Forum Center, 6/26

How Does the Fate of the Euro Affect the U.S. Economy?

It’s hard to remember a time when the election of new government in Europe was so closely watched and had such a potential economic impact on the United States. The recently completed Greek parliamentary elections had observers in not just the U.S., but all over the world, on the edges of their seats. Why, many Americans wondered, does a country of 11 million with an economy smaller than that of Ohio’s get so much attention?

Last week’s elections in Greece were pivotal. Depending on which side prevailed, Greece would either remain in the European Union (EU) accepting an austerity budget as a condition of remaining, or leave the EU and in doing so likely precipitate financial turmoil in Europe and in the markets of the rest of the world.  In a very close election, the center-right New Democracy Party won a plurality in parliament and will be able to form a government. For now, Greece will stay in the EU and will keep the euro as its currency. Crisis averted. Or is it?

The main reason that the outcome of the Greek elections was so important is that Greece is only a leading indicator of Europe’s many problems. While the election results may have calmed immediate fears that Greece would abandon the euro and throw financial markets into turmoil, things are far from settled. Following Greece on the list of troubled economies with shaky banks are Spain and Italy. The stark reality is that either country is big enough to threaten the stability of the global financial system if they default.

On some level, Americans understand that the European debt crisis is impacting their 401(k)s. Markets hate uncertainty, and debt-ridden, decentralized Europe is full of it.

Many financial policy observers have noted that Greece and the United States have a good bit more in common than Americans like to acknowledge. Spending hawks in the U.S. argue that Greece, with all of its financial woes, is the nation the United States is becoming. Those critics believe that, like Greece, the United States has borrowed too much money. The U.S. national debt of $15.8 trillion (which includes money owed to Social Security and other government agencies) now exceeds the one year’s output of the U.S. economy which was estimated to be $15.1 trillion last year. That’s only slightly better than Greece’s debt of 1.6 times annual output. Is the U.S. in a Greek-like financial death spiral?

Although the U.S. Government still can borrow money at much lower rates than the troubled countries in Europe, deficit spending by the U.S. can’t continue at its current levels. The reality is that the U.S. government is still very polarized, with Democrat and Republican leaders seeing the way out of the financial mess very differently. While Republicans insist on more spending cuts, Democrats argue that additional tax revenue has to be part of the solution.  Has the near collapse of the euro served as a needed wake up call for the U.S. to control spending levels? Does Congress have the political willpower to install greater fiscal austerity?

Forum Question of the Week:

Should the economic turmoil currently taking place in Europe (specifically what is happening in Greece, Spain and Italy) be a wake-up call for the USA? And, if so, what is the wake-up call message?

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