In the more than two years that have passed since the start of Europe’s financial crisis, France has consistently aligned itself with Germany in pushing for greater austerity in so-called “peripheral countries” like Greece, Portugal, Spain and Italy. German Chancellor Angela Merkel even took the rare and somewhat awkward step of publicly campaigning for French President Nicolas Sarkozy.
Jason Lange contributed to this post.
Suddenly the shoe is on the other foot. The financial crisis of 2007-2008 had its roots in the U.S. banking system and then spread to Europe. Now, it’s Europe’s political debacle that threatens economic growth in the United States.
With Southern Europe getting so much of the blame for the continent’s financial crisis, it is refreshing to see someone highlight the other side of the coin. That’s just what Joshua Rosner, managing director of Graham Fisher & Co., did in testimony on Thursday. Asked to discuss the potential risk to U.S. taxpayers of the ongoing political battle over a frayed monetary union, Fisher began his remarks by debunking the reigning narratives being used to describe the crisis:
Any lingering illusion that the European crisis could be contained to so-called peripheral countries with high debt levels was shattered on Wednesday. German government bonds, which had thus far been seen as a safe-haven, slumped sharply after investors shunned the country’s auction of new 10-year debt.
The reigning narrative of Europe’s financial turmoil is that profligate European states, agglomerated all too offensively by a swine-referenced acronym, are forcing the continent’s wealthy, prudent northern countries to come to their rescue. Not so, according to two policy experts who spoke this week at a conference on the euro zone crisis at the University of Austin’s Lyndon B. Johnson School of Public Affairs.
After a hopeful couple of weeks and the “euphoria” caused by an agreement to tackle the euro zone debt crisis, financial markets got a reality check from Italy’s sale of 7.94 billion euros of government bonds. The debt met lower demand than at previous auctions, forcing the country to pay the highest premium since joining the single currency to sell 10-year debt.
So much for Germany being insulated from the euro zone’s troubled periphery. German credit default swaps are already beginning to price in the country’s worst nightmare: that it will have to pay a hefty bill for a deepening euro zone debt crisis.
“Inflation is always and everywhere a monetary phenomenon.” That insight of Milton Friedman’s underpins the general perception of a rising money supply as associated with a booming economy. So why, as Europe teeters and the United States struggles, have U.S. monetary aggregates like M1 and M2 been spiking sharply in the last two months? According to Paul Ashworth, chief economist at Capital Economics, it is a knee-jerk reaction to fear, which has driven investors away from European securities and into dollar-denominated deposits:
Greece is in the danger zone. Even as the country’s finance minister sought to reassure his euro zone counterparts at a meeting in Poland, Greek credit default swaps were pricing in a more than 90 percent chance of default, according to Reuters calculations of Markit data. Economists in a Reuters poll see a 65 percent chance of that happening, probably within a year.