As the Rest of the World Burns

To say that the political turmoil in the United States is disruptive seems to be an understatement of alarming proportions. The attempts to retake ISIS strongholds in Iraq, new Jewish settlements on the West Bank firing up angry Palestinians, US attacks in Yemen against Houthis rebels, the collapse of Putin’s opponents in Russia, Brexit pains, China advancing her agenda in Asia and Africa as the US moves towards increasing isolationism and the rise of firebrands and populists in Europe would seem to be the stuff of headlines as well. So it’s easy to miss the “little stories” that have the potential for serious further global disruption, like this little issue in Europe.

For those European Union nations who agreed to adopt the euro as their currency – eurozone nations – they bought into some significant restrictions on their ability to deal with financial crisis within and among very different countries (compare Greece with Germany, for example) but under a single currency. When you have one nation over-performing and another under-performing, the difference is reflected in the fluctuation of the respective value of their currencies against each other. But when those nations are bound by the same currency, that reality is simply not available. Something else has to give.

Where you have two different currencies, no one in the under-performing currency gets paid any less within their own borders, but as their currency falls in values, their buying power erodes, particularly when they want to buy imports. When they are in the same currency, you start seeing the controller of that uniform currency (as for the euro, that would be the European Central Bank) demanding “austerity measures” in the under-performing nation: curtailing governmental services, raising taxes, laying-off workers, cutting pay, much harsher than had the underperforming nation simply maintained its original currency.

We watched as EU bailout money, needed to sustain governments mired in unsustainable debt with central banks running out of reserves, was accorded to Spain, Portugal, Greece, Italy, etc. under condition of such austerity measures. Some countries fared better than other in surviving these austerity requirements. Others, like Greece, found average life in their nations to be miserable, staggeringly painful, with massive unemployment accelerated by more layoffs, government services cut to the bone, pay cuts and heavy new taxes.

But even with all that, Greece, now joined by Italy (a much more populous country in Europe’s mainstream) with horrendous solvency issues facing their biggest banks, do not seem to have hit bottom. The trending in European financial circles is suggesting a rather huge collapse looming in the very near future:

“Over the past year, aggressive bond buying by the European Central Bank and encouraging signs of economic growth across Europe have helped the eurozone overcome a series of political jolts, including Britain electing to quit the European Union and Italian voters rejecting the proposals of a reform-minded government.

“Yet with the central bank expected to eventually unwind its purchases of government bonds and other assets, investors are increasingly becoming concerned about how Europe — and Germany, in particular — can cope with escalating debt pressures in Italy and Greece.

“The result has been a sell-off of European government bonds as investment funds reassess the risks of holding such securities. In Italy, for instance, some hedge funds are making direct bets that the prices of Italian bonds will collapse.

“The yield on Italy’s benchmark 10-year note — which moves in the opposite direction of its price — has doubled to 2.3 percent since late last fall. The yield on the equivalent Greek note has jumped to nearly 8 percent from 6.7 percent at the beginning of the year.

“Mario Draghi, the European Central Bank’s president, promised in summer 2012 to do whatever it took to save the euro, but the debt burdens of Italy and Greece have become progressively worse amid the stagnation of their economies.

“Italy’s debt as a share of its economic output has risen to 133 percent from 123 percent during that period. In Greece, debt has increased to an expected 183 percent of the country’s total economy from 159 percent.

“These figures highlight a harsh economic reality: Just as an individual will struggle to pay off a punishing credit card bill if her salary stays flat or falls, a country cannot reduce its debt pile without expanding its economy.

“And with Italy and Greece held back by the fiscal constraints that the euro’s rules require and not expected to generate sufficient growth in the future, the only alternatives are a restructuring of debt or an exit from the common currency.” New York Times, February 8^th. What does all this mean? Well, let’s look at the risks.

With England pursuing Brexit and France moving severely into a Trump-like political mindset, as much of Eastern Europe rewards a new populist leadership as the Netherlands lurch to the rights and even liberal EU spokesperson, Germany’s Angela Merkel, backtracking on immigration policies, nothing short of a renegotiation of global trade, commerce and financial stability is at stake. We are moving from an era of global cooperation to an “every man for himself” world. Yes, the European Union could dissolve or at least materially reconfigure. NATO could just implode as the United Nations loses even more influence.

Wars, civil wars and wild economic instability thrive in such conditions. It’s bad enough that this trends happen anywhere… but they seem to be happening everywhere. With all the Strum und Drang here in the United States, Americans are missing the turmoil that is exploding overseas. But trust me, we are all connected, and we will all be negatively impacted by all of this. As we turn increasingly inwards, we are slowly letting go of any semblance of control or input on these serious international problems that will plague us for the foreseeable future.

I’m Peter Dekom, and good government has to be on top of issues… everywhere; we’re just withdrawing.