Secretary Gates apparently said today that European countries should increase their defense spending, because the United States has a debt problem and is not willing anymore to pay for Europe's defense.
Well, one of many reasons the US has such huge debt is the enormous defense budget, which is so much higher than those from other major powers. European nations are not spending more on defense, because we have debt problems as well and can't afford the US debt levels, because we cannot print dollars.
Besides, the US has not spent a fortune in Iraq, Afghanistan and Libya to protect Europe, but because of its own perceived self-interests. Thus I take issues with these statements by Secretary Gates as reported by the BBC:
EU countries mired in debt are getting help from an unlikely source: China. The ascendant superpower is buying up large amounts of European bonds and investing heavily in euro zone countries. Moreover, there is talk of a reversal of the long standing EU arms embargo on China. Is this all a coincidence?
Kurt Volker, a former U.S. ambassador to NATO and now managing director at Center for Transatlantic Relations at Johns Hopkins University commented: "If all this were to play out - that is, lifting the embargo, subsequent sanctions, etc. - it would bea new low point in U.S.-E.U. relations." (HT: NATO Source)
I agree. I hope the EU does not lift the arms embargo. In my opinion NATO countries should not sell any arms to non-NATO members.
Ahead of the G-20 summit we are witnessing rising German-American disagreements. Germany wants to reform the financial markets and deal with the debt crisis, while US academics and the president prefers economic stimulus plans and criticize the teutonic export champion. Spiegel International:
Krugman is far from alone with his concerns about German and European austerity packages. Last week, US President Barack Obama sent a letter to other G-20 countries in which he fired a not-so-subtle shot across Berlin's bow. "I am concerned about weak private sector demand and continued heavy reliance on exports by some countries with already large external surpluses," he wrote in a clear reference to Germany. He also warned against reversing economic stimulus policies too soon. "We worked exceptionally hard to restore growth," he wrote. "We cannot let it falter or lose strength now."
Germany and France were hoping that the G-20 summit would focus on measures aimed at reforming global financial markets. In particular, Merkel would like to see an international tax on financial transactions as well as a mandatory bank levy, which would go towards a fund to be used to bail out banks in future crises. But opposition to both proposals has been stiff. And the US, in particular, is hoping to use the G-20 to push for more economic stimulus rather than less, given ongoing high unemployment at home.
Personally, I am not sure, if the US and Europe really need and can afford more stimulus plans right now. They make the long-term debt crisis worse. Besides, tax cuts do not lead to more consumer spending, when citizens are smart enough to realize that the economy and government finances are in trouble and consider tax cuts for what they are: desperate measures to stimulate growth. In those cases citizens use the tax cuts to save more money to prepare for the worst. Of course, stimulus is more than tax cuts.
ENDNOTE: I am sorry for the lack of blogging. In the last six weeks, I learned quite a lot of stuff the hard way: First, a new bike with strong front wheel breaks is not necessarily a good thing. Second, I cannot fly. Third, a broken elbow joint requires two surgeries, the second one kept three doctors over four hours busy. Fourth, doctors and nurses are nicer and more caring than I thought. Even the hospital food was good. Our health care system is still okay. Fifth, even if only the elbow is broken, fingers don't work (typing etc.) very well. Regaining full flexibility apparently takes months. Sixth, one can get quite a lot done with just one functioning arm. Now "I'm a graduate of pain." Yeah.
There is a significant amount of hand-wringing going on in the US that the Euro is fraying on the edges. Some pundits have even coined a rather derogatory acronym for Euro-countries in economic distress: the PIGS (Portugal, Italy or Ireland, Greece, Spain). The acronym bunches together four countries with very different backgrounds but one shared fact: they all face serious budget shortfalls.
The grouping of these countries, largely by investment banks, may simplify investment and policymaking decisions to an unfortunate level. Italy for one does not want to be part of the group, and the Italian bank UniCredit has waged an effective campaign to change the "I" in PIGS to Ireland. But Ireland too has begun to restore both consumer confidence and budget stability thanks to aggressive action by the central government. Commentators seem to keep the "I" because that is the crucial vowel that holds the acronym together.
Portugal, Spain, and Greece are also all facing very different challenges. Portugal has a sizable but manageable budget deficit, while Spain is struggling with a burst housing bubble a la Florida. Greece remains the real country of concern; but then again, Greece has roughly the same debt levels as Germany, so what is all the fuss about?
