This morning you will have woken up from the weekend to read that Apple has more cash in their accounts than the United States has left before it runs up against its debt ceiling. You also awoke whereas, in a euro zone up to its neck in debts, the most expensive soccer player in the world, Cristiano Ronaldo of Real Madrid, is being offered to Spanish bankers as collateral for emergency loans.

Over the weekend in Washington, Democrats and Republicans have hammered out an “interim framework agreement” to raise the public debt ceiling. More negotiations will continue. The euro zone had it pretty tough the previous weekend too, when a new rescue plan for Greece was approved.

No reason for optimism

Don’t start celebrating just yet. We mustn’t forget that the greatest debts of developed economies arose over three historical periods: the first followed the Napoleonic wars, the second came after World War II – and the third arrived yesterday, is with us today and will be around tomorrow too. A few states can handle this situation. Certainly, this is merely hypothetical, for anyone can still go bankrupt.

America now has a public debt somewhere around 100 percent of its GDP. Euro zone debt is around 88 percent of GDP. For the sake of comparison, China’s public debt is at 17 percent, thanks to the strength of its economy, while in Brazil and India it’s at 66 percent, and in Russia at 11 percent.

Three fundamental differences

There are three crucial differences between the United States and the euro zone:

  1. The first is the possibility of debt financing – so-called liquidity. Like the federal government of the US, some individual states can also finance debt more cheaply than members of the euro zone. Like the United States as a whole, indebted California or Illinois can now borrow for five years at around 2-4 percent interest. Germany is in a similar situation. Greece, Ireland and Portugal, however, would be unable to get an interest rate below ten percent. A comparison with the rest of the world works out similarly. Japan’s public debt stands at 233 percent of GDP, but it can still issue bonds more cheaply than Italy, which has a debt of “only” 121 percent of GDP. The UK, with a public debt currently at 83 percent of gross domestic product, can issue bonds at lower interest than Spain, whose debt stands at 68 percent of GDP.

  2. Between the U.S. and the EU there are also big differences in policy options. In the United States they certainly do not have the recipe for success, and everything can still go wrong. Nonetheless, unlike Greece & Co., they have it in their own hands. America is threatened more from within: a year before elections, politicians are jockeying for position. Still, the world’s investors and speculators remain willing to roll over their debt cheaply. For the Greeks, though, investors and speculators are sizing it all up from the outside – and remain frankly unwilling to finance the Greek debt. And if they do so, they will demand punitive interest rates. If the euro zone is to get the situation under control, it needs to clearly define its vision – either Greece and the other super-indebted states will go back to their own currency, or the euro zone will turn more federalist and we will end up with a common European Ministry of Finance and common bonds.

  3. The third big difference is the solvency of the country concerned. In solving each specific debt problem one must distinguish between problems of solvency and problems of liquidity. When someone has a liquidity problem, he needs a quick loan to tide him over – in the case of a country, loans keep the economy running. Greece, however, is insolvent. The problem of insolvency must be solved by having the country begin to generate its own revenues – simply to earn the money to pay those debts. And in this respect, again, the United States have it easier than the euro zone, which is shown clearly by the example of Greece: Greece must have businesses that thrive at selling their products, and especially at selling them abroad – because the domestic economy is in recession (first-quarter GDP has contracted by 5.5 percent year-on-year), unemployment is high (16 percent) and the state is to lay off more employees.

Compared with 2005, unit labour costs in Greek industry are now 34 percent higher. In Germany they went up by only six percent, and in America they have remained as they were in 2005. In Greece, entrepreneurship is at zero and all suffer from dependence on the state. Without a competitive industry, businesses fail to generate revenues from exports, and so nothing comes in to pay back long-term debts.

Only the Chinese will be taking any pleasure from this Monday – because they know that, when they fall into recession and need help themselves, they will be able to make ruthless use of all those bonds and shares they bought in US and eurozone companies.