Debt crises

Europe and America, increasingly alike

Jul 6th 2011, 13:52 by M.S.

The Economist

GIDEON RACHMAN had a good thumb-sucker in yesterday's Financial Times arguing that the current political-economic crises in America and Europe are basically two sides of the same crisis. "In Washington they are arguing about a debt ceiling; in Brussels they are staring into a debt abyss. But the basic problem is the same. Both the US and the European Union have public finances that are out of control and political systems that are too dysfunctional to fix the problem," Mr Rachman writes. I have some quibbles about the way he frames the economic issues as a generalized problem of "an unsustainable and dangerous boom in credit", viz homeowner credit in America and the overdrawn borrowing of Greece and Italy in Europe.

This seems to smooth over a lot of differences a bit too easily; the American housing bubble was fueled by CDOs, but the economic problems in Europe aren't about an asset bubble caused by Greek or Italian government borrowing, and to the extent that the problems are due not to asset bubbles but to financial interconnectedness, the interconnectedness caused by private-sector issuance of CDOs and CDSs isn't really the same as the interconnectedness caused by the adoption of the euro across 17 countries.

But I think this part is worth coming back to from various angles:

...on both sides of the Atlantic, the economic crisis is polarising politics, so making it much harder to find rational solutions to the debt problem. Populist movements are on the rise – whether it is the Tea Party in the US or the Dutch Freedom party or True Finns in Europe.

The idea that Europe and the US represent two faces of the same crisis has been slow to sink in because, for many years, elites on either side of the Atlantic have stressed the differences between US and European models... The US political debate still uses the otherness of “Europe” as a reference point. The accusation that Barack Obama is importing “European-style socialism” is used to paint the president as un-American. Some on the left do indeed look to Europe as a place that does things differently and better on some issues – such as the provision of universal healthcare.

Yet the similarities between the two regions’ dilemmas are now more striking than the differences – mounting debt, a weak economy, an increasingly expensive and unreformable welfare state, fear for the future and political gridlock are the common points.

Again, I have a couple of quibbles here about whether the European welfare state is too expensive for Europe to afford. For Greece and Italy, clearly. But for Germany (6% unemployment, 5% GDP growth), the Netherlands (5% unemployment, 2.8% growth), and Sweden (7% unemployment, 5.5% growth), which all have very manageable levels of public debt, things look more sustainable. What I think is definitely right here is the assessment of the public mood, the sense of anxiety, and its connection to political radicalism. And I also think Mr Rachman is right to take the next step and ask what the combined political and debt crises of Europe and America look like from a Chinese perspective: "Among Chinese leaders and intellectuals, it is now standard practice to suggest that westerners of all sorts should stop trying to 'teach China lessons' – given the depth of their own political and economic problems."

I actually think the issue goes beyond the increasing unwillingness of Chinese authorities to even pretend to listen to Western complaints about human rights. Unless you buy the Nouriel Roubini argument, and I don't, China is going to be the world's largest economy within ten or 15 years, bigger than America or the euro-zone. And, in case anyone has failed to notice, it's a Communist country. Every year China continues to grow, the case that countries need to be democracies in order to become wealthy and developed becomes more tenuous. In fact, what's happening both in America and in the EU at this point is raising the possibility that democratic governance may in some modern situations be inimical to competent economic stewardship. The incentive structure created by democratic political competition in an internet-era media society may actually be driving countries towards fiscal self-destruction. We're increasingly getting a polarised, viciously divisive, intellectually bankrupt, wildly irresponsible populism that lives up to every negative caricature of multiparty democracy that a CCP ideological hack could dream up. That's certainly what the behaviour of the tea-party-driven GOP and the Party for Freedom suggests.

Last week Clive Crook had a piece, also in the FT, arguing for America to create more automatic fiscal stabilisers to take the issue of stimulus during recessions out of the hands of Congress; the less economic policymaking in the hands of that "broken institution", he wrote, the better. I agree with the point, but it says something pretty troubling about the place of democratic rule on the world stage at this point in history. It seems to me that if we're at a point where we are increasingly calling for important policymaking to be taken out of the hands of our elected representatives, we need to start addressing the problems that are rendering our representative institutions unworkable. The case for democracy is a moral one, not an economic one; but if democracies can't handle responsible governance, either on economic or more general policy issues, then governance will gradually become less democratic, and the moral case will make little difference. And this is where Europe and North America, the places where democratic rule is most deeply rooted, ought to see themselves as being on the same side.

(Photo credit: AFP)