Another financial crisis is potentially months away if American and European leaders aren’t able to take significant steps to address national debts. Most people don’t pay attention to the European Union, but its decisions in the next few weeks could spill over and affect the rest of the world. Some economists and leaders have gone so far as to predict global depression, a breakup of the EU and revolutions in southern Europe.
The problems Europe is facing today can be traced all the way back to World War I. After the Allies defeated Germany, they forced Germans to pay extremely high reparations to the rest of Europe. The cost to Germany was so high, they had to reduce the amount demanded several times because it was causing huge economic problems. The German government had to print money to fund these payments, resulting in hyperinflation. Needless to say, this pissed Germans off. Then the Great Depression hit, and Adolf Hitler, who was involved with the German government for years, began to rise to power with a nationalistic message, feeding off German distrust for outsiders and frustration with the economy. We all know what happened next.
After World War II, European and American leaders decided it was probably a good idea to avoid this type of thing again, so they pushed for European integration as a means for swift economic recovery, to avoid more conflict and to balance out the growing threat from the Soviet Union. Slowly but surely, European countries joined into organizations that would later become the European Union.
The EU has succeeded in eliminating conflict in its region for the longest period in history. Never before has that part of Europe been peaceful for so long. It also succeeded in sustaining decent economic growth for a long time, especially in countries that were poor 50 years ago. However, the EU was probably too ambitious and linked too many economies together. Italy, Spain, Portugal and especially Greece have problems with debt, and if any of these countries defaults on debt payments, it could cause a domino effect throughout Europe and America’s financial systems.
The United States cannot afford another financial crisis at this point. The last one caused budget deficits to triple, and now the government only has options that will shift economic problems onto a different part of the economy. The government has used the method of buying assets with real money and money essentially from nowhere. While this gives banks more flexibility, it also can lead to inflation. Not to mention we have our own debt problems.
Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke have pressured Europe to act on its debt problems. European leaders have called on Congress to make significant budget cuts over the next decade. Meanwhile, European leaders met Wednesday, agreeing to a $1.4 trillion fund to bail out several European governments. The “super committee” in Congress is looking less and less likely to make the cuts needed to keep the United States fiscally afloat. These governments must fix their overspending and debt problems, because they can only continue to prop each other up for a certain amount of time before crises like these become more severe. There is some optimism for the EU deal now, but pay attention to the next several months, and don’t be surprised if the world economy slips into another recession in the next year.