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German Chancellor Angela Merkel (R) welcomes Spanish Prime Minister Mariano Rajoy upon Rajoy's arrival at the Chancellery on Jan. 26 in Berlin, Germany. Sovereign debt issues have threatened to decouple the eurozone's economic stability. (Sean Gallup/Getty Images)
The first few weeks of 2012 started quietly in world news. Threats from North Korea’s new leader and Iran closing the Strait of Hormuz died down. The stock market got off to its best start in two decades, with few signs of volatility—swings in volume were less than 100 points daily.
Then Costa Cruise Lines’s Concordia ran aground off the coast of Italy.
The accident stranded 4,200 passengers and 1,000 crew, killing dozens of innocent people; some are still missing. Worse, Capt. Francesco Schettino guided the cruise ship into the rocky shoals not once, but twice, before it crippled the 5-year-old vessel on an underwater ledge, where it listed for the world to see.
For Europe’s sovereign debt crisis, there appears to be no better metaphor symbolizing its fiscal futility and failed monetary policies than a shipwreck.
Will Concordia be a dark omen for the inexorable EU decline? Or will the European Central Bank (ECB) and northern member states find a way to prevent a Greek default from burning a hole in the firewalls of Italy, Spain, and Portugal?
The latter $500 billion question is critical to answer, if only to allay fears of a global economic slowdown. Yet the opinions of political, financial, and analyst professionals, who discussed the hot topic in a daylong marathon at Bloomberg Link Sovereign Debt Conference, oscillated from somewhat optimistic to downright pejorative.
Will the next round of austerity work?
No one knows as Europe continues to work through its structural problems and political impasse on a near-term fix for 2012. It seems the only consensus that can be drawn from the summit was this: the EU and ECB are still a long way from solving the fiscal ills and putting in place a solution for long-term growth generation.
EU Contagion Spreading
Peter Orszag, vice chairman of Global Banking at Citigroup Inc., warned of a triple witching hour that will hit the United States at the start of 2013.
“This time next year, the tax cuts will expire, defense cuts come online, which will be too significant to implement, and the U.S. debt limit hits again,” he said at the Bloomberg conference. “Throw in fiscal contraction happening at the same time and these old issues will be difficult to solve.”
In the path of the EU financial storm sits the United States with its slowing growth, high unemployment, and ever-rising debt.
Orszag underscored his bleak view by telling the audience that total debt accumulated from the time of George Washington to President Bill Clinton was $5.6 trillion. “In the last dozen years, we’ve tripled the deficit to $15 trillion,” he said.
David Walker, CEO/founder of Comeback America Initiative, agreed, stating, “We need to make real progress to structurally change our debt and deficit. We’re much worse off than in 1992 when Ross Perot ran for president.
Without a central, political, economic model that needs to be in place for the next decade, Orszag said, “We are fundamentally broken.”
With no middle ground in Congress, the United States can’t legislate. Although elections are won in the middle, neither the House nor the Senate craft solutions there anymore, since the gap between the parties has grown from a fissure to a rift valley.
“Investors believe we’ll find the solution,” Lewis Alexander, managing director and U.S. chief economist of Nomura, pointed out. “Near-term uncertainty in policy is why the bond market is strong.”
The Weight of Global Debt Loads
Numbers were beamed on the New Museum’s wall, where the summit was held, putting the troubles facing Europe and the world into perspective.
• There are 2 billionaires in Greece, 52 in Germany
• $2.8 trillion of U.S. debt is maturing in 2012
• $3 trillion of Japanese debt is maturing in 2012
• $1 trillion will be added to the U.S. deficit this year
Yet the sobering numbers don’t tell the whole story.
In an earlier session, John R. Taylor, CEO and founder of FX Concepts, said: “In 1964, I taught a course in Europe. The person on the street hasn’t sold a united Europe as a concept in the last 50 years. It’s very weak. The average man says to hell with the EU and its bad economy. And yet, the political landscape is moving toward more Europe, not less. … Good luck with that.”
