BY PAUL SHERMAN
Published November 29, 2012
With the national media focusing attention on the United States’ fiscal cliff, the European debt crisis has dropped off our radar. While the U.S. economy slowly recovers under the leadership of President Barack Obama, Europe remains in chaos. The European crisis was in large part triggered by the enormity of the Greek government’s debt. That, combined with the fact that Italy, Portugal and Spain have failed to manage their own debts, has crippled the European Union and the euro.
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As time has passed, however, Americans have failed to realize the significance of the Eurozone’s sovereign debt crisis in light of our own situation.
It’s time for the United States to act more quickly and for Americans to pay closer attention, since the American economic recovery may falter if the European debt crisis isn’t reined in soon.
One obstacle to managing the crisis is European countries varied their responses. According to the Atlantic Council, the origins of the crisis can be traced to the “political failure to establish credible governance for economic and monetary policy” and the fact that EU leaders have been more concerned about the politics of certain issues within their respective countries. This has led to rigid reforms like austerity measures and bailouts for Greece and Spain, which have created mechanisms that will not resolve the EU’s problems.
Both these reforms will only provide temporary relief, if any at all. Austerity will only hurt social programs and increase unemployment. Countries such as Greece and Spain will still find it difficult to pay off their debts in the long run with the limited resources at their disposal.
The Eurozone’s economic prospects have already been diminished by its inability to stabilize the economies of its southern countries. If the current situation continues, lenders will be less likely to provide loans to European governments. As a result, a reduction of consumer confidence and spending in Europe will lead to further contractions in European economies. The downward spiral of decline in economic activity will reduce demand for American products, pulling the U.S. economy back toward recession.
If this crisis isn’t mitigated, a weaker Europe will mean a weaker trade partner for the United States. According to Reuters,13 percent of all U.S. exports go to EU members. If the European crisis continues in the coming months, trade between the EU and the United States will decrease. This will lead to economic contractions and higher unemployment in the “world's biggest economic blocs,” which “could be a drag on global economic fortunes for years to come,”according to Rachel Epsteina, a professor at the University of Denver.
So how should Europe and the United States react? In the coming years, they must come up with innovative, permanent solutions as opposed to temporary ones. Austerity measures alone won’t solve anything, as cutting vital social programs without raising any new revenues could create further economic problems for many fragile European economies. Like the United States, the Eurozone must use a balanced fiscal approach to solve their problems, which will mean raising taxes and cutting spending. European countries should look at revising their tax codes as well as reforming their banking institutions.
Obviously, it will be difficult for the United States to influence European policymaking, since European nations are so focused on their internal problems. One way to tackle this problem is to fix the American banking system to make it more difficult for banks to engage in risky business behavior. Once we’ve resolved our own financial woes, the United States will be able to provide guidance to Europe that Europeans will deem credible.
It has been four years since the beginning of the U.S. financial crisis. These years have been long and tough for many Americans and Europeans. Western political leaders must implement solutions to solve this crisis. Clearly, much more needs to be done to resolve Europe’s debt crisis. Americans who ignore the European debt problem do so at their own peril. With that in mind, American media should focus on the importance of the crisis in the coming months.
Paul Sherman is an LSA sophomore.