As Europe, and especially the Euro area, seems to slowly be sinking into recession, the sun seems to shine brighter on the other side of the Atlantic. Indeed, the data for the third trimester of the American economy were recently published, and reached a nice and round 2%. Apart from being good news for the actual President, it is also a rather intriguing one for Europe. The crisis has lasted for so long on the old continent - five very unhappy years - that it is now known as the euro crisis. But how Euro(pean) is it really?
From the financial crisis...
First, it is important to recall that the crisis was not born in Europe but was imported. It started in the United States when the asset bubble financed by unhealthy subprime credits finally burst during summer 2007. The problem then was that through the complex process of securitization, what was once thought as a risk-mitigator became a factor of generalized uncertainty, nobody was able to differentiate the toxic assets from the good ones anymore. The generalized uncertainty made winds of panic rise on the stock markets, culminating in September 2008 with the collapse of Lehman Brothers, creating a credit crunch in most developed economies requiring massive amounts of public money to prevent to whole system from crashing down. From 2008 to the end of 2009, it was a world crisis, but still not a euro crisis.
... to the debt crisis...
However, as from 2010, things began to change when a small country recalled major world economies how their growth had been financed for the last decades, and what price it might cost them. The several reevaluations of Greece’s total debt and deficit created major swings on the sovereign bonds market, of a country rated until then as "A" by credit rating agencies, with soaring interest rates until the country could not finance itself anymore. After a beautiful fiasco of European governance – this time very European – on what would the destiny of Greece be: In or out? Public or private bail out? 30% haircuts or more? The saga never gave a clear answer, markets panicked (again) and went off hunting for other misbalanced economies, with either extremely high public debts (Greece, Italy) with business suffering from an extra risk premium on credit costs or unhealthy banks (Ireland and Spain) where the state ultimately pays for unnecessary risks. By then, what was before known as the financial crisis had become the debt crisis.
But is it really? Yes if you look at the levels of total indebtedness that Greece just reached: a frightening 189% of its GDP. But the country weighs only 3% in the total GDP of the Euro area. Ireland and Portugal are not that heavy either. Things started to get worrisome with Spain, forth economy of the Euro area. However, the country’s debt is “relatively” low, right in the average of the 17 members of the single Currency (88% in 2012), and considerably lower than the one of the United States (101% of its GDP).
... to a crisis of trust
The crisis is therefore not a debt crisis, but indeed a crisis of confidence and trust in the Single Currency, or even more in the commitment of the Member States of the Euro area to do whatever it to save the euro.
In order words, the crisis is essentially a crisis of governance. Yes, some of the European economies need to be restructured and based on sounder finances. There lies no doubt. And things have already started to change with the Six Pack, and the future adoption of the Two Pack and the TSCG, fiscal stability will be endorsed.
However, a more urgent issue needs to be addressed: the one of European governance. The US has institutions to take (relatively) fast and quick decisions; Europe too often lags behind. More than the available institutions, it is also a lack of credible commitment. Today, only the ECB seems to still have some credibility as we saw last summer with Mario Draghi’s intervention saying the ECB will do whatever it takes. His sole intervention seemed more credible than the numerous “last chance” summits where our heads of state and governments have met. If the Euro area wants to get out of the crisis, it has to restore its credibility as a consistent and reliable actor.
Nonetheless, though the US has not been as hurt during the last two years of the crisis, it does not mean that they should become a model for Europe. The debt crisis has shown us that it is unsustainable to finance growth through credit, and that good governance is part of that. Second, and the results of the American elections will give us an idea, future political blockages on the American debt ceiling are possible, as we have seen during summer 2011. If tensions between a differently oriented presidency and chambers continue to grow, and block the whole decision-making process, consequences maybe catastrophic. The US would only be able to pay back its debt and thus, would abandon paying its civil servants and all the necessary state intervention and aid. Markets might then finally open their eyes on the real financial state of the United States. It all lies in the trust you inspire.
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- Nick Mead and Garry Blight, Eurozone Crisis: Three Years of Pain, The Guardian, 2 November 2012