Eurozone SO mirrors America

In: Uncategorized

17 May 2010

This is my latest comment from Fund Strategy.

Last week saw a raging debate on the other side of the Atlantic which was, at least to us economics geeks, hilarious.

The row focused on the thorny subject of whether America is Greece. Not in a literal sense, of course, but in relation to its fiscal problems.

Critics of America’s loose finances argued that, judging by various fiscal measures, the two countries were not that different. Both were suffering from the results of years of fiscal profligacy.

More Keynesian economists countered that not only is America not Greece but, echoing Friends, California is SO not Greece. Not only are America’s public finances healthier than Greece’s but even the fiscally troubled Golden State has a more robust economy.

All of this is highly amusing but misses some key points. Most important of all: Greece is not Greece.

The crisis of the eurozone cannot be explained by Greece’s poor fiscal state. Greece only accounts for about 3% of total eurozone output. It is better to understand Greece as a catalyst of the turbulence in the region rather than its cause.

The eurozone’s finances are not that different from America’s. For example, the American federal deficit as a proportion of GDP was just under 10% last year while for the eurozone it was 6.3%.

There are differences between America and the eurozone. One is an integrated national economy and the other is a monetary bloc consisting of various nation states. But they share a problem of bloated finances.

For that matter Britain, which is neither a member of the eurozone nor part of America, has similar problems too. Each of the developed economies has its own characteristics but also much in common.

Swollen state finances are in turn a symptom of a weak underlying economy. Even before the financial crisis started in 2008 state spending was shoring up weak economies. Since then the trend has become even clearer.

It is easy to concede the argument that America is not Greece. But the similarities between the economic plight of the economies on the two sides of the northern Atlantic are hard to dismiss.