Hardly a day goes by that we do not hear about the debt crisis in Europe. It started with Greece, then filtered over to Spain, Italy, Portugal and Ireland. Unlike the U.S., where the Federal Reserve just prints money to buy our own debt, the troika of the European Central Bank, the European Union and the International Monetary Fund demands a series of austerity measures from the non-compliant nations. If the offending nation meets the terms of the troika for austerity, the troika then arranges enough bond purchases to get that nation through its crisis.
Of course, this is not a permanent solution to the problems facing these nations. Forced austerity often will put an economy into recession, thus forcing that same nation to come back to the troika for yet another bailout. The troika forces austerity on nations using leverage and, unfortunately, the offending nations then see austerity as punishment. Many of these nations have run welfare states for many generations, and to suddenly cut wages and benefits is not well-received.
As new countries are added to the list of EU members in trouble, those nations face slumping demand, deteriorating bank balance sheets and lack of confidence. The contagion spreads. Unfortunately the disease of running long-term deficits to finance social programs does not respond well to austerity as medicine.
The European Central Bank and the IMF have not been willing to guarantee support for the debt of the troubled countries, nor have the surplus nations like Germany agreed to allow nations like Greece to use their AAA ratings to lower interest rates on their debt. That creates a problematic lack of demand for the bonds of the troubled nations in the EU.
There also is a long-term structural problem of the costs of the southern European countries being much greater than the northern countries, mainly Germany. Germany has a massive trade surplus and is not interested in allowing the southern nations to destroy the Euro. Turn that around, and the countries like Greece, using the same currency as Germany, cannot devalue the Euro to balance its trade deficits.
Keep in mind that unlike the Federal Reserve - which has two mandates - regulating inflation and overseeing the monetary supply - the ECB has a single mandate - inflation. Again, the problems of keeping the 2 percent inflation target would harm the northern countries to help the south, and the ECB is not interested in doing anything that harms the German economy.
Sounds like quite the mess to me, and perhaps too many bakers in the kitchen. The troika, ECB, EU, IMF International Bank of China and a host of other players means that can-kicking will continue in Europe until there is a disorderly default of the EuroZone and a return of all nations to their own currencies. Since the EuroZone is so intertwined at this point, there is little chance that the troika will be successful in solving all the fiscal problems in Europe without calamity.
This year could be an interesting year in many ways.
• Carol Perry is a retired financial adviser and has been a Northern Nevada resident since 1983. She can be reached at Carol_Perry@att.net.
