For those with memories longer than the time it takes to read this article, the month of May is quickly approaching, and with it, the one-year anniversary of not only the “Flash Crash”, but also the moment when the European Debt Situation grabbed financial headlines, causing an immediate crisis of global proportions. Capital suddenly flew to safe havens in the form of treasury bills and precious metals. The Euro fell from its lofty perch relative to the greenback, and “PIIGS” was a euphemism that forever joined our daily lexicon of favored terms.
The Euro had strengthened from its debut to the $1.60 range, but the recession pulled it back. As it began to recover afterwards, it staged another assault, rising to $1.51 until news of debt problems surfaced at the end of 2009. In May, the full import of the debt problems became common knowledge, and the downdraft plummeted the Euro to its lowest value in four years, a startling $1.18. Greece was the initial focus, but then the malaise spread to concerns over Portugal, Ireland, Italy, and Spain, the remaining members of the “PIIGS” anagram.
TIME TO GO ON A DIET
Bail out programs and promises of austerity programs ensued, but, one year later, the same basic issues remain. This is not just a case of whether the Euro is a better currency than the Dollar. The core issue relates to whether Western economies can generate the growth necessary to increase domestic tax revenues and pay down astronomical national debt and deficit values. The “EUR/USD” forex battle is an interesting sideshow, but the issues continue to perplex government officials on both sides of the Atlantic. Relative changes in the two currencies only reflect minor differences in the success or lack thereof of economic recovery programs in each region.
Debt is the battleground today, and the war needs favorable results to encourage market participants that the battle is being won. Standard and Poor’s shot a signal over the bow of Capitol Hill suggesting that the pristine “AAA” rating of U.S. debt may be revised downward in the not-to-distant future if something is not done to address it. Markets fell, as reasons for concern became a distinct reality rather than a shadow within denial.
The debt situation in Europe appears to be ameliorating, if you believe the statements of Carlo Cottarelli, head of the IMF’s fiscal affairs department. After acknowledging that fiscal risks to the global economic recovery are still Euro-centric, he commented that, “If I look at fiscal fundamentals, I see the situation in Europe improving faster than in the U.S.” Are these words to be taken at face value or are they just another attempt to assuage public doubt without significant substance behind them?
Yes, bailout programs have been established, and Greece and Ireland have been dealt with in orderly fashion. Portugal is next on the “hit parade”, but there is already social unrest and governmental back peddling on proposed austerity measures. Spain is not out of the woods either. A real estate “bubble”, similar to here in the States, has left banks and individuals deep in debt with assets underwater from a mortgage perspective. The general belief is that the entire dimension of the overall debt problems has yet to be determined, and the acceptance of the level of bailout programs by Germany and France is beginning to wane.
ONE CURRENCY, NO ESCAPE
The European debt crisis has underscored a basic problem in the framework behind its single currency, the Euro. The European Union may have consolidated behind the Euro, but actual control of trading policy, resulting imbalances, and related deficits remained firmly in the hands of each member state. The “PIIGS” represent the net-importing states, while Germany, The Netherlands, and France are the large export engines that keep the Euro strong. However, credit ratings were handed out evenly when standards should have varied by region. Over borrowing ensued and now must be paid down.
For the past few months, the Euro has strengthened to $1.42, a reflection that Europe has progressed while the U.S. seems mired in Congressional deadlock. Both regions need economic growth to materialize, but manufacturing capacity has already been off shored to Asia. Welcome to the new world order.
Readers, what are your thoughts of the European Debt Crisis? Do you think everything is under control, Germany will bail out everyone, and there will be no more contagion? When will the US state debt crisis hit?