An Entrepreneurial Spin on the European Debt Crisis

If you follow the financial news at all you are doubtless aware of the European debt crisis.  Your awareness probably includes the notion that somehow the problem relates to the difference between European monetary union (captured in the notion that the Euro is the currency of all of the members of the European Community) and the contrasting lack of European fiscal union (captured in the notion that the various members of the European Community vary from the fiscally disciplined, e.g. Germany, to the spendthrifts, e.g. Greece).  Beyond that frontier of understanding the details can get confusing and contentious.

So, herewith, what is going on in terms most entrepreneurs can understand.

Consider the entrepreneur starting out on a new venture that needs money for, say, a copy machine.  The entrepreneur has sensibly formed the new venture as a corporation (“Newco”), or some other entity (LLC, partnership) that insulates the entrepreneur from liability for the debts of Newco.  Alas, when the entrepreneur Newco needs a copy machine and needs credit to buy it the typical response from the vendor is not “great” but more likely “ok, assuming you, Ms entrepreneur, sign a personal guarantee.”  Basically, the  vendor is saying “Newco is not credit worthy, but the entrepreneur is, so we’ll lend the money to Newco if the entrepreneur agrees to personally guarantee that the debt will be paid.”

Ok, what is going on in Europe is just like the above situation, only substitute Greece (or Italy, or …) for Newco; substitute Germany for the entrepreneur; substitute massive deficit spending for the copy machine; and substitute the global investment community for the vendor.  You should get it – the European debt crises is all about whether fiscally disciplined countries like Germany are willing to guarantee the debts of spendthrift countries like Greece.

Now, I suppose if the spendthrift countries could convince countries like Germany they would themselves become fiscally disciplined maybe the Germans would play the game.  But the only way, realistically, to do that is for the Greeks to let the Germans have ultimate authority to control the spending (and tax) policies of Greece.  Does anybody really think that is going to happen?  Bygones may be bygones, of course, but I don’t think the Greeks will let themselves be governed by the Germans.  And I am even more convinced that the Germans will not want to guarantee the debts of every spendthrift country like Greece in the European Community.

So what is going to happen?  Well, the timing is hard to say, but my take is that the entrepreneur/Germany will ultimately not agree to guarantee the debts of Newco/Greece, and the vendor/investment community will ultimately not agree to provide the copy machine/credit to Newco/Greece.  And chaos will reign as the European Union – the monetary part of it at least – implodes.

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About Paul A. Jones

Serial venture capital backed entrepreneur, angel investor and venture capital investor; Co-chair of the VentureBest team at Michael Best & Friedrich, LLP.
This entry was posted in Entrepreneurship, Public Policy. Bookmark the permalink.

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