At the close of an emergency Sunday meeting of financial ministers from the
27-member European Union (EU) that lasted until the early hours of Monday, May
10, 2010, the exhausted attendees emerged to announce a startling nearly 750
(US$1 trillion) financial stabilization package for EU member states with
sovereign debt problems and the European Monetary Union (EMU) to restore market
confidence in the euro, its common currency for the 16-country eurozone.
Immediately after foreign exchange markets opened several hours later on the
same day, the dramatic news caused the euro to soar against the dollar and the
yen, reversing its recent sharp decline as fallout from the sovereign debt
crisis in Greece.
Unfortunately, the trillion dollar package seems to be a total failure. The
relief from downward market pressure on the euro was short-lived, confirming
the market's continuing apprehension about the heavy and worsening sovereign
debts burden facing all EMU member economies and possibly beyond and across the
Atlantic. The crisis in trade
The eurozone buys around 15% of US exports. Reflecting the global economic
slowdown, the EU bought $221 billion from the US in 2009, down from $244
billion in 2007. The US trade deficit with the EU fell sharply from $110
billion in 2007 to $60.5 billion in 2009.
A sharp fall of the euro against the dollar in 2010 accompanied by fiscal
austerity in eurozone economies will adversely impact the US economy by making
US exports more expensive in a market of falling demand, while investment and
tourism from the eurozone will moderate. This may reverse the recent downward
trend of the US trade deficit with the EU.
The eurozone is now China's largest trade partner, surpassing the US. Europe's
imports from China grew by around 18% per year for the previous five years from
2009. This trend will accelerate further if the euro falls. Two decades ago,
China-Europe trade was negligible. In 2008, the EU imported goods worth 248
billion euros from China, which is now Europe's biggest source of manufactured
imports and also Europe's fastest growing export market.
Europe exported 78.4 billion euro worth of goods to China in 2008, a rise of 9%
compared with 2007 and a growth of 65% between 2004 and 2008. Europe runs a
surplus on trade in services with China - 5.7 billion euros in 2008, up from
3.9 billion euros a year earlier. Yet this is about 30 times smaller than its
trade deficit for goods, which was 169 billion euros in 2008.
EU-China trade decreased in 2009 due to the global economic downturn. European
imports from China went down, while EU exports to China have remained largely
stable. This trend can be expected to accelerate as the EU deals with its
sovereign debt crisis in its member states with austerity measures.
A slowdown of the eurozone economies will further adversely impact China's
export sector, which has already been hit by severe recession in the US. A
falling euro will also present problems to the Chinese central bank in its
recent efforts to diversify its huge foreign reserves away from the dollar.
The crisis in exchange rates
The euro jumped to a high of $1.3048 on the day the EU stabilization package
was announced. European policymakers prematurely breathed a sigh of relief that
their "shock and awe" package had helped to shore up market confidence in the
However, by Thursday, May 13, two trading days later, the euro had fallen back
near its 14-month low at US$1.2586, down 0.3% on the day, putting it within a
cent of where it had been just before word of the bold stabilization move hit
the market. It traded at $1.1960 on Friday, June 4, almost 11 cents below the
$1.3048 level traded immediately after the stabilization package was announced
on May 11.
The crisis in government
The failure of trillion dollar stabilization package is more than financial.
The package helped ease concerns over the prospect of a wave of imminent
sovereign debt defaults within the 16-country eurozone, but currency traders
were aware that the underlying problem had not been solved. Even with a
gargantuan stabilization fund, there was no hint on how the highly indebted
eurozone member states would get their public finances back on track going
forward to meet European Monetary Union (EMU) requirements without triggering
political crises from popular opposition to fiscal austerity.
A major concern was the problem of deep popular discontent with pending
government austerity measures that would be required to lower excessively high
public debt levels and chronic fiscal deficits. In particular, there were
worries in the market that the recently installed socialist government in
Greece would not be able to push through the draconian measures it had been
forced to accept in order to secure the earlier 110 billion euro rescue pact
scheduled over three years. This was because of the fear that resultant
political resistance and social unrest would topple the socialist Greek
government under Prime Minister George A Papandreou that had been elected on a
platform of increased prosperity only seven months earlier on October 6, 2009.
