A Comparison of Problems in Europe With Those in the US

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Simon Johnson compares the problems in the US and Europe in this article. Europe has the biggest problems. In a sense, they are suffering from something like our sub-prime housing bubble problem. Many countries were able to borrow, primarily from other European banks, at AAA interest rates without the means to service the debt. Their moral hazard was the expectation that they would be bailed out by the economically stronger countries if they got in trouble. Well they got in trouble. Now Europe must find a way to save the Euro, which benefits the entire euro zone, without an effective fiscal governance structure. Their other problem is that one of their largest export markets, the US, is not growing very fast. This will make it harder for Europe to grow its way out of difficulty.

The US has its problems as well. Fortunately, its real fiscal problem occurs around 2021. Unfortunately, its governance problems preclude directing attention to its real long-term fiscal situation. Washington is primarily concerned with its short term budget deficits. It is being forced by politics to take steps that will reduce economic growth and exacerbate its deficit problems by cutting government spending while the rest of the economy is also cutting spending.