Stormy Seas on the Atlantic
by John Browne
May 21, 2010
The European Union’s debt crisis, the threatened collapse of its fledgling ‘euro’ currency, and the uncertainties created by the UK elections may seem very far removed from the American ship of state, but, in reality, this turbulence threatens to capsize our fragile economy.
Greece is in the most immediate danger of default, followed closely thereafter by Portugal, Spain, and perhaps Italy. As the European Union overrides its own treaty agreements to offer bailouts to these ‘PIGS,’ global financial markets have panicked. Essentially what has happened is that the covenants and assumptions underlying one of the bedrock reserve currencies of international finance – and the presumed successor to the US dollar as primary reserve – have been broken. This requires a global re-rating of purchasing power risk. The problem is today’s investors have few havens left.
The essential political model of most of the developed world has been to promise, promise, promise, and push any costs on to the next generation. These Mediterranean countries are starved for growth because their coddled union laborers sit around waiting to hit age 50, so they can collect a pension that pays as much as their working wage. It wasn’t always this way, but politicians always find it safer to add benefits than take them away. Only a taxpayer revolt can install a reformer like Lady Thatcher or Ronald Reagan, and in Club Med, the belief is that only suckers pay taxes.