There is a lot of macro going on right now but much of it is being pushed below the surface by car bombs, Ahmadinejad’s nomination for the Nobel Peace Prize (just kidding), Steve Hogan’s win in the Bloomington primary, and Greece. So I thought it might be a nice time to take a step back and talk about Greece and Europe. Most of us Americans know that Grease was a cool musical with John Travolta and Olivia Newton-John. We also know cool stuff like who sang Under the Board Walk, who won the Kentucky Derby, why the Dodgers left Brooklyn, and how many Mannings play quarterback in the NFL. We Americans know a lot of cool stuff.
When I was growing up in Miami, Europe was a continent and a place that had a lot of World Wars. I heard it had a lot of cathedrals but none of that was ever much of a draw for me until my dear friend and mentor Chuck Bonser invited me to join him on a program in Europe. I think I went three times – two weeks each time – and I heard lectures by Europeans about Europe in places like Paris, Brussels, and Berlin. What a lucky duck! I am not an expert on Europe but I do know enough to try to add a little perspective to what is going on there and why it is such a big mess.
What we call the European Union or EU started shortly after World War II mostly because Germany and France decided that if they created more economic trade (iron and steel) between their two countries they might not want to kill each other so often. Before you know it they added Belgium, the Netherlands and Luxembourg and created a union of five countries. I suspect these three additions had less to do with coal and steel and more to do with really good beer. Anyway, I digress. From there we see an expansion from five countries to 27 and some 450 million people. Sixteen of those countries decided to drop their own currencies and adopted the euro when the Maastricht Treaty was signed. Since 1999 we began thinking of the euro as Europe’s currency despite the fact that many European countries are not part of the Euro-Zone and still have their own currency (E.g. Britain).
Enough history. Now some facts and wild guesses. First, despite the EU and the Euro-Zone, the countries of Europe are NOT like states in the US. They remain independent countries ruled by their own governments. They have made scores of agreements with each other that help facilitate European-wide trade and monetary union. These agreements bring wealth and prosperity to the people of the EU. They have great value and will not be reneged easily.
Second, it somehow APPEARS to some of us that there is more union than there really is. For example, the EU has government institutions that sound a lot like a federal government. There is an Economic Commission and an Economic Parliament. There is also a recent agreement that looks a lot like a Constitution. There is a new EU President and someone who acts a lot like a Secretary of State. Sounds like a country to me.
Third, appearances can be misleading. For example and relevant to 2010 and Greece (but not to Grease or the Drifters) is that while those in the Euro-Zone agreed to give up their currencies and let the European Central Bank determine their joint monetary policies – they did not give up their FISCAL POLICIES – that determine government spending and taxation. All 16 Euro-Zone countries have their own government spending and tax policies. For the sake of the monetary union they did agree to some constraints – to keep their fiscal deficits at no more than 3% of GDP and national debt at no more than 60% of GDP.
So when Greece (and Spain, Portugal, Ireland, and others) were found to be exceeding these fiscal limits, the rules required that these countries grapple alone with their fiscal problems, subject to fines if they habitually exceed the fiscal limits. Despite all the agreements within the EU and the Euro-Zone, there is no agreement that provides a European solution for countries that have debt problems. Germany’s original response was something like – let them charge higher taxes on gyros. Good German citizens are not going to bail out Greeks who spend so much time at the beach. Strange thing happened then – their shared currency, the euro, started to depreciate as if all those 16 countries were scofflaws.
Accordingly, the Germans and the French and the rest of the countries felt compelled to act. Only problem is that there is no legal EU means to do so. So now they are being more flexible and more innovative. Only trouble is that they are not yet being very convincing despite the fact that the IMF jumped in with their considerably deep pockets. It took a while to come up with a solution for Greece and now the world is wondering just how bad things are in the rest of the countries. Until more of this is digested and understood, the euro is bound to be under some pressure. The members of the EU are under a lot of pressure to restructure their rules. Until they do, the world’s financial markets are watching. This is BIG STUFF since the very act of restructuring means another round of compromise—individual countries giving up sovereignty.
Okay – so now I feel better. I feel good enough in fact to find a nice Belgian Wit in my fridge. If only I could find some Dutch pommes frits. Yummy. I hope you all had a nice May Day. Today is Cinco de Mayo which in Spanish means a big headache on May 6th.