How Does the European Financial Crisis Affect Us?

As Europe scrambles to contain the Greek debt crisis, the stakes are high for African-Americans.

Posted: 11/07/2011 03:16 PM EST
Euro Crisis

Every day seems to bring urgent news about the Greek debt crisis and the threat it poses to the European financial system. But how does that affect us?  According to Thomas Boston, professor of economics at Georgia Tech and founder and CEO of the market research company, EuQuant, these overseas problems could put serious pressure on an already weakened U.S. economy. In an exclusive interview with BET.com, Dr. Boston explains the crisis abroad.

 

 

Who is involved in this European debt crisis right now and how are they affected? 

 

The crisis is mainly centered around five heavily indebted countries: Greece, Italy, Ireland, Portugal and Spain. Their debts are financed partly by their own citizens, but primarily by foreign entities, including U.S. financial institutions. The concern is the extent to which their debt has outstretched their ability to repay it. In some countries, the debt reaches over 100 percent of their gross domestic product and that’s really, really extreme.

 

What is the biggest concern, if one country defaults or goes into bankruptcy?

 

In real terms, the economy of Greece is relatively small, but if Greece goes into default, then there could be a snowball effect. Italy might be next, and that is a much larger economy. Investors may not be so willing to come to the rescue of the other ones.

 

 

What caused the crisis?

 

In 2002, many European counties began using a common currency — the euro. No more French francs, German deutschmarks, Spanish pesetas or Greek drachmas, to give a few examples. But there’s no common governmental structure that regulates how the countries operate fiscally. And many of these separate governments ran up as much debt as they could get away with. 

 

At a point about a year ago, Greece got to where it couldn’t pay its debtors, so it had to go and borrow money from the rest of the countries. Those countries demanded to see the books and were surprised to see the depth of the problem.

 

 

How are the other European countries reacting to the crisis?

They’re caught between a rock and a hard place. While they don’t want to see member countries of the Euro zone go into default, in order to prevent it, the stronger countries, such as Germany and France, have to provide the funds to bail out the weaker countries. There’s a lot of resistance among their electorates for putting up those funds. As a result, the lender countries are demanding that places like Greece institute drastic, draconian austerity measures, in terms of raising taxes and cutting back spending and cutting wages, in order to cut the extent of their debt.

 

 

How does all of this affect Americans?

 

It has a significant ripple effect, because the five largest banks in this country are heavily invested in Euro zone countries. Bank of America, for example, had some $17 billion dollars invested in the five countries facing the largest problems. JPMorgan has $14 billion [invested]. The probability of default hits them directly. If you take the case of Greece, as a part of the agreement struck a few days ago to rescue the country, it was mandated that private institutions holding Greek debts have to take a 50 percent loss. That’s huge.  That’s writing down billions and billions of dollars.

 

 

Does the crisis have adverse effects on African-Americans in particular?

 

Yes, it does. These financial institutions were already extremely tight in terms of their lending and now they’re even tighter because they have to preserve capital, in the event that they have to write down this debt in Europe. This means that with all of these housing foreclosures, particularly hitting hard on African-Americans, there’s often no place to go to finance, to refinance a home or to get any funds to dig yourself out of the hole. There are already very few funds available for African-American-owned banks and small businesses to go and borrow, so it just makes the problem that is bad that much worse.

 

 (Photo: Johannes Simon/Getty Images)

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