Europe's Lehman Brothers Moment

By Ferguson, Niall | Newsweek, June 18, 2012 | Go to article overview
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Europe's Lehman Brothers Moment


Ferguson, Niall, Newsweek


Byline: Niall Ferguson

As if Obama didn't have enough economic problems at home, the gathering Eurostorm could come to American shores just in time for the election.

Could Europe cost Barack Obama the presidency? At first sight, that seems like a crazy question. Isn't November's election supposed to be decided in key swing states like Florida and Ohio, not foreign countries like Greece and Spain? And don't left-leaning Europeans love Obama and loathe Republicans?

Sure. But the possibility is now very real that a double-dip recession in Europe could kill off hopes of a sustained recovery in the United States. As the president showed in his anxious press conference last Friday, he well understands the danger emanating from across the pond. Slower growth and higher unemployment can only hurt his chances in an already very tight race with Mitt Romney.

Most Americans are bored or baffled by Europe. Try explaining the latest news about Greek politics or Spanish banks, and their eyelids begin to droop. So, at the end of a four-week road trip round Europe, let me try putting this in familiar American terms.

Imagine that the United States had never ratified the Constitution and was still working with the 1781 Articles of Confederation. Imagine a tiny federal government with almost no revenue. Only the states get to tax and borrow. Now imagine that Nevada has a debt in excess of 150 percent of the state's gross domestic product. Imagine, too, the beginning of a massive bank run in California. And imagine that unemployment in these states is above 20 percent, with youth unemployment twice as high. Picture riots in Las Vegas and a general strike in Los Angeles.

Now imagine that the only way to deal with these problems is for Nevada and California to go cap in hand to Virginia or Texas--where unemployment today really is half what it is in Nevada. Imagine negotiations between the governors of all 50 states about the terms and conditions of the bailout. Imagine the International Monetary Fund arriving in Sacramento to negotiate an austerity program.

This is pretty much where Europe finds itself today. Whereas the United States, with its federal system, has--almost without discussion--shared the burden of the financial crisis between the states of the Union, Europe has almost none of the institutions that would make that possible.

The revenues of the European central institutions are trivially small: less than 1 percent of EU GDP. There is no central European Treasury. There is no federal European debt. All the Europeans have is a European Central Bank. And today they are discovering the hard way what some of us pointed out more than 13 years ago, when the single European currency came into existence: that's not enough.

Indeed, having a monetary union without any of the other institutions of a federal state is proving to be a disastrously unstable combination. The paradox is that monetary union is causing Europe to disintegrate--the opposite of what was intended. According to the IMF, GDP will contract this year by 4.7 percent in Greece, 3.3 percent in Portugal, 1.9 percent in Italy, and 1.8 percent in Spain. The unemployment rate in Spain is 24 percent, in Greece 22 percent, and in Portugal 14 percent. Public debt exceeds 100 percent of GDP in Greece, Ireland, Italy, and Portugal. These countries' long-term interest rates are four or more times higher than Germany's.

Perhaps the most shocking symptom of the crisis on the so-called periphery is youth unemployment. In Greece and Spain, more than half of all young people are out of work. That's right: one in two young Greeks and Spaniards are unemployed, eking out an existence on doles, cash-only gray-market jobs, and rent-free accommodations with mama and papa.

In the north European "core" of the euro zone, however, the picture is completely different. Unemployment in Germany is 5.

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