This year the euro area countries governments combined will have a budget deficit of 4.5% of GDP, whereas the United States Government will run a deficit of about 10%.
In the eurozone, the aggregate Government debt to GDP ratio is 87%, whereas in the US it is 100%
In all the eurozone countries, while there is some difficulty in some countries in implementation because of low growth rates and vested interests, there is broad agreement on measures to reduce these excessive deficits and debts where they exist, whereas in the US the Congress and the President cannot agree at all. The eurozone has a plan, so far the US has none.
THE FOUR REASONS
So why then is it that all the pressure is on euro zone debts, and not on US debts?
- Although they is not willing to do so just now, the US Federal authorities have the legal capacity to levy taxes to pay off debts, whereas the EU does not itself have that ability. It has to rely on its individual member states to raise the taxes.
- There are bigger problems with Europe’s banks. The gross debt of the eurozone banks comes to 143% of zone’s GDP, whereas US banks debt only come to 94% of US GDP. Furthermore eurozone banks owe twice as much, proportionate to their assets, as US banks do.
- The assets of eurozone banks are disproportionately in the form of bonds issued by Governments. So if Governments are in financial trouble, that means trouble more trouble for banks in Europe, than would be the case for banks in the United States. In Europe the banks problems are the Governments problems and vice versa, in ways they are not in the United States. This unhealthy situation was, in part, the perverse result of rules designed to make banks sound, which encouraged banks to buy Government bonds as reserves, but which assumed, wrongly, that Government bonds were risk free.
- The US Federal reserve can, and does, ease money supply ( print money) to keep the economy moving, whereas the EU Treaties make it much more difficult for the European Central Bank to do this, partly because of historic German fears of inflation. For example, article 123 forbids the ECB to extend credit to member states. In a sense, it could be said that the euro was designed as a “fair weather currency”, rather than be able to cope with foul weather too.