The European Union (EU) is a major destination for US exports ($315 billion in 2011) and a valued investor in the US ($111 billion in 2011).  EU purchases and investments are the source of millions of US jobs.  Our sharp interest in jobs and our cultural connections explain our concern for the economic and membership challenges that beset EU members.

The EU is suffering an economic slowdown and potentially a recession, much as in the US.  But in many respects, the EU is unlike the US.  Seventeen of the member countries use the Euro (so-called Euro Zone).  Others such as Poland, Sweden, and the UK use their own national currency.  The EU lacks a strong central authority like the US Congress.  EU laws typically are focused on freedom of movement for people and trade, not so much on individual freedoms.  To impose a new law on members can require a treaty amendment and/or a referendum within the member countries.  But most elected officials have higher regard for the EU than do their own voters (the bias of the elites).  As a result, member officials rarely are willing to conduct a referendum on an EU issue. 

The US and the EU have GDPs of the same scale.  Germany has a regular trade surplus, that reached 16 billion Euros in August 2012, and 60% of the surplus is with EU members.  Italy had a 4.5 billion Euro trade surplus in July 2012.  Sweden and Finland regularly have a trade surplus.

Some EU members produce dismal trade results due to low productivity or taxes that support lavish safety nets.  For example, in France,56% of GDP is spent by the government and it is very difficult to separate an employee from the payroll regardless of job performance or the employer’s financial problems.  In Greece, government bureaucracy makes it difficult to start a new business and there are high cost special interest concessions such declaring hair cutting a hazardous job worthy of a very early pension.  Italy and Greece also neglect to collect significant portions of taxes that are due.  France, UK, Greece and Spain suffered 5.3, 4.3, 1.7 and 1.7 billion Euro deficits in August 2012 (July for Greece and Spain).  

The economic conditions of the 27 EU member countries differ radically but none is free from concern.  As in the US, EU countries faced housing price declines that stressed their banks.  During 2010-2011, there were regular crises over defaults on Greek debt and looming bank insolvencies elsewhere.  Greece imposed a 70% “haircut” on its sovereign debt held by private bondholders.  The haircut chilled lending to other Club Med members such as Italy, Spain, and Portugal who also ran chronic budget deficits.  It also chased out many US lenders to wobbly EU countries.

The EU correctly saw deficit and default problems as unsustainable and in 2011 chastised the “Club Med” big spenders by imposing a budget discipline of “less than 3% deficit” for Euro Zone members.  To reach the target, members were supposed to cut back social programs and remove growth-suppressing labor laws.  Private lenders were unconvinced by this Kabuki theater and set interest rates accordingly.  At times this year, borrowing costs for Spain and Italy exceeded 6% for 10-year money – a cost 4 times higher than in the US.

Today, budget targets and execution are kilometers apart.  The IMF reports France will run 4.7% deficit in 2012 and 3.5% in 2013.  For Spain and Italy the 2013 deficits will be 5.7% and 0.5% respectively.  Greece is sliding into the Aegean and pushing debt up to 182% of GDP in 2013.  The UK is expected to run a shocking deficit of 8.2% in 2012 and 7.3% in 2013.  Most of the EU is perilously close to recession, if not already dug in.  

The European Central Bank (ECB) has lately announced that it will buy unlimited amounts of sovereign bonds.  Translation: print money to buy the debt of those Euro Zone countries suffering from excessively high interest rates.  This is an unpopular move with the German public, but on the other hand, it is largely Germany’s accumulated trade surplus that is being financed by the borrower nations.  The countries to watch are Spain and Italy.  They have so much debt afloat that the ECB could not buy a significant chunk of it.  If the ECB goes overboard, it will decrease the value of the Euro and likely trigger inflation within the Euro Zone.   

If financial markets regard the ECB moves as unsustainable, that could deepen Europe’s recession, decrease EU Imports from the US and decrease the EU’s investment in the US – putting palpable downward pressure on US employment.  In other words the EU could gag on excess debt and that would put Americans out of work.

Most Europeans have positive sentiment towards their Union, but they have a more positive sentiment toward their own country, culture, and language.  Multiple languages are an inevitable burden of uniting so many countries.  When melded with policies that welcome “guest workers” from outside Europe, multiculturalism spread beyond most European’s expectations.  There have been multicultural backlashessome temperate, and some violent.   Euro Zone members are reconsidering migration from outside the EU.

The benefits of free movement of people and trade in the EU are immense, as they are in the US.  Still, there is breakup talk by some in the EU.  Most breakup talk comes from “Club Med” members trying to extort bailout funds from Germany.  A Financial Transaction tax has been approved by 11 EU members.  (France quickly found ways to spend the future windfall).  The tax is structured to harm the City of London most and it is one more reason that the UK will not join the Euro Zone.  The UK also grumbles about EU bureaucrats with their thickets of regulations and interminable consultations – too often in a foreign language.  There is also sentiment for breakups within members (e.g. Scotland and Catalonia).

The main risks to the US come from financial entanglements that try to prop up the EU’s vast social safety net – the same unsustainable fantasies that we cannot afford here.  

Alan Daley is a retired businessman living in Florida and following public policy from the consumer’s perspective.