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President Barack Obama recently told members of Congress and the public:
If we don’t come to an agreement, we could lose our country’s triple-A credit rating, not because we didn’t have the capacity to pay our bills – we do – but because we didn’t have a triple-A political system to match our triple-A credit rating.
Prophetic words! Standard and Poor’s in the end cited the US political carry-on rather than the ability to repay debt as the reason for downgrading.
George Friedman, the CEO of Stratfor, maintains that the GFC and the current economic strife (all of a piece) is a crisis of political economy. It started with the behaviour of the financial elites but now the focus is on the adequacy of the political systems in the US, Europe and China to deal with the situation. But, he says, crisis does not mean collapse:
The United States has substantial political legitimacy to draw on. Europe has less but its constituent nations are strong. China’s Communist Party is a formidable entity but it is no longer dealing with a financial crisis. It is dealing with a political crisis over the manner in which the political elite has managed the financial crisis. It is this political crisis that is most dangerous, because as the political elite weakens it loses the ability to manage and control other elites.
Of course, these three large entities are related to each other. China needs the exports to the US and Europe to maintain economic growth, but growth, it is said, is necessary to maintain political stability. Friedman thinks that China is unstable politically and economically and will indeed collapse with the US the prime beneficiary.
Nobel Laureate Michael Spence has a more sanguine view, seeing the US and EU as cooperating with the new Asian powers rather than competing, but he too has important caveats and perhaps neglects the political realities of China.
In the US, while one would wish the adults were in charge, the political system still works in a fashion. There has been a political accommodation. And the US dollar still acts as the world’s main reserve currency. Immediately after the credit rating downgrade there was a run on purchasing US Treasury notes, still seen along with gold as the ultimate safe haven.
Much of the focus is now on Europe, where confidence seems elusive. Every time a patch is applied the wound re-opens. Any number of commenters will line up to say that Europe’s institutions are not up to dealing with the kind of crisis they face. The 17-member Eurozone has a common currency, but now needs further fiscal and political integration to resolve its problems and create confidence. Kenneth Rogoff finds it
hard to see how the single currency can survive much longer without a decisive move towards a far stronger fiscal union.
Europe seems stuck half way on the road to full democracy, unable to move decisively forward or back. Larry Siedentop sees Europe as suffering from a crisis in belief:
The process of integration has reached the point where it ceases to touch merely interests and begins to touch identities. In that sense the root cause is moral, a crisis of belief. Are Europeans willing to shed national identities? They have discovered that integration is not a cost-free process. It threatens their sense of empowerment as the citizens of nation states. They have come to feel that integration is not something they are doing, but rather something that is happening to them. This is not bleak nationalism, but a concern for self-government.
Political leaders must act in the interests of Europe as well as in the interests of their constituent nations, but politically they are only answerable to their own electorates. Public opinion has moved decisively against further integration. The time required to build a genuine European identity and constituency is not available. Any moves towards integration must be done without consulting the people.
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In this context, the relationship between the odd couple, Angela Merkel and Nicholas Sarkozy, is crucial. Before the Eurozone crisis meeting last month Merkel and Sarkozy met for seven hours to align their proposals.
Broadly this process is undemocratic in at least two ways. What Merkel and Sarkozy decide, and the conditions they apply, must be pretty much accepted by the mendicant countries. Then the various parliaments, including those of France and Germany, need to rubber stamp the decisions. Effectively they have no choice.
Der Spiegel has a more detailed account of the meeting and the political difficulty it causes the German government. But it seems the tendency to bifurcate with southern Europe lining up behind the French and the north supporting Germany remains.
For the record, this is what was decided. Immanuel Wallerstein identifies how this met their respective agendas and much else besides. He sees the result as “a compromise that moved Europe closer to a common governance structure” and perhaps built a lifeboat for the troubles to come.
Lawrence Summers thinks full political integration is not necessary for a resolution of the crisis, but sees fuller integration evolving step by step through the crisis. The whole interview is worth reading. He has much to say about Europe and the United States, where taxes are too low to repair the roads and to send kids to school more than four days a week in some places.
Satyajit Das on Late Night Live thinks that the firewall around Italy, the eighth largest economy in the world, will not hold and that France and Germany will be in play, as they aren’t big and healthy enough to underwrite Italy. He believes it inevitable that the problem countries will have to leave the Eurozone. Also he thinks we will have 30 years of stagnation during which the standard of living will be reduced by 30%.
Summers says that “confidence is the most important asset in any financial system”, but in this commentary on the implications of US decline Wallerstein says we won’t get it:
We have moved into an era of acute, constant, and rapid fluctuations – in exchange rates of currency, in rates of employment, in geopolitical alliances, in ideological definitions of the situation. The extent and rapidity of these fluctuations leads to an impossibility of short-run predictions. And without some reasonable stability of short-term (three years or so) predictions, the world-economy is paralyzed. Everyone will have to be more protectionist and inward-looking. And standards of living will go down. It is not a pretty picture. And although there are many, many positive aspects for many countries because of U.S. decline, it is not certain that, in the wild rocking of the world boat, other countries will in fact be able to draw the profit they hope from this new situation.
Joseph Stiglitz thinks there was scope for governments to act, but confidence has evaporated and the austerity fetish has paralyzed possible action. Unfortunately:
Now the scale of the problem is apparent, a new confidence has emerged: confidence that matters will get worse, whatever action we take. A long malaise now seems like the optimistic scenario. (Emphasis added)
Wallerstein says:
It is time for much more sober long-term analysis, much clearer moral judgments about what the analysis reveals, and much more effective political action in the effort, over the next 20-30 years, to create a better world-system than the one in which we are all stuck today.
Stiglitz says we need to turn left for growth, as well as opportunity, equity and justice. Turning right has seen the elites shoring up their positions, massive inequality and the waste of human potential as opportunities diminish or vanish for the greater part of the population.
Menawhile yesterday Merkel and Sarkozy were at it again in Paris, deciding what’s next for the Eurozone. Here are the summaries from the BBC and Der Spiegel. In brief:
- A new European financial transactions tax
- A body created under the existing European Council to co-ordinate financial policy making
- Germany and France to synchronize corporations tax
- Member states to incorporate in their constitutions rules about budget deficits
‘The markets’ saw this as incremental and insufficient to the immediate problems. They wanted a Eurobond backed by all governments to cover individual country’s debt and/or an increase in the existing the European Financial Stability Fund (EFSF). Formerly Merkel wouldn’t even talk about Eurobonds. Now she will, but Sarkozy has agreed that they should be left to a later phase.
Even the optimistic Michael Spence said we need if to “act decisively and aggressively” to avoid having more than one rough decade. What Merkel and Sarkozy did seems short of the mark. It’s difficult to see where such concerted action is going to come from politically in any of the main power centres. We need Rudd to stir up the G20.