Friday, November 26, 2010

Eurozone: Living Beyond Its Means And Implications For U.S.

If the U.S. looks at the issues facing a number of the Euro Zone countries, it is not too much of a stretch to say the U.S. could go down that same path. Certainly the U.S. economy is more diversified than those of the coutries that are encountering financing issues. However, much of what is occurring in a number of the Euro Zone countries is a result of countries living far beyond their means. In the U.S. we seem to be going down that same path. Recent government policies and entitlement growth are creating a situation where the public sector is absorbing more of the financial burden versus the private sector. Not only is there a large burden (that is, budget deficit) at the federal level, nearly every state in the U.S. is dealing with significant budget deficit issues. As the below chart shows, the U.S.budget deficit as a % of GDP and gross debt as a % of GDP is pretty close to some of the Euro Zone countries that have encountered financial difficulties.

Recent articles in the Wall Street Journal address some of the issues impacting Spain. The first article, Spain: A Quick By The Numbers, notes the folowing financial characteristics of that country. As the above chart shows, the U.S. debt and deficit is worse than Spain's. Additionally, the U-6 unemployment rate for October is 17% and not much better than Spain's.
  • The fourth-largest economy in the euro zone.
  • Deficit-to-GDP in 2009: 11.1% (Ireland is 14.4%. Greece is 15.4%)
  • Government spending as a percentage of GDP: 45.8%.
  • Government debt-to-GDP: 53.2%.
  • Unemployment rate: 19.8% in the third quarter. That is more than twice the European Union average, although the figure is down slightly from 20.9% in the second quarter.
The other article, Spain: What Are Its Funding Needs?, provides details on the magnitude of the debt that will be rolling over in Spain. The article concludes, and we agree, that these issues will be headline material in the financial press and thus impact market volatility for the near term.

Updated: November 27, 2010. Next Debt Crisis May Start in Washington: Bair

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