Debt Crisis: Should the US Blame the Euro Zone?

ForexNewsNow – As the global debt crisis hits Europe and the US, it seems that investors, especially forex traders, seem to still prefer the US dollar to the euro.

The main explanation for the current doubts about the euro zone is the institutional disorder that has rocked the area which has been underlined by the current debates over the various solutions to adopt in order to overcome the Greek crisis.

Institutional disorder

The recent crisis in the euro area, the threat of a default or the bankruptcy of certain EU member states has exposed the EU’s institutional problems:

• Insufficient federalism;
• The lack of a mechanism to support countries facing a liquidity crisis;
• Differences of opinion between countries on the future of EU supranational institutions.

This has not helped encourage investors to buy securities from the euro zone, especially recently. However, despite these institutional weaknesses, the current investor sentiment vis-a-vis the euro zone may be unfair.

The EU economically healthier than US

Here is what European Central Bank President Jean-Claude Trichet said to members of the press following a meeting of European finance ministers in Wroclaw, Poland over the weekend: “Taken altogether, the EU and the euro area are probably in better shape than the economies of other major developed countries.”

And one has to admit that Trichet is right given that the economic situation in the euro zone as a whole is a lot better than the one in the United States with respect to:

• The current account (aka the external deficit):

• External debt (aka the foreign debt):

• And the public deficit :

Nevertheless, Trichet also acknowledged “errors were made in some individual countries” which have allowed the accumulation of high deficits and public debt.

Conclusion:

Some in Europe are currently shocked that the sovereign debt crisis occured in the euro area and not the United States. But the explanation bowls down to one basic point: the dollar remains the only international reserve currency.

Indeed, any economic comparison between the US and another economic area is not completely fair. As we explained in a previous analysis, the dollar has been the unrivaled international currency for almost a century now and that allows the United States to maintain a status that the euro zone has never had.

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