The European Central Bank looms large over the Euro debt crisis. Photo: soumit (flickr)

As Europe attempts to thwart a broader global recession, it is facing what many economists refer to as a trilemma, and poorer countries could be the victims.

A financial trilemma is comprised of three goals that policy makers try to achieve: (1) a stable/fixed exchange rate; (2) an economy open to international flows of capital; and (3) a sound monetary policy to stabilize the economy.

Here's the catch: In reality you can only achieve two of these goals, not all three.

In 1999, the Eurozone decided to give up the third goal, independent monetary policy. In exchange, they enjoy a common currency across 17 member nations and the freedom to exchange money and goods across borders. Though the European Central Bank creates monetary and fiscal policy for the European Union, each member nation relinquishes its own control.

This becomes an issue when a country gets into financial trouble and must defer to the European Central Bank or greater European Union. This was recently evidenced with the bailout and continuing debt problems in Greece.

Potential for problems arise due to our ever globalized, interconnected world. Eurozone policies are far-reaching, extending their grasp to neighboring emerging markets dependent on foreign dollars. With austerity measures becoming the norm, lenders are avoiding risk and could cut foreign lending in favor of keeping business in their own backyard. The Economist references a speech by the Financial Stability Board head, Mark Carney, in which he warned about the damage if the European bank were to deleverage on the world economy.

Many emerging economies in Eastern Europe depend on both foreign aid and outside investment. If the Eurozone's financial well runs dry the effect will ripple throughout Eastern Europe, even the U.S. Poorer E.U. members worry that they'll emerge the victims. French president Nicolas Sarkozy rocked the political world after his comments at a University of Strasbourg debate on November 8, where he described a proposal for a two-speed Europe, presumably divided between richer and poorer nations.

What part does the European Central Bank (ECB) play in this? That’s the question everyone is asking. Similar to the U.S. Federal Reserve, the ECB has the power and leverage to swoop in and bail out E.U. members on the brink of collapse. They are hesitating, however. Germany feels the ECB should step in only as a last resort. Many policymakers in Germany believe that the current crisis is forcing reform and thus serving a purpose, as recently expressed in The New York Times.

With optimism waning on debt solutions for the U.S. and abroad, tensions mount and consensus becomes imperative. Politics need to be set aside before any sort of real dialogue can exist. Will the E.U. decide on a two-speed Europe? Will any countries abandon the Euro? The implications for emerging markets are considerable; several outcomes could result in global recession.

A government deeply in debt is limited in it ability to implement public programs that would benefit the young and old by providing services such as education and health care. Photo: Matthew DeGalan/Mercy Corps

Recently, international creditors forgave almost $20 billion in foreign debt amassed by the Democratic Republic of the Congo. The debt was mostly accumulated under the former president, Mobutu Sese Seko, and is considered odious debt as the money was used for the President's personal amusement rather than for the benefit of the populace.

The timing of Congo's debt relief is fortuitous as the country's economy needs as much help as it can get. The country consistently lands near the bottom of the World Bank’s “Ease of Doing Business” rankings and is plagued by persistent internal conflict.

But maybe the DRC just got its big break: escaping the chains of debt may allow the country to take the first steps towards economic development and progress. The head of the central bank and monetary policy committee, Jean-Louis Kayembe wa Kayembe, certainly thinks so.

[The] cancellation of the debt which have a positive impact on central bank reserves and will also allow the state to create budgetary space...for the battle against poverty and for infrastructure, given a durable growth for the wellbeing of the population.

There are some concerns about corruption, governance and human rights abuses in the DRC. Critics argue that debt cancellation should have been used as leverage to encourage reform in the country. However, debt relief should allow for some improvements in the government's ability to implement more progressive and pro-poor policies.

U.S. soldier helps Afghan construction workers lay brick for a new classroom Photo: the National Guard (flickr)

While U.S. troops and aid workers struggle to convince Afghans that Americans have their best interests at heart, independent contractors are tearing down these efforts left and right, says The New York Times. According to the article, construction companies like Bennett-Fouch are hiring Afghan workers to rebuild local infrastructure, running up multi-million dollar debts, and leaving the country without making good on their contracts.

Jalaluddin Saeed, an Afghan businessman, said in an interview with The Times that he "was owed $1.5 million by Bennett-Fouch for four contracts to provide concrete barriers for American and NATO military bases last year." According to the article, "his life was now in danger and he had had to...move his family to avoid his many angry creditors."

Instead of causing desolation, contracting companies could bring immense positive change to Afghanistan by creating well-paying jobs for small business owners and construction workers. This would lower the 35 percent unemployment rate and help Afghans develop a sense of leadership and participation in the economy.

Contractors could look at a program run by the U.S. government for inspiration. The Afghan First policy seeks to hire and train Afghan workers whenever possible, build domestic production capabilities,pay employees in local currency and incorporate Afghan businesses into reconstruction efforts. The policy promotes local development while creating positive business interactions between Afghans and Americans.

It seems natural that private contracting companies should follow suit, attempting to strengthen these efforts rather than undermine them. Instead, The Times article suggests contractors are destroying the delicate trust that Afghans have placed in the American presence.

