Why the USA can’t join the EU

A case study of why the United States of America could never join the European Union, based on financial rules (as geo-political reasons are probably too obvious to point out).

The insanely massive public debt of the USA’s federal government, coupled with the instability of the US Dollar sparked a little debate in the IRC channel I frequent, and we decided to find out how best to compare the USA’s situation to our own in the European Union. A great baseline for such a comparison are the monetary union terms of the Maastricht treaty, signed by eleven member states who now use the Euro as currency. Of course, this only means they can’t join the EMU, but explain that to Americans. ;)    

The terms we used are:

  • Their inflation rate should be within 1.5% of that of the eurozone.
  • Their exchange rate should be stable in relation to the Euro.
  • Their annual budget deficit should be below 3% of their gross domestic product (GDP – the total output of their economy).
  • The total amount of money owed by the state, known as public debt, has to be less than 60% of GDP.

So what does this mean for the USA?

  • Inflation in US: 3.2% (source)
  • Inflation in EU: 1.8% (source )
  • For comparison, Bulgaria: 7.3% (source)

1.4% difference. That’s very close to the limit, but no deal breaker yet!

  • US Public debt: 64.7% (source)
  • Bulgaria public debt: 26.2% (source)

Ouch. Almost 5% too high for the EMU. Fumble! We now get to the current USA budget deficit. That’s the one we were most curious about. The CIA tells us:

  • revenues: $2.407 trillion
  • expenditures: $2.655 trillion
  • GDP: $13.06 trillion
  • Budget deficit in percentage of GDP = ((expenditures – revenues) / GDP) * 100 = 1.89%
  • Bulgaria
  • revenues: $12.86 billion
  • expenditures: $11.73 billion
  • GDP: $79.05 billion
  • Budget surplus in percentage of GDP = ((expenditures – revenues) / GDP) * 100 = 1.42%

1.89%. That’s pretty low, considering the war-expenses. But great fun to notice Bulgaria actually has a surplus here! The last one is the real kicker and should worry economists a lot. We have arrived at the exchange rate issues. One of the key points is that the exchange rate should be stable in relation to the Euro. However:

  • The value of the Euro versus the dollar has risen from 1.30 to 1.44 in the last 11 months, which means dollar depreciation of almost 10% over that period. 
  • The value of the Euro versus the dollar has risen from 1.16 to 1.44 since Euro trading officially started in januari of 1999, which means the dollar depreciated almost 20% over 8 years.
  • Bulgaria: In 1997, macroeconomic stability was reinforced by the imposition of a fixed exchange rate of the lev against the German D-mark – the currency is now fixed against the euro – and the negotiation of an IMF standby agreement.

It is already too late to reverse the downward cycle of the Dollar. Events will have to run their uncertain course over the next several years. With trillions of dollars now invested in exotic derivatives and packaged mortgage investments, many which have no ready market, the stage is set for a total disaster. The global financial linkage of many of these investments makes any forecast by anyone for what may happen highly uncertain. For a time, people are suggesting moving to other trade currencies like the Euro, or to ramp up trading in gold, which is much more stable.

The days of the USA being the leading economic power in the world seem to be ending. Developing powers like China and India already have a huge impact on the world economy, and the euro-zone is getting more powerful each day. I wonder what the long-term effects will be.

With thanks to Jochem for additional research. Please take this article with a grain of salt. It wasn’t written by the ECB or anything.