The creation of the E.U. countries such as Greece, Portugal, Italy, Ireland and Spain gained the ability to borrow money at all time low. As a result, this fiscally irresponsible countries have absurdly high levels of debt (see Chart 1). Due to the financial meltdown of 2008, these countries became highly insolvent, the costs of borrowing skyrocketed (above 10% for most of P.I.I.G.S.) and economic activity slowed down dramatically therefore, unemployment skyrocketed (see Chart 2). Despite that the E.C.B utilized most of its monetary power to increase confidence in the area, fiscal irresponsibility that these countries took is now an issue that not only the E.U. should be concerned about it but the United States too.
The implications that the possible collapse of the European Union can have on the United States are not hard to comprehend. As we can see in chart 3, the United States is running a deficit in its trade balance with the E.U. If the E.U. were to collapse due to the ongoing debt crisis that the zone is experiencing, then we can expect these deficit to expand. This is so, because we can expect American exports to drastically drop but imports from Europe to remain at similar levels. With that in mind, a drop in the ~$22 billion dollars that the European Union demands from the United States monthly can result in a major hit for G.D.P in the U.S. causing unemployment to increase.
The question is, what can the Untied States do in order to prevent the collapse of a Union that makes no-sense economically but has significant influence in the future of the world economy?
2 Comments
This pertains to what Professor Davies was saying in class when he was talking about the overall equation for GDP: Y=C+I+G+NX. With the other variables seemingly fixed, European countries have focused on trying to increase exports. Perhaps it would help if the US began buying more European made products?
But why would we buy European made products when we can get them from China or India for much cheaper?
Going off our very brief discussion on globalization, what goods does Europe have a comparative advantage in manufacturing/trading, and what can the EU do to encourage the production of these goods or services?
Although not the best example, check out the following article on Greek yogurt consumption in the US. It’s an entertaining read, and it’s nice that we think we’re helping the Greek crisis by buying “their” products (http://gawker.com/5916664/most-people-are-eating-the-wrong-kind-of-greek-yogurt).
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