Why Europe Matters

Every day we hear news about the economic crises in Europe -- how the PIIGS of Europe (Portugal, Italy, Ireland, Greece, and Spain) are dragging the entire Eurozone down.   We hear that the European fiscal crisis will hurt America.   But I haven't read a better description of why this should be so than this one by the eminent historian*, Niall Ferguson:

So why should Americans care about any of this? The first reason is that, with American consumers still in the doldrums of deleveraging, the United States badly needs buoyant exports if its economy is to grow at anything other than a miserably low rate. And despite all the hype about trade with the Chinese, U.S. exports to the European Union are nearly three times larger than to China.

Until March, it seemed as if exports to Europe were on an upward trajectory. But the eurozone crisis has stopped that. Governments that ran up excessive debts have seen their borrowing costs explode. Unable to devalue their currencies, they’ve been forced to adopt austerity measures—cutting spending or hiking taxes—in a vain effort to reduce their deficits. The result has been Depression economics: shrinking economies and unemployment rates approaching 20 percent.

As a result, according to the new president of the European Central Bank, Mario Draghi, a “double dip” recession in Europe is now all but inevitable. And that’s lousy news for U.S. exporters targeting the EU market.

He has more, including about the likely effect of American banks' exposure to European sovereign debt (sort of the reverse of 2008, when European banks were exposed to American subprime mortgages through mortgage-backed securities and collateralized debt obligations).   Read it all.   It's sobering, particularly coming from Ferguson, whose work as a historian focuses on how international economics leads to both to war and the decline of empires.  





*  Ferguson is the author of four books that I've read, all of which are incredibly insightful charting the nexus between economics and politics and war:  The Pity of War: Explaining World War One (1998), Colossus: The Rise and Fall of the American Empire (2004), The War of the World: Twentieth-Century Conflict and the Descent of the West (2006) and The Ascent of Money: A Financial History of the World (2008).