Monsters in our Wallets

07/14/10 — My husband travels a lot, mostly to the U.S. and Europe, which means his wallet is often stuffed with both U.S. dollars and euros. This can also mean that — in his case, that is, being an academic and all — on more than one occasion, he’s tried to pay for his coffee and bagel with wrong currency. The other day, packing for a two-week conference at Penn State, he opened his wallet to check the stash, then looked at me, seeming lost for a moment.

“Honey, I have monsters in my wallet,” he said.

It took me a while to stop laughing, but when I finally did, I told him, “Thanks, you just gave me a great heading for my next PROFIT CONFIDENTIAL article.” And not only that; my husband’s
exasperated statement was spot on, although unintentional and uttered in a completely different context. Regardless, these days it seems there really are monsters in our wallets.
For months now, the world has come to perceive the euro as bordering on apocalyptic. The headlines have swelled with words like “crisis,” “sinking ship,” “chaos,” “perfect storm,” “horror,””panic,” “failure,” “Armageddon,” etc. The moment that Greece’s sovereign debt debacle started unraveling, the euro experienced one of the more violent instances of dethroning. The currency that unified an entire region and was one of the greatest economic experiments in recent history nearly disintegrated in a matter of months.

I don’t know if the euro will survive the eurozone’s sovereign debt crisis. It may or it may not. But, in comparison to the U.S. dollar, I still think the euro may be a lesser monster. Broken, bloodied and battered, there may still be healthy tissue underneath all that mess.

For example, comparing the regulatory push towards fiscal and structural reform in Europe to that in the U.S., it is clear that the latter’s efforts resemble those of an impressionable child imitating an adult. Perhaps the eurozone has been pushed against the wall and perhaps this is why the EU regulators are coming up with constructive decisions, not just promises. Then again, perhaps it is not. Still, the U.S. should wield a much bigger bat and should try not to strike out as much.

Additionally, look at what Europe has done to support its currency. April was a black month forthe euro. Greece’s finances were in disarray and the country was dealing with frequent occurrences of citizen unrest. As things went from bad to worse, bond prices plunged, sending yields and costs of borrowing into the stratosphere. Everything in Europe smelled of decay, not just the ruins of Pantheon.

Understanding that a second credit crisis could be only days away, the eurozone finance ministers knew they had to do something and they knew it had to be something big. So, they came out with a rescue package valued at 750 billion euros. It was more than anyone had anticipated and it was designed to help not just Greece, but other PIIGS countries as well. However, unlike the U.S. bailouts, which were mostly about saving Wall Street, the European bailout was first and foremost about the euro.

The EU bailout came with huge strings attached. Greece, Portugal, Spain, Italy, Britain, Ireland, etc., had to agree on harsh austerity programs. That meant severely limiting public spending, increasing taxes, increasing retirement ages, and infusing new life into the labor market. It also meant those accepting the bailout had to agree to reduce deficit to about three percent of their respective GDPs within the next few years.

Recently, I wrote about what fiscal austerity happens to mean in the U.S. From the day that Congress passed the TARP Program in the fall of 2008 to the G20 Toronto Consensus in June of 2010, all I have seen from the U.S. government were ineffective attempts to placate voters, calm investors and please everyone else. To accomplish all that, the U.S. government would have had to have supermen on its payroll. Of course, there are no supermen. Instead,
we seem to be saddled with a government paralyzed with indecisiveness and lacking initiative, but having plenty of “short-sighted” long-term vision.