“The crisis in Greece… is a crisis for Europe as a whole,” says John Kay in the FT. “Not because that is the nature of a single currency, but because Europe has consciously chosen to make it one.” Contrast the eurozone situation with a different monetary union – the United States. While the two are not exactly alike, the American system shares a high degree of decentralised budgeting, with states responsible for their own spending and borrowing. But crucially, “the federal government does not guarantee the solvency of the states, which can and do go bust – and as several economic historians have pointed out, have done so without damage to the federal government’s credit”.
America’s record of allowing states to default puts Europe’s struggles into perspective. At the same time, it makes fears over one potential US bond-market problem look overdone. Some analysts fear widespread defaults on municipal bonds – those issued by cities and local governments. Most famously, Meredith Whitney – who made her name by predicting Citigroup’s downfall – forecast that there would be 50-100 ‘muni’ defaults in 2011, amounting to hundreds of billions of dollars. So far, that isn’t happening, says Joe Mysak on Bloomberg.com; just $746m of munis have defaulted this year. But even if it did, it would pose no threat, argues John Hempton of Bronte Capital. In fact, given that the majority of munis are owned for tax reasons by wealthy individuals who can absorb the losses, even a huge wave of defaults “will have next to no economic effect”.