Hajji Layeq is just one of many Afghan shareholders that Bennett-Fouch left disheartened. “People are thinking the Americans are failing in everything,” Layeq told The Times.

Certainly in this regard, it seems they might be right.

In 1978, the poor West African country of Liberia borrowed $6 million from a New York bank. The Liberian government promised to use the money to buy and develop an oil refinery, and to pay the money back in seven years.

Today it's not clear if either of those things ever happened.

Two years after the loan, the Liberian government was overthrown in a coup, which later led to a 14-year civil war. Meanwhile, the loan was bought and sold several times, according to allAfrica.com.

But now two investment funds say they hold the note and are entitled to $20 million from the current government of Liberia — a claim upheld by a London court. Today Liberia is led by a democratic government whose president is working with the IMF and World Bank to settle old debts. The Guardian says Liberia struck deals with most of its private-sector creditors, but these two funds are refusing to settle, demanding full payment through the courts.

A representative for the Jubilee Debt Campaign, a coalition fighting for debt relief for the world's poorest countries, accuses funds like these of "profiting from poverty."

As Al-Jazeera's Barbara Serra reports:

So-called vulture funds have been condemned by several governments for preying on the world's poorest states. They buy up the debt of near-bankrupt nations at a cheap price from financial institutions. They then sue those nations in international courts for the full value of the debt, plus steep levels of interest and penalty charges. Every year, developed countries spend billions of dollars to help pay off the debts of poorer nations, but vulture funds siphon off that money for themselves.

Even the lawyer for Liberia says this is a moral issue as well as a legal one. Get the full scoop from this Al-Jazeera video:

Rice is incredibly important for delta communities. Photo: Jeremy Barnicle/Mercy Corps

Mercy Corps has started an agency blog to give a glimpse into the work, thoughts and ideas of our team around the world. Here's a post I wrote yesterday that is really appropriate for Global Envision.

Farming communities in Myanmar's Irrawaddy Delta have always followed a cycle of debt. Each year, wealthy land owners would lend farmers money, tools and cattle needed to till the soil. After the harvest, the debt is repayed and the cycle continues.

Farming is important for delta communities. The Irrawaddy Delta produces more rice than any other region in the country. Nearly everyone is employed through rice production or the fishing industry.

So when Cyclone Nargis hit the delta about a year ago, the storm not only destroyed homes, fishing boats and agricultural fields, it destroyed livelihoods.

Nargis was the worst natural disaster Myanmar has ever experienced and racked up about $4 billion in damage. Some say the damage sustained in the Irrawaddy Delta was as bad as the Indian Ocean tsunami. Emergency aid from the UN, the government and NGOs has helped shelter and feed the thousands of survivors but there's still a lot of recovery work to be done.

Today, farmers looking to start over are caught in an incredibly frustrating situation: the wealthy land owners that used to lend money and tools lost everything as well, so now there is nobody to lend. Without cattle, tools and seeds, the farmers have little chance of ever getting ahead. Adding to the situation, prices for crops are down from past years. This leaves farming communities with few options, therefore trapping them in poverty.

I first learned about this debt trap in the Al Jazeera video below. The situation is so heartbreaking, but also too common in poverty-stricken communities. Mercy Corps has helped more than 7,000 families rebuild their rice paddies in the delta. We've also given more than 25,000 people small grants to help them earn an income, which in turn helps restart the local economy and helps free these communities from the cycle of debt.

While reviewing his social security statement, W. Hodding Carter realized his family was living beyond their means. About $30,000 per year beyond their means. In Extreme Frugality: Doing the Unthinkable, a weekly article on Gourmet magazine's website, Carter journals his family's experience of trying to live a more frugal lifestyle.

Carter explains how they got into such a predicament:

Thanks to those heady days of refinancing, deft shuffling of credit-card debt, deceased grandparents, and a lucrative house sale, however, we had lived, year after year, as if we were making $120,000. Like 70 percent of our fellow Americans, we were living off our VISA cards with no means of paying them off any time soon.

Carter's family had racked up $75,000 in credit card debt while holding little equity in their house. With a $550 monthly budget for six people — after paying for his mortgage, insurance and credit card payments — the Carter family embarked on their new adventure.

Food habits were the first to change. The family stopped eating out, made their own bread and shopped in bulk. They bought chickens for the free eggs and fertilizer they provide. Their oil furnace was replaced with an unused wood stove. Carter is excited about starting "anew", even though the transition has been difficult.

The Carters are not alone. The average American household owes more than $8,200 in credit card debt and — until the economic crisis hit — was saving only about one percent of disposable income. But there are signs that things are turning around.

Government figures show that over a nine-month period ending in December, the personal saving rate more than tripled to 3.6 percent. Harris Poll findings reveal that 54 percent of households spent less on recreation and entertainment, while half of Americans shopped at discount stores in 2008.

Will people continue this increasingly thrifty mindset after the economy rebounds, or fall back into another spending craze? The Carters have been able to successfully change their ways for two months — but will the novelty of gathering chicken guano for fertilizer lose its luster over time?

