German Chancellor Angela Merkel welcomes French President Nicolas Sarkozy Monday at the Chancellery in Berlin. The two leaders discussed the ongoing Eurozone debt crisis. Photo by Sean Gallup/Getty Images.
Paul Solman frequently answers questions from NewsHour viewers and web users on business and economic news on his Making Sen$e page. Here’s Monday’s query:
Jonathan Garner asks: Please explain the difference between a nation that issues its own currency versus a nation that is a user of currency. Isn’t this the primary difference between the U.S. debt situation and debt-ridden European nations, and why the U.S. will never experience what Greece or Italy are going through?
Paul Solman: So the U.S. will never experience what Greece or Italy are going through? Are you absolutely sure? Not even if our national debt were to quadruple in the next year, say? Or a president took office on a platform of repudiating our bonds?
But yes, your basic point is well-taken, Jonathan. We can inflate dollars by printing them ourselves, thus decreasing the real value of what we owe — in dollars — to our creditors. Greece and Italy, by contrast, are currently obliged to pay back their debts in euros, which they cannot simply print as they once did drachma and lire. That’s why economists like Ken Rogoff have long predicted that Greece will have to abandon the euro and return to its own home-grown currency to give it economic wiggle room.
Remember, though: the euro was a great deal for the likes of Greece and Italy when they first embraced it. The world’s lenders thought that precisely because they could no longer print their own currencies, they were suddenly reliable borrowers and could therefore be charged very low interest rates. So with supposedly lower risk, there would be less need to be compensated for taking it, thus the lower return.
And according to the rules of Europe’s Economic and Monetary Union, all members were expected to manage their budgets responsibly. Why creditors believed this is beyond me, but they did, and countries like Greece and Italy were able to borrow cheaply, without changing any other aspect of their economies, it seems. Meanwhile, their exports were now priced in euros. Not a recipe for long-term prosperity, as creditors eventually realized.
The biggest economies in the Eurozone — Germany and France — have been scrambling ever since to preserve the union with assurances of financial support for wobbly members. But faith in those assurances is again slipping. On Monday morning, Reuters quoted billionaire hedge fund manager George Soros that in regard to the euro situation, “We now have a crisis, which in my opinion is even more serious than the crash of 2008.” As I write, creditors are demanding a 7.1 percent interest rate to lend Italy money for 10 years, compared with 1.94 percent to buy U.S. 10-year bonds (the IOUs we “sell” when we borrow).
Even the dollar, though, is no stronger than the faith of those willing to hold it. As we’ve long pointed out: creditâ‰ˆcredibilityâ‰ˆcredence. For every currency on the planet. Given the volatility of markets on that planet in recent years, my counsel is, even with regard to countries that print their own currencies: Never say never.