In this Economist podcast, journalists describe the euro zone debt crisis with a wonderful array of metaphors. (Directly and indirectly, I quote what they said.)
- Minnows: The smaller peripheral nations in the euro zone, Greece, Ireland and Portugal are minnows.
- The Big Fish: With the third largest economy in the euro zone, Italy is a big fish.
- An Infected Core: The debt “illness” that has struck the euro zone has moved from the minnows on the periphery to a big fish at the core. Described as “too big to save; too big to let fail,” Italy has been a “stealth debtor” with sovereign debt close to 120% of its GDP. Still though, like a family that has managed massive credit card debt for many years, Italy has successfully handled its obligations. However, if the Italian bond market has been “infected,” then the cost of borrowing could soar. The result? Italy will lose control of her fiscal responsibilities.
- A Badly Dented Can: Thus far, euro zone leaders. coping with the tension between “political and economic imperatives,” have opted for short-term solutions. By “kicking the can down the road” they have badly dented it. Now, before it breaks, as the contagion spreads, they need a long-term resolution.
- Fewer Days at the Beach: As a result, euro zone leaders will need to spend considerable time this summer developing a solution.
The Economic Lesson
Monetary policy involves the supply of money and credit. Fiscal policy takes us to spending, taxing, and borrowing. The euro zone oversees the monetary policy of its 17 member nations but not their fiscal policy. And therein lies the problem. Monetary policy and fiscal policy are closely related. Banks buy sovereign debt.
An Economic Question: How are U.S. fiscal and monetary policy in the U.S. related and yet also separate?