“No man is an island,
Entire of itself.
Each is a piece of the continent,
A part of the main.
If a clod be washed away by the sea,
Europe is the less…”
–John Donnne, “For Whom the Bell Tolls”
The words from the poem of the early 17th century poet, John Donne, are apt when applied today toward the fiscal plight of the European Union (EU) members who share a common currency, the euro. After the reunification of Germany over 20 years ago, many European nations acted to adopt the euro as their official common currency. Numerous treaties led to greater economic integration among European nations and the eventual adoption of the common currency.
The euro is the symbol of an ideal: Europe with open borders and strong economic bonds that diminish the chances of armed conflict in the future and strengthen the EU members in trade dealings with other nations and regions. Unfortunately, history is replete with examples of ideals (the League of Nations, Pan-Arab Nationalism) that fail miserably in the realm of reality. In Europe today, the euro and the EU itself are teetering on the brink of failure and are threatening to plunge both Europe and the rest of the world into a recession.
The root of the problem centers on the fact that the EU is not itself a true national entity. While there is a European Parliament, each nation within the EU has its own sovereign laws and institutions. There is no United States of Europe. While there is a European Central Bank, it does not have the powers of the Federal Reserve Board in the U.S. The lack of common economic laws and a true central budget has always opened the door for a major fiscal crisis to threaten the future of the EU. That time has come.
The soft underbelly of the EU has always been the lack of an enforcement mechanism to crack down on nations that run budget deficits beyond the range allowed in the EU’s monetary treaties. Ireland and Portugal have already needed financial bailouts when their sovereign bonds were threatened by high insurance costs due to their shaky national finances. Recently, Greece plummeted into fiscal crisis necessitating even larger bailouts. Now Italy is having the same problems with bond buyers demanding unsustainable interest rates of over 7 percent. The problem is there is not enough money in Europe to bail out Italy, especially if such an action channels the “bond vigilantes” toward Spain and France next.
Unfortunately, if the “clod” of Europe’s fiscal stability is washed away, the problem won’t stay on European shores. The devastating impact that would befall the European economy (many experts say Europe is already entering a new recession) will impact the U.S. too. Our banks have loaned large sums of money to European banks and have purchased European sovereign bonds as well. (It is anyone’s guess how many at this juncture.) Europe is also a major trading partner with the U.S. If our exports to Europe tumble, it will have a strong negative effect on our economy, resulting in diminished corporate profits and more job losses.
John Donne’s conclusion to his poem perhaps best describes the predicament that the U.S. and other non-European nations find themselves in as the European fiscal crisis continues to unfold:
“Each man’s death diminishes me,
For I am involved in mankind.
Therefore, do not send to know
For whom the bell tolls,
It tolls for thee.”