Myths About the European Debt Crisis

Europe consumed more than a fifth of America’s exports last year, yet U.S. markets seem to be ignoring Europe’s current economic turmoil. Much of Europe is heading into a recession, Euro-zone unemployment is at record highs, and Europe’s largest banks are struggling. With European governments imposing austerity budgets, a looming credit squeeze, and many countries facing shrinking tax revenues and overwhelming debt burdens, it is hard to see when growth will return. To understand how Europe poses a risk to the U.S. economy, it is important to dispose of some of the myths that surround Europe’s debt crisis. Germans are more fiscally responsible. To ensure fiscal discipline, the Maastricht Treaty restricts the amount of public debt that countries in the European Union can assume to 60% of their gross domestic product. Yet Germany has violated this limit every year since 2003. That has not stopped German politicians from bragging about German fiscal discipline. A few months ago Bavaria’s Christian Social Union party, a key member of German Chancellor Angela Merkel’s governing coalition, almost derailed Germany’s contribution to a European bailout fund because Bavarians do not abide debt. “We are not prepared to accept zero debt here and total debt elsewhere,” declared CSU party leader Horst Seehofer, to a standing ovation. But three years earlier the Free State of Bavaria secretly took a $2.4 billion bailout from the U.S. Federal Reserve, and a 94% Bavarian government-owned bank, Bayerische Landesbank, took another $10 billion secret bailout from the Fed, according to data uncovered by Bloomberg News. In fact, many other German and European banks secretly received $500 billion in secret bailouts from U.S. taxpayers during the same period, according to Bloomberg, all on top of the $50 billion they got from the U.S. government’s TARP bailout of AIG. American bailouts of European (including German) banks continue. The Fed is quietly extending currency swap lines via the European Central Bank, thereby funneling billions of more U.S. dollars to European banks whose identities remain undisclosed thanks to ECB privacy rules. The ECB has also increased its own bailouts for 523 banks to €489 billion ($640 billion), in the form of three-year, 1%-interest loans The European Union respects democracy. Because so many Europeans feared that larger countries would dominate the EU, the Treaty on European Union promised more than half a billion people that “every citizen shall have the right to participate in the democratic life of the Union,” that “decisions shall be taken as openly and as closely as possible to the citizen,” and that the “functioning of the Union shall be founded on representative democracy.” Despite that, Germany proposed that Greece’s receipt of a second bailout be conditioned on Greece surrendering its tax and spending sovereignty to a Euro-commissioner. Greece’s revenues were “to be used first and foremost for debt service,” and “only any remaining revenue may be used to finance” government activities, such as national defense or the judicial system. And in place of decisions made by democratically elected leaders, the Euro-commissioner would have “a veto right against budget decisions not in line with the set budgetary targets and the rule giving priority to debt service.” Germany backed down after France and other countries objected, but the assault on democracy and self-determination in the EU is not dead. In December, European Council President Herman Van Rompuy secretly proposed that EU countries that did not meet strict fiscal rules should be subjected to “intrusive control of national budgetary policies by the EU” as well as “political sanctions such as the temporary suspension of voting rights.” And of course both Greece and Italy voluntarily surrendered their governments to unelected ECB “technocrats,” because their embattled political parties had lost credibility with other European governments as well as their own citizens.