Great Britain and the Nature of Europe

Since 2008, the pound has lagged the euro.
Image credit: Yahoo! Finance

Among the bystanders caught up in the Eurozone crisis is the United Kingdom of Great Britain. As the NY Times correctly notes, the UK is stuck between a rock and a hard place.

While the Brits are a party to the European Union, they are not a member of the Eurozone--they kept the British pound instead of transitioning to the euro note. As such, their monetary security should not be immediately affected by a collapse of the European currency. The British pat themselves on the back for this decision, especially (but not limited to) PM David Cameron and his ruling Conservative Party. But should they be so self-satisfied?

In a previous era, staying on the pound would have guaranteed a buffer against continental woes. But Britain's membership in the European Common Market--and the simple matter of their geographically-defined exposure to the European economy--guarantees that the UK would be hit hard by the disruption in trade and finance that would likely follow the euro's implosion.

Moreover, one need only glance at the performance of three major currencies since 2008 to take a bit of polish off of the pound sterling: Britain's independent currency has underperformed both the US$ and the euro since the onset of the financial crisis (see top right).

Whither collapse and recovery?

Federal Reserve Board Building
Photo credit: Wikipedia

Mark and Mauricio recently sent me a pair of articles that relate to what we've discussed in class this semester.

In the first article, Paul Krugman (Nobel-winning economist) and Larry Summers (former adviser to President Obama) debate whether the US is facing a "lost decade," or a long period of slow growth that doesn't quite count as a recession. Mr. Krugman believes we are, while Summers disagrees. I happen to agree with Summers. What do you think?

In the second piece, Bloomberg reveals that the Federal Reserve (the US central bank) lent out $7.7 trillion (with a 't') to beleaguered banks during the 2008 financial crisis. This is something that we're just learning about now, and it dwarfs the $770 billion Troubled Asset Relief Program (TARP) that became the focal point of the government's stimulus program.

Should the Fed have disclosed these loans earlier? Or should it have protected these banks from the stigma of failure that may have precipitated a run?

Review Sheet for Cumulative Assessment

As you should know by now, your Cumulative Assessment is on December 7. I have posted the review sheet so you can study for the exam. The list of terms is also available after the jump.

Study tip: Define the terms, explain their relevance in the course, identify what texts, articles and lectures for which they're relevant and explain how they are connected to each other.

Euro Crisis Continues

One Euro Piece
Photo credit: Wikipedia

Just before the Thanksgiving holiday, the European currency crisis claimed its fifth government victim: Spain's Socialist government, which had ruled since just after the 11 March 2004 rail bombings in Madrid, lost in parliamentary elections. But parliamentary transitions won't solve the underlying problems that the crisis is only now unearthing.

If you're going to link several governments to a single currency, the currency zone must A) restrict member state borrowing or B) constantly bail out poorer states when things turn sour. So far, the EU and the Euro-trading states have been unwilling to agree to either.

Despite widespread acknowledgement of the disaster that might result from the collapse of the Euro, there is still a chance that the system may fold or fracture. France and Germany are pushing the debtor states to reign in their spending and place caps on future borrowing, but they cannot do so without approval of the states themselves (and if they didn't want to curtail borrowing before, they may be less likely to now that they have to find money to service prior debts).

What happens if the Euro dissolves or merely shrinks? Think widespread bank defaults and capital evaporation on a greater scale than what we experienced in 2008. This is not what we in the US needs just as several leading indicators of domestic growth are turning positive. Whether Europe gets its act together will affect us all directly, from the cost of the products we buy to the likelihood that we get jobs upon graduation.

Such is the reality of the globalized, integrated market economy.

Democracy over Time (Updated with Atlas)

Democracies (states that score above 5 on the Polity IV scale) compose the majority of states today, and democratic state pairs (dyads) are more common than autocratic dyads or mixed dyads. It wasn't always this way. Use the slider at the bottom of the graph below to explore how the distribution of democracies and dictatorships has evolved over time.

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