The classification overlooks the more important--and legally binding---organizations already in existence, namely the EU and the Eurozone. Talk of the dissolution of the Euro is premature but rampant: the New York Times has published no less than three articles on the subject in the last two days alone (here, here, and here). At the end of the day, policymakers in Europe and the US have to honestly ask themselves: is leaving the Euro really an option? The case of Iceland clearly demonstrates what happens to small countries with large debt obligations in tumultuous times and it is not pretty.
The discussion of categorization reminds me of the BRIC acronym held in high regard by investors prior to 2008. Brazil, Russia, India, and China were touted as the hallmarks of the developing world at the time, and investments in all four countries were seen to be equally appeasing. Two years, a war in Georgia, and a global economic crisis later, the BRICs no longer look so homogeneous. I suspect the same will soon be true for the PIGS.
How should we classify countries economically? Is there any value in grouping problem areas? Just as a reference, I did a quick look at state budgets in the US and found five states with budget deficits greater than 10% in 2009: Arizona, California, Nevada, New Jersey, Rhode Island. Do you think CARINN could catch?
Changes are afoot in the tight-knit world of transatlantic central banking. The problem is, central bankers and the markets that follow their every word hate change.
In the US, Fed Chairman Ben Bernanke underwent his renomination hearings in Congress last week. The public grilling and aggressive questioning surprised some and spooked investors who feared they signaled the beginning of Congressional meddling with monetary policy.
Meanwhile, EurActiv reports that Italy is refusing to support the renomination of Jean-Claude Juncker, the ever-present Luxembourg Prime Minister, as president of the Eurogroup. The position coordinates the central bank activities of countries using the Euro, and Italian resistance may cause further problems when countries decide on a new president for the European Central Bank. In the complex wrangling of EU politics, each country seeks to have its fair share of prestigious posts. Italy feels left out from the recent appointments in the European Parliament and European Council and seems to see the Eurogroup or even ECB as a consolation prize. Though such a compromise may appease EU players, it would likely upset financial markets unaccustomed to politicized central banking.
All of this uncertainty in central bank leadership in Europe and the US is not helpful. The extraordinary intervention by central bankers during the past two years was only the first half of the plan. Arguably, the trickier part will be for central banks to divest their positions and resume their normal responsibility as interest rates nudgers. Wrangling about leadership, particularly while countries like Italy and Greece struggle with enormous burdens of debt, will only be a dangerous distraction.
This post is from Andrew Zvirzdin, who used to be a guest blogger, but now joins Atlantic Review as part of the team. Andrew is originally from upstate New York and is currently finishing his second year of grad school at the Maxwell School in Syracuse
After the implosion of the Dubai miracle in the desert, investors are nervously looking elsewhere for the next debt debacle. No small wonder that the focus has turned to European countries with high debt loads such as Greece and Italy. Top European monetary gurus have been quick to assure investors that no European default is likely. But these days, anyone with a big credit card bill looks suspect in international finance.
The remarkable thing is that the EU has taken a significant lead in charting the course towards global economic recovery, despite its heavy debt burden. Consider for example that Germany and France were among the first countries to escape the present recession late this summer. Their robust growth was due in part to automatic stabilizers already in place when the financial crisis hit. And the notorious-and by some estimates, beneficial-cash-for-clunkers program in the US was inspired by Germany and other European countries who already had similar but more successful programs.
Now, as Europe is fading as the American health care punching bag, the continent's ability to live with government debt is under close scrutiny. Paul Krugman has recently warned (here and here) against an excessive focus on fiscal deficits in the US, pointing to Europe as an example: "If these countries can run up debts of more than 100 percent of GDP without being destroyed by bond vigilantes, so can we." CNBC is less positive in its assessment but acknowledges that Italy's resilience despite high debt levels means there is still a "lot of debt tolerance out there."
Still, debt will remain a worry on everyone's mind for some time to come, though the Eurozone has the tools needed to weather this storm (as I have written about here and here), and the US still has its financial strength. With the US and European countries consistently ranked as among the most indebted countries in the world, both sides of the Atlantic will likely need to work together on debt-related matters. Indeed, as the eurozone has already shown, teaming up with other indebted nations makes it that much harder to be bullied around by international markets.
