The European Financial Crisis: Some Links Of Note

by Pejman Yousefzadeh on May 24, 2010

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1. France appears set to raise the retirement age to 60. This isn’t even remotely sufficient as a reform, but it is a start.

2. More on how Europe’s social welfare scheme should no longer be seen as viable by anyone:

The system known as the European welfare state was built after World War II as the keystone of a shared prosperity meant to prevent future conflict. Generous lifelong benefits have since become a defining feature of modern Europe.

Now the welfare state – cherished by many Europeans as an alternative to what they see as dog-eat-dog American capitalism – is coming under its most serious threat in decades: Europe’s sovereign debt crisis.

Deep budget cuts are under way across Europe. Although the first round is focused mostly on government payrolls – the least politically explosive target – welfare benefits are looking increasingly vulnerable.

“The current welfare state is unaffordable,” said Uri Dadush, director of the Carnegie Endowment’s International Economics Program. “The crisis has made the day of reckoning closer by several years in virtually all the industrial countries.”

Germany will decide next month just how to cut at least 3 billion euros ($3.75 billion) from the budget. The government is suggesting for the first time that it could make fresh cuts to unemployment benefits that include giving Germans under 50 about 60 percent of their last salary before taxes for up to a year. That benefit itself emerged after cuts to an even more generous package about five years ago.

“We have to adjust our social security systems in a way that they motivate people to accept regular work and do not give counterproductive incentives,” German Finance Minister Wolfgang Schaeuble told news weekly Frankfurter Allgemeine Sonntagszeitung on Saturday.

The uncertainty over the future of the welfare state is undermining the continent’s self-image at a time when other key elements of post-war European identity are fraying.

3. Reassuring!

If the trouble starts — and it remains an “if” — the trigger may well be obscure to the concerns of most Americans: a missed budget projection by the Spanish government, the failure of Greece to hit a deficit-reduction target, a drop in Ireland’s economic output.

But the knife-edge psychology currently governing global markets has put the future of the U.S. economic recovery in the hands of politicians in an assortment of European capitals. If one or more fail to make the expected progress on cutting budgets, restructuring economies or boosting growth, it could drain confidence in a broad and unsettling way. Credit markets worldwide could lock up and throw the global economy back into recession.

For the average American, that seemingly distant sequence of events could translate into another hit on the 401(k) plan, a lost factory shift if exports to Europe decline and another shock to the banking system that might make it harder to borrow.

“If what happened in Greece were to happen in a large country, it could fundamentally mark our times,” Angelos Pangratis, head of the European Union delegation to the United States, said Friday after a panel discussion on the crisis in Greece sponsored by the Greater Washington Board of Trade.

A crisis isn’t a certainty, so I am not out to buy canned foods and shotguns just yet. And as the article notes, in some ways, the United States may benefit by having global investors go after American government bonds, seeing the price of oil reduced, and strengthening the dollar–thus reining in inflation, which is rather important given the size of our budget deficits. But as the excerpt above notes, all of this could be offset by increased unemployment that stems from lower consumer demand in Europe.

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