During May all forms of media had their gaze fixed on Europe, in particular Greece and the so called PIIGS (Portugal, Ireland, Italy, Greece and Spain). All of these states, because of large deficits and government debt, were under threat to default on their sovereign debt. This gave rise to the fear of “contagion,” that this would spread throughout Europe, and even possibly to the U.S. and cause a sovereign debt crisis throughout the world as investors would lose confidence in government bonds.
This did not happen. Europe finally agreed on a bailout package for these states if default should occur. This nearly $1 trillion package, including IMF support, was finally agreed upon with resistance from Germany, who did not want to pay for the sins of its irresponsible neighbors.
For Germany the crisis now appears over, its economy is surging and its strict employment laws have curbed the problem the U.S. is facing with a jobless recovery. Now Eurozone states must balance their budgets and the only way to do this is through austerity measures and/or raising taxes. States must meet a relic of a regulation called the Stability and Growth Pact (SGP). Under this pact states must keep their annual deficit at 3 percent of GDP and total government debt below 60 percent. The formation of the SGP came at a time when economies were growing on average of 3 percent, a fact that is not reality in the present.
Budget slashing is also a trend in the U.S. Republicans are basing their platforms around balancing the budget through slashing spending without raising taxes. I come from a rural town in New Jersey, a typically democratic state that recently elected a Republican governor, hell bent on getting New Jersey’s debt under control, which has spiraled out of control and is in the billions. This comes with good reason and leads to the title of this post. New Jersey is similar in many ways to Greece in the EU. New Jersey citizens face some of the highest taxes in the U.S., with the highest property taxes in the country. There have been recent scandals within the state government and inefficient spending and civil service bloat has been a reoccurring problem.
Like people in Europe, in New Jersey we are now facing drastic cuts in spending. These cuts have affected transportation and education to highlight a few on a long list of cuts. Education spending has recently taken a huge hit and is the most visible to me. My mother is a teacher and many of my friends are education majors. A few of these friends were let go from their jobs and are now finding it nearly impossible to find employment (veteran teachers are secured their positions through tenure and a powerful teachers union, but that is another discussion in itself). With irresponsible states like New Jersey and California, who have run up huge deficits and who now must tighten their spending belts, why haven’t there been protests on the streets like in Europe? Why haven’t New Jersey and California threatened to undermine the dollar like Greece did the Euro? I decided to look at the economies of the PIIGS countries and compare them to U.S. state economies.
State | GDP billion $ | Country | GDP billion $ |
U.S. | 14520 | EU | 15050 |
California | 1846 | Italy | 1832 |
Texas | 1223 | Spain | 1413 |
Washington | 322.8 | Greece | 340.2 |
Wisconsin | 240.4 | Portugal | 239.1 |
Alabama | 170 | Ireland | 186.7 |
New Jersey’s economy, at $475 billion is much larger than Greece’s and two times that of Portugal’s, yet these small states threaten the entire 16 state Eurozone. So why did Greece, the size of Washington state, have such a huge impact on the Eurozone? The answer is simple; U.S. states have the backing of the federal government. New Jersey, or even California, an economy the size of Italy, is not going to single handedly take down the dollar because fiscal and economic policy is a competency of the federal government and because of the dollars supremacy as a reserve currency throughout the world. While the Euro has become a stronger currency since its creation and has grown stronger relative to the dollar over almost the past 10 years, the Eurozone does not have the equivalent of the federal government.
Member states hesitated to back Greece and it caused bond rating agencies to attack Greek bonds, exacerbating the crisis, something that just wouldn’t happen in the U.S. Both U.S. states and EU member states face a tough road ahead as they try to lift themselves out of the crisis and balance their budgets. With the German economy strong, Europe cannot hesitate to delegate more authority to supranational institutions, especially Eurozone members. Supranational Eurozone fiscal and economic governance is the only way to avoid another Greek crisis and give the world complete confidence in the Euro. For this to happen the PIIGS are going to have to accept austerity measures, and Germany and other strong economies are going to have to accept picking up the slack for struggling economies during times of crisis. As for New Jersey and the rest of the U.S., only time will tell if it is time to slash budgets and balance the budget, or pump up the economy with more deficit spending to create jobs. Partisan lines have been drawn.
Member states hesitated to back Greece and it caused bond rating agencies to attack Greek bonds, exacerbating the crisis, something that just wouldn’t happen in the U.S. Both U.S. states and EU member states face a tough road ahead as they try to lift themselves out of the crisis and balance their budgets. With the German economy strong, Europe cannot hesitate to delegate more authority to supranational institutions, especially Eurozone members. Supranational Eurozone fiscal and economic governance is the only way to avoid another Greek crisis and give the world complete confidence in the Euro. For this to happen the PIIGS are going to have to accept austerity measures, and Germany and other strong economies are going to have to accept picking up the slack for struggling economies during times of crisis. As for New Jersey and the rest of the U.S., only time will tell if it is time to slash budgets and balance the budget, or pump up the economy with more deficit spending to create jobs. Partisan lines have been drawn.
No comments:
Post a Comment