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 These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

The European summit this week will feature a standoff between German Chancellor Angela Merkel advocating austerity and French President Francois Hollande promoting stimulus to boost growth.

Neither position is without merit, but neither by itself will solve what ails Greece and other failing European nations. Sadly, none of the leaders involved, including the insurgent left most likely to win the next Greek elections, appear willing to accept that a successful strategy to put Europe back on track will require abandoning the euro and returning to national currencies.

After the single currency was introduced in 1999, productivity growth was slower and prices rose faster in southern Europe than in Germany and other northern states owing to both cultural and immutable geographic conditions. Consequently, the north enjoyed growing trade surpluses at the expense of deficits in the south.

Trade deficits can instigate high unemployment and curb tax revenue, and to support employment and social programs on a par with their northern neighbors, the Greek, Italian and Portuguese governments borrowed too much.

In Spain, northern Europeans purchasing second homes and vacationing in its sunny climate instigated a rush of foreign funds into its banks to build dwellings and hotels. Spain actually had budget surpluses prior to the 2008 global financial crisis, and its trade deficits were financed by bank borrowing from foreign sources and questionable loans to homeowners: the U.S. model of excess. Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Europe is approaching the end game–credit markets and other governments know what its leaders won’t admit–the euro is failing. And then gold, more than the dollar, is set to rocket in value as the crisis unfolds.

In addition to looser monetary policy–generous European Central Bank purchases of member country bonds–and austerity–higher taxes and less spending–across most of the EU states, euro-zone governments have a three-pronged policy for avoiding a contagion: the European Financial Stability Fund to purchase and insure bonds of troubled governments; IMF supervision of finances for those governments and direct loans to several; and in Greece’s case, a 50% haircut on private debt. None of those three policies are working out.

Even with the haircut for private bondholders, Greece will have a debt to GDP ratio of 120% a decade from now, if everything goes right. Virtually no independent economist expects things to go that well and most regard the situation as wholly unmanageable. Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Prime Minister George Papandreou apparently lost his governing majority when Socialist Finance Minister Evangelos Venizelos bolted in protest over the decision to place to a referendum the Greek acceptance of the European bailout for Athens’ finances. Apparently, democratic decision making is now a threat to the One Europe designs of the continental elite.

French President Nicolas Sarkozy, and German Chancellor Angela Merkel and other leaders see a referendum, and the chaos that would follow the fall of the Papandreou government, as placing their cherished euro in jeopardy. That is sad–the false obsession with a single currency places at great peril the welfare of the Greek people and their democracy.

The bailout plan would cut in half the privately held Greek sovereign debt. However, to receive this concession and other aid from richer EU governments, Greeks must accept draconian austerity measures. These would further drive up unemployment, and shrink Greece’s economy and tax base at an alarming pace, placing in jeopardy eventual repayment of Athens’ remaining debt. Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Prime Minister George Papandreou is correct to put the EU bailout package to a vote. Without public consent to the tough austerity imposed by the EU aid package, those measures will not be sustained–a future government can balk at its conditions and start spending again.

For their part, the EU, the IMF and leaders in Germany and other wealthy countries are falsely convinced no good solution for the Greek mess exists other than the package now offered Athens. Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

European efforts at economic integration have not delivered sustainable prosperity in poorer nations like Greece and Portugal. Instead, they have left Mediterranean governments teetering on bankruptcy and at the mercy of Germany and other rich states who exploit European unity to live well at the expense of their poorer brethren.

The 1992 Maastricht Treat, which considerably harmonized product and safety regulations and methods of taxation across Europe, was supposed to remove untold barriers to growth. It didn’t, because it did not moderate European labor laws and social programs that discourage individual ambition and investment.

The euro, created in 1999, floats against the dollar and yen, and its value reflects an average of the competitiveness of its entire membership. This leaves higher productivity economies like Germany with an undervalued currency and trade surpluses, and lower productivity economies like Greece with an overvalued currency and in constant need to borrow from foreign investors.

With Maastricht and the euro, German manufactures and technology became more valuable in a more integrated European market. However, Greece, Portugal and others are not able to use their lower labor costs to capture assembly plants to the degree, for example, that the U.S. South attracts automotive and high-end electronics manufacturing.

Moreover, Germany and other rich states continue subtle forms of protection that discourage outsourcing even to other EU member states, and this frustrates the EU single-market promise to more effectively equalize employment opportunities and prosperity between the prosperous core and southern Europe. Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Just a year after wealthier European governments rescued Athens from default with $157 billion in loans, Greece is slipping into crisis again.

After seeing its credit rating sharply downgraded on Monday, and unable to meet deficit-reduction targets laid down by Germany and others, Greece is getting desperate–and Europe is getting anxious.

Officials are floating euphemistic phrases like “voluntary restructuring,” but make no mistake: The painful concessions Greece would probably require from creditors amount to a default. If that happens, the broader European economy will be on its knees, its credibility shattered. So what should Greece do?

The only real solutions are for Greece and other low-income countries to abandon the euro and for Europe as a whole to rethink its welfare state.

Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Crises in the Middle East and Japan threaten to thrust the U.S. and global economies into a second recession.

Since the economic recovery began in July 2009, GDP growth has averaged only 2.8%, a pace insufficient to bring unemployment down to acceptable levels. And that rate of growth leaves the economy too vulnerable to the slightest hiccup and a deceleration into recession.

Prior to the turmoil in the Middle East, economists were forecasting 3.5% growth for 2011, but the surge in oil prices and gasoline will likely shave half a point–perhaps more–from that rosy outlook.

Should oil surge to $140 a barrel, gasoline prices would pierce $4.00 a gallon and U.S. growth could slow to a mere 2.5%. That would be barely self-sustaining and not enough to create many jobs–likely many fewer than the 1.5 million needed each year just to keep up with population and labor-force growth.

Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Economists expect a strong jobs report for May, but the unemployment rate is expected to ease only slightly.

Friday, the Labor Department will release May employment data, and forecasters expect something north of 500,000 new jobs; however, many are in the public sector reflecting stimulus spending. Manufacturing is expected to add a respectable 30,000 new positions.

Unemployment is expected to only fall to 9.8% from 9.9% in April, because many sidelined adults, sensing improved conditions, started looking for work.

The big challenge is to keep gross domestic product growing at least 3% to pull down unemployment.

Much recent growth has been inventory adjustments, and sustainable growth, reflected in real consumer and business investment demand, has been only about 2%. As stimulus spending tails off, new sources of demand will be needed.

If the economy keeps growing at 3% the balance of 2010, demand for new capacity–improved rental housing, better located new homes, and commercial construction for retail and factory improvements–should accelerate in 2011. Auto sales, currently a bit above 11 million a year, should move up to 12 million plus with noticeable multiplier effects in the Midwest and Upland South.

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These are the personal views of David Gilmore, partner at Foreign Exchange Analytics:

For some in the market the Greek debt crisis has always been about the European banking system…collateralized by “risk-free” sovereign paper from some less than “risk-free” sovereign credits. Tons of debt issued by Greece, Spain, Portugal (not too different from AAA rates subprime MBS) and yes Italy support the banking system in the Euro Zone as collateral for borrowing from the ECB and from other banks, as well as a place to capture yield. Well when markets discern that “risk-free” sovereign debt is not really “risk-free” the inevitable run on weak credits starts. And like the subprime-driven run on banks in 2008, officials only add to downside risk as they assume the problem is contained.

Continue reading…