Harvard University history professor Niall Ferguson says that Americans should be paying more attention to the eurozone crisis. He believes that the issues facing Europe are going to make their way to the U.S.
Writing in The Daily Beast, Ferguson explains why we should be paying close attention:
The first reason is that, with American consumers still in the doldrums of deleveraging, the United States badly needs buoyant exports if its economy is to grow at anything other than a miserably low rate. And despite all the hype about trade with the Chinese, U.S. exports to the European Union are nearly three times larger than to China.
Indeed, the EU and the U.S. economies account together for about “half the entire world GDP and for nearly a third of world trade flows,” writes the European Commission website.
Consider the $240 billion that the U.S. made from exports to the EU and compare that to the $91.1 billion that the U.S. made from China. It would stand to reason that a total collapse of the eurozone could have disastrous economic repercussions in the U.S.
And Ferguson has more to say.
Europe’s problem is not just that governments are overborrowed. There are an unknown number of European banks that are effectively insolvent if their holdings of government bonds are “marked to market”—in other words, valued at their current rock-bottom market prices.
His fear is that, because of the existence of our present global economy, some U.S. financial institutions will naturally be affected by the euro banks collapsing. Consider the fact that some of the biggest U.S. banks have some sort of “exposure” to euro bonds and banks. If the euro banks become “effectively insolvent,” this will affect the U.S. banks that have investmenst in those bonds.
A more timely example: “MF Global, run by former Goldman Sachs CEO Jon Corzine—just blew up because of its highly levered euro bets,” writes Ferguson. Now imagine the fallout of Mf Global but on a much larger scale involving major banks. That’s what Ferguson is worried about.
And although these are all valid points, Ferguson goes on to say that that’s not even the worst of American concerns. He continues writing:
…what is happening in Europe today could ultimately happen here. Just a few months ago, almost nobody was worried about Italy’s vast debt, which amounts to 121 percent of GDP. Then suddenly panic set in, and Italy’s borrowing costs exploded from 3.5 percent to 7.5 percent.
Today the U.S. gross federal debt stands at around 100 percent of GDP. Four years ago it was 62 percent. By 2016 the International Monetary Fund forecasts it will be 115 percent. Economists who should know better insist that this is not a problem because, unlike Italy, the United States can print its own money at will. All that means is that the U.S. reserves the right to inflate or depreciate away its debt. If I were a foreign investor—and half the debt in public hands is held by foreigners—I would not find that terribly reassuring. At some point I might demand some compensation for that risk in the form of … higher rates.
Athens, Rome, Washington … The shortest route from imperial capital to tourist destination is precisely this death spiral of debt.
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