The Real Problem in Europe

By: Jim Walsh

We have been hearing a lot recently about the financial problems in Europe. American corporations sell a lot of products there, and any threat to their economies is a threat to ours as well. Here is a quick explanation of what is happening and why there is no easy solution. When 21 European countries adapted the Euro as a common currency about 15 years ago, it was not seen as a complete answer to economic integration but rather as a first step toward true European Union. All of the Euro nations have benefitted from the facilitation of trade from using the common currency, not to mention the boom for tourism that comes when an American or Japanese visitor can pay for all of his hotel bills and airline tickets with the same currency. But all of that comes with a cost. Any economist will tell you that a nation’s Fiscal policy (Taxing and spending) and monetary policy (Interest rates and money supply) need to work in harmony to either stimulate or slow down the economy. In Europe, you have 21 different countries each pursuing its own fiscal policy, while the monetary policy thanks to the common currency needs to be set by the central authority in Brussels. When countries like Greece spend like sailors on shore leave and pile up large deficits, other countries with surpluses like Germany need to “bail them out” to protect the common currency. The only solution is to have a central government for all of the countries doing the taxing and spending. But just try to get a Frenchman to say he wants to be under the same flag as an Italian!  However, short of giving up on the Euro which no one wants to do, it is the only long term solution for the instability.