The Carter's stopped eating out and started buying in bulk. Photo: bcmom (flickr)

A stack of bills. Photo: ThePants (flickr)

As credit-card debt, the loss of homes, and predatory lending are leaving many Americans in financial crisis, financial training for the underprivileged has never been in greater need.

Now, a movement within social work to provide clients with the tools to make financially responsible decisions — and to understand why they get into financial trouble in the first place — seems to be taking off.

David Crary with the Seattle Times reports there are financial think tanks in St. Louis, new on-line certificates in financial social work, and financial training at many social work universities.

Margaret Sherraden, a professor at University of Missouri-St. Louis has long advocated for financial training in social work schools. Sherraden explains,

The growing field of economic empowerment represents an exceptional opportunity for the social work profession. Arguably, no other profession is as well positioned as social work to assume leadership.

Getting to the roots of why people spend the way they do is a main objective for those in financial social work.

Robin Mckinney, a University of Maryland social-work graduate, explains that much of our financial education is focused on numbers, but emotions play an important role in making financial decisions.

Although long overdue, approaching financial crisis from a behavioral perspective makes sense as a more sustainable method to addressing debt for those in economic need.

In Japan, her overnight hospital stay would only cost her $10. Photo: Hamed Saber (flickr)

“Every 30 seconds in the United States someone files for bankruptcy in the aftermath of a serious health problem,” according to the National Coalition on Health Care.

The United States spends the most in the world on health care – about $2 trillion annually. Yet, the U.S. ranks 37th in world in terms of the quality and fairness of its health care, according to the World Health Organization (WHO).

The U.S. has no comprehensive national health insurance system. Those who have insurance get it through their employers, government programs, or private suppliers. However,there are 47 million people that are not insured. Furthermore, millions more are underinsured, which has led to a growing epidemic of medical debt and bankruptcy in the United States. A Harvard University report found that about 50 percent of all bankruptcy fillings were partially due medical debt.

In light of this growing problem, correspondent T.R. Reid traveled with Frontline to investigate if other free-market countries were having the same problems with medical-related bankruptcy. What he found was shocking.

Traveling to the United Kingdom, Japan, Germany, Taiwan, and Switzerland, Reid found that health-related bankruptcy is almost unheard of in these countries. Unlike the United States, all five of the visited countries have universal health care and pay a lot less.

Switzerland spends the second-highest amount on health care, but the government still spends 44-percent less per capita than the United States.

The full program, "Sick Around the World," is available online, along with a list of resources and a Q&A with Reid.

All the countries have varying degrees of private, market-based health care, like the United States. They, however, also limit the level of freedom the health care market can have. According to Frontline:

First, insurance companies must accept everyone and can't make a profit on basic care. Second, everybody's mandated to buy insurance, and the government pays the premium for the poor. Third, doctors and hospitals have to accept one standard set of fixed prices.

It's unnecessary for health care costs to send hundreds of thousands of Americans into debt each year. As Reid has learned, it is possible to make health care universal and affordable in a free-market economy.

Photo: Chris Hondros for Mercy Corps

Like it or not, Kosovo is independent. Yet its survival depends on whether or not it will be able to build a functioning and sustainable economy, a goal that remains far from certain. Post-independence Kosovo faces daunting economic challenges, including weak infrastructure, unemployment rates of nearly 50 percent, and economic corruption that has been ranked as fourth worst in the world by Transparency International.

Although some in Kosovo are confident about prospects for economic growth and development, many estimate that it will be another ten to fifteen years before Kosovo can support itself economically. Commentary from the World Politics Review argues that independence may actually exacerbate Kosovo's economic problems:

While Kosovo may be able to get loans now from the IMF and World Bank, the last nine years have shown that aid alone is not going to do it. Kosovo has already received 25 times per capita the amount of aid given to Afghanistan, and the economy is still in shambles. Furthermore, it is a safe bet that Serbia will obstruct investment in Kosovo, first by shutting down the commercial border between the countries, and then by challenging privatization plans in the World Court and other international bodies. Late last week, Serbia indicated that it will continue to pay Kosovo's debts to the international community, which will amount to $70 million this March alone. Serbia's only reason for doing this is to preserve its legal claim to the territory and its right to tax any development projects. The legal wrangling likely to result will tie up proposed projects for years, and chase away the few investors Kosovo might be able to attract.

In a land where three farmers commit suicide per day, microfinance is making positive difference in Vidarbha- India's primary cotton growing region. Over 500,000 female small entrepreneurs there are determined to lift their families from the burden of debt by forming microfinance groups and finding alternative ways to make an income.

The micro credit banks urges them to save with them, with each member depositing money, ranging from 50 rupees to 1,000 rupees every month. The bank in turn provides credit to the group, whose members borrow money from the group depending on their needs.

Thatcher Cook for Mercy Corps

A sobering piece on Chinese/American trade by James Fallows in this month's issue of The Atlantic:

Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China.

Fallows concludes:

Like so many imbalances in economics, this one can’t go on indefinitely, and therefore won’t. But the way it ends—suddenly versus gradually, for predictable reasons versus during a panic—will make an enormous difference to the U.S. and Chinese economies over the next few years, to say nothing of bystanders in Europe and elsewhere.