MAP: Debts and Deficits: How does the U.S. Compare? (View Global map of debt-to-GDP ratios in a larger map.) Source: OECD Economic Outlook, Volume 2012 Issue 2—No. 92 (Statistical Annex Tables 27 & 32) Note: The OECD includes in its calculation of national debt and deficit figures all borrowing by federal, state and local government, including debt held by public entities. Thus, in the case of the United States, the Social Security Trust Fund and other long-term liabilities would be included in the national debt-to-GDP ratio.
Could the U.S. join Europe and share a common currency?
On the face of it, the question is patently absurd. Constitutional law and U.S. politics weigh overwhelmingly against the idea -- not to mention simple geography.
Nevertheless, here at Marketplace, we sometimes like to entertain patently absurd questions (don't ask us why), so we put together a fictional ‘what-if’ scenario sketching out an imagined U.S. campaign to join the eurozone (centered in the very real town of Brussels, Wisc., home to many descendants of Belgian immigrants to the U.S.).
To pull back the editorial curtain a bit: The idea for this ‘thought experiment’ came up in a brainstorm meeting we had at Marketplace early this year, after the short-term budget deal in Washington averted the so-called ‘fiscal cliff’ of large tax increases and deep spending cuts.
One of our editors pointed out that the EU member states that launched the euro were required to meet very stringent fiscal targets for annual government budget deficits and long-term national debt.
So we asked ourselves: Could such a mechanism work for the U.S., where there is now such a clamor for debt and deficit reduction? Would the U.S. qualify for eurozone membership today... or in the near future?
Here’s what we found: The Maastricht Treaty establishing the eurozone requires countries to achieve a deficit-to-GDP ratio of 3 percent or less, and a debt-to-GDP ratio of 60 percent or less, in the year prior to accession.
According to data from the OECD, the U.S. ratios in 2012 were 8.5 percent, and 109.8 percent, respectively. The short answer is (again, putting aside the geography): No, the U.S. could not join the eurozone today.
In fact, achieving such levels any time in the near future -- let’s say, within a decade -- would be virtually unthinkable, at least without massive revenue increases (i.e., tax hikes) and spending cuts (i.e., austerity). Even using deficit- and debt-ratio figures from the Congressional Budget Office, which show the U.S. in a considerably more favorable light, the targets are a long-shot in the near future. (For 2013, the CBO projects the U.S. federal deficit at 5.3 percent of GDP, and debt at 76 percent of GDP; the discrepancy with OECD figures is accounted for by the fact that the OECD includes state and local government deficits, as well as debts held by private and public investors, which would add the Social Security Trust Fund and other federal liabilities to total U.S. national debt.)
But here’s the rub: Most of Europe wouldn't qualify for eurozone membership right now, either. Many countries in Europe -- Greece (181.3 percent), Portugal (125.6 percent), Ireland (123.2 percent), Italy (127 percent), Spain (93.8 percent) -- are way over the debt-to-GDP line at this point. France (105.1 percent) and Germany (87.6 percent) have deficit-spent through the recession and now also have national debts significantly above the Eurozone accession targets.
At this point, Luxembourg (29.8 percent) and the Czech Republic (51.3 percent) would qualify, but not the Netherlands (82.5 percent) or Austria (83.1 percent).
And many of the eurozone’s original founding members turn out to have fudged their accounts to get in at the very start. Belgium (103.2 percent for 2012) bought and sold gold reserves and dealt in complex derivatives trades to make its debt and deficit appear to qualify, says Jacob Kirkegaard at the Peterson Institute for International Economics. Similar creative accounting allowed Italy, Greece and other countries to qualify on paper, he says. And since then, as countries like France and Germany have busted the limits, he says little has been done to hold them accountable or even audit their national finances.
The bottom line in our examination is that the U.S. could certainly not join the eurozone right now; nor could most European countries, including our large-economy peers, like Germany, France and the U.K.
Some smaller peripheral European countries that are now seeking to adopt the euro, such as Latvia, Lithuania, and Poland, would be in a better position than the U.S. at this point. And absent severe budget cuts and tax increases, the U.S. will likely fall more out-of-line with Eurozone accession criteria in coming years.