I saw there were 900,000,000 cars all over the world.  Consumers go into debt to buy all of those cars.  They pay taxes and interest and insurance on all of those cars.  All of that is added to GDP.


How can it possibly make sense for economists to not even talk about the depreciation of all of those cars?  I know a woman that just spent $4000 to have the transmission replaced on a used car that she only paid $10,000 for.


How can it possibly make sense for the entire economics profession to ignore the depreciation of all of those cars world wide and then add their replacements to GDP and call it ECONOMIC GROWTH?  Not to mention all of the other so called durable consumer goods.



Trust the White folks who pretend to be smart to tell everyone to focus their attention in the wrong place.  And plenty of them believe the lies.


The LAWS OF PHYSICS do not give a damn about the human race.  Tell all of the lies you want.  Physics does not care!!!  Physics makes your car wear out!!!


Economics without Physics!  LOL



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