If you have been watching Europe over the last year or two (or have been reading my blog), you know that there is a slow motion car crash happening over there. As I have written about previously, the European Union is caught in an apparently unreconcilable conflict between Germany’s fear of inflation and a need to rationalize government spending and investment in a more flexible manner. I am afraid that a breakup of the Euro is looking more and more likely, and in light of the path that Europe is on right now it could be argued that the sooner the better. The similarities to early 1930s economic history with today’s Euro substituting for gold as the main protagonist are troubling. Unless Germany dramatically changes its position and willingness to support monetary expansion in the EU, it is likely that a number of EU nations will be forced to take back their right to issue currency or fall ever deeper into a deflationary spiral.
Before I go on to the main point of this blog posting, I do want to emphasize that the breakup of the Euro would be a net positive for the United States (provided we don’t engage in self-inflicted harm – see below). We generate very little export benefit from the EU, and unlike Europe have a central bank that would support national financial markets and avoid bank runs in the event of a Euro-based default (for example, Greece or Spain). That doesn’t mean that a Euro collapse or sovereign default wouldn’t provide opportunities for investors to short markets – it would – but longer term the US would benefit. This would be the case for a few important reasons: (i) the US dollar would become even more important to international trade (since the Euro would become less viable as a medium of international exchange after a default which undermined perceptions of its stability), (ii) the perception of the US as a safe haven for capital would be enhanced and (iii) in comparison to Europe longer term investment and economic trends favor the United States.
The bigger threat the Euro poses to the US is political. An undercurrent of “we don’t want to be Greece” will likely become a full throated meme as we head into the fall. This will be an issue for the election, but frankly, it will be much more of an issue for Congress and the President, after the election. The Debt Ceiling, Sequestration and the Bush Tax Cuts will all require attention from our politicians in November and December, at least some of whom will not be in power after January. Quite simply, no matter how the election goes, we are going to have lame duck politicians deciding these important issues. If you thought that the Debt Ceiling follies of last summer were fun, just wait until you see how “people of principle” act when they aren’t accountable. To say that I am worried about this would be a bit of an understatement. Wilbur Ross, a well-known investor summed it up well yesterday, calling it a potential “freakshow.”
Here is my point – we are not Greece, nor are we any of the other EU countries. The issues for the United States are not the same, and we run the risk of burning the furniture to stay warm by embracing the idea that we are.
As we head into a discussion about the role of deficits, taxation and the role of government this fall, we should consider some important nuances in how the US is similar and different from Greece, Spain and the other EU nations and build an approach that allows the US to grow with a stable fiscal base.