By Philip Stephens
I am never quite sure whether to be depressed or consoled when I cross the Atlantic. Europe is in a fair mess. Travelling to the US reminds me that this is a shared affliction. Political paralysis rules. The maddening thing is that everyone – maybe that should be almost everyone – says they know what must be done. They just won’t do it.
Yet talk to European policy makers, whether from the creditor north or the debtor south, and, strange though it may seem, they pretty much agree on the essential elements of a serious rescue plan. Peripheral nations such as Italy, Spain and Portugal will have to reform radically the supply side of their economies. Restored competitiveness must be accompanied by a credible effort to pay down public deficits and debts. The austerity, however, cannot all be front-loaded. Europe is sliding back into recession. In the short term, the periphery needs open-ended financial support and economic growth to avoid a classic debt trap. Longer term, the eurozone will have to add economic to monetary union.
This should be uncontentious, if not without its political challenges. The trouble arises over sequencing. Angela Merkel insists the fiscal squeeze and structural reforms must come first – for the avoidance of moral hazard and for the reassurance of German voters. Italy’s Mario Monti and colleagues in Spain, Portugal and beyond respond that deeply unpopular policies are possible only with an unambiguous German commitment to provide a bridge to fiscal union. Germans refuse to bail out “feckless” southerners, but Italian and Spanish voters will bear the pain only if they see a route back to prosperity.
Both sides have a point. The missing ingredient is trust. What’s needed is a plan to revive economic growth and to strengthen the credibility of medium-term fiscal retrenchment. It is surely not beyond the wit of the politicians to recognise as much. As things stand, markets are unpersuaded both of Germany’s willingness to sustain the euro and of the political will of debtor states. No wonder the mood is bleak.
In the US, political gridlock has become a way of life. The presidential election promises to be a depressing affair. Democrats struggle to hide their disappointment with Barack Obama’s first term, and the president’s aides are still casting around for a slogan to encapsulate his claim to a second.
Republicans have opted for Mitt Romney as the only choice from a line-up of otherwise certain losers. The general view says that, now the Republican primaries are out of the way, Mr Romney will tack back towards the centre. Conservatives in his party have other ideas.
True, America’s problems are not as acute as those of the eurozone. The US economy is growing and unemployment is on a (slightly) downward trend. The dollar’s role as the world’s reserve currency is always a help. Yet policy makers are looking out at budget deficits for as far as the eye can see. Somewhere, there is a limit to the amount of debt that can be borne even by the world’s most powerful economy.
Once again, the answer is obvious enough. I have heard it from both Republicans and Democrats. If Europe needs less upfront austerity and more long-term belt-tightening, the US needs, well, anything that might be called a fiscal strategy. Returning the government’s finances to a sustainable path will require tax increases and cuts in spending. There is, of course, a legitimate political argument to be had about the balance between lower spending and higher taxes, but both are ultimately unavoidable.
You will not hear much about this during the campaign. Mr Obama has jettisoned the recommendations of his own independent commission for a balanced approach to deficit reduction. Raise taxes on the super-rich, his manifesto runs, and all will be well. There is a good case for what’s known as the Buffett rule, but it will not fix the deficit.
Mr Romney is a prisoner – willing or otherwise – of the Tea Party ideology that views all and any tax increases as a fundamental threat to the American way of life. Yet even the staunchest conservatives recoil from the big cuts in programmes such as Medicare that this implies.
All these politicians have their excuses. European leaders protest that no one could have foretold the scale of the shock that hit the eurozone. Reconciling national with European interests is not easy. In the US, mainstream Democrats and Republicans lament the passing of the bipartisanship on which the US political system ultimately depends.
It is true also that the expectations gap between what governments can do and what their voters expect has widened. Powers that once resided in nation states have been lost to global economic integration. For much of the time, as François Hollande will discover if he wins the French presidency, the bond markets rule.
The problem, one European prime minister has remarked, is how to do the right thing and then go on to win an election. The present bunch of leaders seems to prefer being imprisoned by circumstance. Perhaps I have reached that age when the past always reappears through rose-tinted lenses, but wasn’t there a time when politics was about shaping circumstance?
firstname.lastname@example.org Copyright The Financial Times Limited 2012.
See online: A transatlantic tale of paralysis