The Continuing Euro-Crisis
- May 15, 2012
After spending some time out of the headlines, the shaky situation in Europe, and its hard-to-predict impact on the world economy, has returned with considerable force to the news. On Monday, one kind of Spanish debt yields shot up to about 6.3 percent, their highest level since the nervous days late last year (nervous in the euro-zone, at least). Also, a species of Italian debt is now trading at 5.74 percent, its highest level since January. Investors are apparently seeing more risk again. (And, like the motion of a seesaw, U.S. 10-year yields dropped to 1.78 percent on Monday, close to its record low.)
On Sunday, President Karolos Papoulias of Greece urged the fractious political parties in that country’s parliament—and we think we have it bad in Congress—to give forming a government, any government, another go this week. No one has expressed optimism about the prospects for this, but it might be the only way to prevent another, and even more destabilizing, round of elections for the Hellenic Republic in June.
Moreover, there are strong indications that even the Germans aren’t too keen on austerity any more. On Sunday, the party of Chancellor Angela Merkel lost elections in the German state of North Rhine-Westphalia, the country’s most populous. The current state premier, a member of the opposition Social Democrats, swatted back efforts to elect a member of the stoutly pro-austerity Christian Democrats.
Commodity prices have been dropping in recent weeks, and on Monday, prices were down even more as euro-woes grew. The Reuters CRB Commodity Index, which includes 17 components (energy, grains, meats, metals and more) dropped 1 percent on Monday alone, bringing its year-to-date loss to 5.5 percent. The index is also at its lowest point since the summer of 2010, back when Greece upset the world the first time.
But at least oil has been dropping, and with it, gasoline prices for U.S. drivers. According to the latest AAA Fuel Gauge report on Monday, the current average price per gallon (regular) is $3.727, down 5 cents from last Monday, nearly 18 cents from a month ago, and almost a quarter from this time last year.
The continuing California crisis
Closer to home, California, with the largest state economy, is behaving a bit like a southern European nation—an unexpectedly large budget deficit for fiscal 2012-13, was announced over the weekend by Gov. Jerry Brown. “We are now facing a $15.7 billion shortfall, not the $9 billion we thought in January,” Brown said on YouTube. “This means we will have to go much further and make cuts far greater than I asked for at the beginning of the year.”
The governor blamed disappointing revenues and spending cuts that haven’t jelled for the state’s fiscal woes. He did not give any details on the video about new budget cuts, but he did urge votes to approve tax increases on incomes over $250,000 in a ballot initiative this November.
On Monday, Gov. Brown did detail budget cuts in his $91 billion proposed budget, which proposes austerity for most public functions, especially in health, social services and public payrolls. Even the expected tax windfall from the Facebook IPO this week, which might be as much as $2 billion, would plug only a small part of the budget shortfall.
Wall Street took a dip on Monday, jittery about euro-zone troubles and maybe California, too. The Dow Jones Industrial Average lost 125.25 points, or 0.98 percent, while the S&P 500 was down 1.11 percent and the Nasdaq declined 1.06 percent.