Q Why should I be concerned about the Greek debt crisis?
A Reports of a Greek bailout and a plummeting euro have dominated the financial pages while speculation abounds as to the identity of the next euro-domino country to fall. Previously considered inconceivable, the disintegration of the European Union is now a distinct possibility if the contagion is not dealt with surgically and decisively.
Failure to take the painful actions required to defuse the situation invites the risk of throwing the continent back into recession, with unpleasant implications for the U.S. economy.
Post-war efforts to forge a unified economic entity culminated in the 1992 Treaty of Maastricht, creating the modern European Union and the first pan-European currency.
To enter the union, members agreed to strict limits on government debt, and acceded to the terms of the treaty that forbade the EU from rescuing states
whose profligacy led them to violate those debt covenants.
Enter the PIIGS. These ignominiously-dubbed members -- Portugal, Italy, Ireland, Greece and Spain -- are the weakest sisters, all of whose deficits far exceed the EU limits.
Greece, the worst offender, is a basket case of kleptocracy and European socialism gone haywire.
Prior to adopting the euro, countries facing sovereign debt crises could simply devalue their currencies, scorch their creditors, and move on; with a common currency regime, however, this option is not available.
After months of fiddling while Athens burned, Brussels finally settled on a $1 trillion mega-lending operation that was immediately adjudged insufficient by global markets. Borrowing costs for the PIIGS have spiked, the euro continues to fall, and Europe stares a second recession (or worse) in the face.
The European Union is America's largest bilateral trading partner, and an important market for our exports.
Continued devolution of the euro makes our products more expensive and dampens exports just as demand is already falling.
Furthermore, the uncertainty regarding European debt has added significant volatility to U.S. equity markets, as illustrated by the recent stock market selloff.
Meanwhile, the necessary (and overdue) adjustment in the Chinese currency peg against the dollar has been halted as the value of Beijing's euro holdings have sunk and they seek safety in U.S. dollar holdings.
The eurozone must ultimately expel the hapless debtors, let them devalue their currencies, and eventually reapply for membership once their houses are in order.
American investors have a vested interest in seeing their European partners offer the PIIGS some tough love.
Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Chris Hopkins is vice president, investments, at Barnett & Co. Inc. Submit questions to his attention by writing to Business Editor John Vass Jr., Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by e-mailing him at jvass@timesfreepress.com.