Market participants are cognizant of the fact that this sovereign debt crisis
is not an isolated local problem in a small country, but a eurozone-wide
financial virus that broke out first in Greece but could detonate explosive
crises in other similarly infested national economies around the globe with
serious economic and political implications.
Already, Germany's conservative coalition government, led by the Christian
Democrat Union (CDU) has been weakened as the CDU suffered an important
regional election defeat over its inept handling of the sovereign debt crisis
in Greece. German voters also fully expect that Germany will have to face its
own fiscal austerity measures soon as a result. Other eurozone member states
are not expected to be exempted from similar popular discontent against
incumbents in government in this regional sovereign debt crisis.
Even in the UK, which has been a member of the EU since1973 but is not a
eurozone member state - although it conducts large trade with the eurozone -
the Labour Party lost control of the government after a general election
produced no majority winners. Failing to form a new coalition government with
the Liberal Democrats, Labour had to hand over the reins of government to a
Conservative coalition supported by the Liberal Democrats.
Voter hostility towards center-left incumbency over painful economic austerity
issues is now rampant in the multiparty democracies.
A panic demand for fiscal austerity
The sovereign debt crisis in Greece has sparked a panic wave of radical policy
demands for fiscal discipline throughout the European Union from a perverse
coalition of neo-liberal public finance ideologues and anti-government
conservatives. Proponents of fiscal discipline argue that the EMU and its
common currency, the euro, will not be sustainable without the drastic
restructuring of public finance in all eurozone member states through a
combination of tax increases and deficit reduction through fiscal austerity.
But creditors, mostly transnational bank, will be protected from having to
accept "haircuts" on their holdings of sovereign debt.
Yet such harsh approaches of tight fiscal austerity at a time when the global
recession of 2008 is still waiting in vain for a recovery will risk increasing
the danger of a double dip recession in 2011 in a secular bear market. The
alarmist voices of these fiscal deficit hawks clamor for fiscal austerity
programs that are essentially punitive for eurozone workers; at the same time,
they continue to tolerate abusive financial market manipulation that will
benefit only the financial elite as the economic pain is passed on to the
Fiscal deficits across the eurozone are to be reduced by cutting public sector
wages, social benefits and subsidy expenditures so that transnational bank
creditors will be paid in full while a blind eye is turned to blatant tax
evasion and avoidance by the rich with non-wage income, which contributes to
loss of government revenue and fiscal deficits.
The dysfunctional disparity of income and polarization of wealth between the
wage-earning masses and the financial elite with income from profit and capital
gain are the main causes of overcapacity in the economy. In past decades, the
neo-liberal response to overcapacity was to shy away from the obvious solution
of raising wages, turning instead to flooding the economy with huge mountains
of consumer and corporate debt that eventually resulted in a tsunami of
borrower defaults that turned into a global credit crisis. Repeating the same
response to the current crisis will lead only to another global crisis down the
While the culprits of the global credit meltdown of 2008 have been bailed out
with the public's future tax money, the sovereign debt crisis across the globe
is blamed on innocent wage earners for receiving supposedly unsustainably high
wages and excessive social benefits that allegedly threaten the competitiveness
of economies in a globalized trade regime designed to push wages down
Sovereign debt crisis not caused by the welfare state
The rush by the rich and powerful to punish the trouble-causing working poor
goes against strong evidence that the current sovereign debt crisis is not
caused by high social welfare expenditure; rather, it is caused by a sudden
drop in government revenue due to economic recession, which in turn is caused
by a credit market failure under fraudulent accounting that is allowed in
structured finance and for which the financial elite are directly and
The sole special purpose of is to treat proceeds from debt issuance as revenue
from sales to remove financial liability from government balance sheets to
present a deceptively robust picture of public finance. Through these devious
"special purpose vehicles", phantom profits are siphoned off from the general
economy into the pockets of greed-infested financiers while pushing the real
economy out of balance, resulting in high real public debts that inadequate
aggregate worker income cannot possibly sustain.