The Failed “Practical” Steps in Europe
In Europe, too, the European Central Bank (ECB) dropped the interest rate in the Eurozone from 4.25 to just 1 percent [23], but that also proved futile.
The Eurozone established a European rescue fund with hundreds of billions of Euros to assist the more vulnerable countries in the bloc. This fund has struggled to raise money from its members. However, the demands for economic and social reforms that are conditions for receiving the funds are so harsh, they could cause widespread riots in the countries receiving them, as is happening in Greece.
At the end of 2011, in the wake of a real danger that Greece would default on its debt—which could lead to a dramatic escalation throughout the Eurozone and the world over—the principle of the fund was increased significantly to more than one trillion Euros. The agreement on the increase was signed after many challenging debates among the Eurozone countries. Many experts believe this attempt, too, will fail to resolve the sovereign debt crisis in Europe. At best, it will slightly delay the financial and possibly social collapse.
The International Monetary Fund (IMF) also jumped in to assist Europe, allocating substantial budgets for that purpose. Many countries in Europe also began to “tighten their belts” to reduce the deficit and meet the conditions for receiving aid from the funds. The cuts in those countries are hampering their abilities to put their economies back on track. In consequence, the cuts are actually worsening the situation in many countries. This situation has created a snowball effect, escalating rather than diminishing the problem. Now, the integrity of the entire Eurozone is in imminent danger.
The Eurozone bloc, which was meant to provide mutual guarantee among its members, is about to collapse from the domino effect that began in Greece and is quickly spreading to Italy, Spain, Portugal. From there, it is only a matter of time before it affects the stronger economies of France and Germany.
Unemployment in much of the Eurozone is very high: In Spain, the unemployment rate of the total labor force is more than 20%, and among young academics, the unemployment soars to approximately 45% [24]. Many firms and sovereign states are approaching a state of default on their debts, and the protests against austerity plans testify to the complexity of Europe’s plight.
In the U.S., unemployment is also high [25] and the national debt is skyrocketing [26]. Economic activity is slow and struggling toward recovery, while housing prices are still falling. In 2011, the U.S. suffered its first ever downgrade of its perfect debt rating, [27] and all the money markets in the world are paying heavily for it.
Although the American debt ceiling has been raised, to avoid increasing the deficit, any additional government aid or tax cuts must be accompanied by budget cuts. Another option would be to raise taxes in other sections of the economy. The unbounded credit that President Obama had to deal with the crisis has been lost, and henceforth, he will have to cut and tighten the belt. This undermines his ability to rescue the faltering American economy from the crisis.
Additionally, the American political system is battered and divided, poverty is rising, and private consumption—the primary growth engine of the American economy—is flatlining. It appears that America’s economy has reached a dead end.
[23] “Euro Area Interest Rate,” Trading Economics, http://www.tradingeconomics.com/euro-area/interest-rate
[24] “Spain Unemployment rate,” Index Mundi, http://www.indexmundi.com/spain/unemployment_rate.html
[25] “United States Unemployment Rate,” Trading Economics, http://www.tradingeconomics.com/united-states/unemployment-rate
[26] “The Debt to the Penny and Who Holds It,” http://www.treasurydirect.gov/NP/BPDLogin?application=np
[27] “Instant view: U.S. loses AAA credit rating from S&P,” Reuters (August 5, 2011), http://www.reuters.com/article/2011/08/06/us-usa-debt-downgrade-view-idUSTRE77504J20110806