David Frum

05.21.12

How the Euro Crisis Will Affect You

In my column for CNN, I explain how the Euro crisis will affect Americans:

The European financial crisis is poorly understood in the United States.

Because so many Americans misunderstand the crisis, they fail to appreciate how -- and how much -- the crisis threatens them.

Americans tend to think (and are encouraged by politicians to think) of the European crisis as a debt crisis. Governments overspent, got into debt, and now the day of reckoning is at hand.

Yet that version of the case is demonstrably untrue. Spain's debt-to-GDP ratio is substantially lower than that of the United States. Germany's debt-to-GDP ratio is neck and neck with the United States. Yet it is Spain, not Germany, that is in trouble.

Europe is not having a debt crisis. It is having a currency crisis. It's not that European countries have bumped up against their ability to borrow. The problem is that some European countries are bumping up against their ability to borrow in euros. That limit is imposed not by markets, but by the European Central Bank.

Nobody doubts that the U.S. can generate dollars to pay its bills. Nobody doubts that Japan can generate yen, or that Britain can generate pounds sterling. But they do doubt that Spain or Italy can generate the euros they need, because -- unlike the U.S. or Japan or Britain -- Spain and Italy lack the power to create their own money. Maybe not Greece, which is a special case, but the other troubled countries could recover their borrowing ability tomorrow if they quit the euro and resumed their former national currencies.

Americans need to understand this truth, because otherwise they will be blindsided by the real risks out there.

The hard-pressed countries of the eurozone have an escape hatch: They can quit the euro currency. Quitting the euro would not be pain-free -- but it might well become a less painful alternative to what those countries are suffering now: Great Depression levels of unemployment, rising taxes, massive social security cutbacks. Over the past two years, for example, Portugal has cut government spending by almost 8 points of GDP. To achieve the same scale of cut in the United States, we'd have to abolish both Social Security and Medicare.

The sacrifices countries make to stay inside the eurozone fall mostly on their own people. But if they quit, the pain is exported -- and will be heading our way.

Click here to read the full column.