Is Greece Europe's California?

Or as a rash of recent articles have put it, is struggling California the USA's answer to Greece? Of course, there are many comparisons that extend beyond beautiful weather, rocky terrain and perfect beaches, as I mentioned in a previous post.

It's a race to see who will default first, according to this article in the Wall Street Journal. It's one of many pieces in the last few days to make the point that equating the two economies is comparing apples and oranges - or olives and oranges, I guess.

According to the WSJ, US states play too important a role to let flounder:

"...one third of the $3 trillion of total municipal debt in the U.S. is held by individuals and mutual funds. Thus, the Feds would likely act to prevent widespread defaults from wiping out a significant amount of household wealth in the U.S. and causing other investors to flee the market in fear, according to Roubini.

By contrast, Greece and the other struggling nations that use the euro can’t take such a euro-zone backstop for granted, something seen today in Fitch’s downgrading of Portugal by one notch and its issuance of a negative outlook for the euro-zone country."

The Eurozone has no obligation to bail out member states, unlike the backup the US government will no doubt provide. In the context of the US, California is certainly "too big to fail"...it has the distinction of being the largest economy in the country, and the 8th largest in the world.

The New Yorker also had an excellent analysis:

"The European model would do more harm than good, as American history shows: in the early eighteen-forties, after the bursting of a credit bubble, many states found themselves in a debt crisis. The federal government refused to bail them out, and eight states defaulted—a move that cut off their access to credit and helped sink the economy deeper into depression.

The U.S. did then what Europe is doing now, putting the interests of fiscally stronger states above the interests of the community as a whole. We seem to have learned our lesson. If Europe wants to be more than just Germany and a bunch of other countries, it should do the same."

The US depression the author referred to was in the 1840's - what major event occurred soon thereafter? Knowing the current (and historical) volatility of many fiscally-troubled European nations, it's not a stretch to envision arms being taken against the Union. I wonder what colours they will choose for their uniforms. The Greeks have dibs on blue.