How European Leaders Are in the Same Boat as Obama When it Comes to Debt

  • Share
  • Read Later

France's President Nicolas Sarkozy and German Chancellor Angela Merkel attend a joint press conference at the Elysee presidential palace in Paris, France, August 16, 2011. (Photo: Gao Jing / Xinhua / Corbis)

A few of you, or at least your 401(k)s, may have noticed that financial markets plummeted again on Thursday. European markets closed at or near two-year lows across the board and the Dow closed down more than 400 points.
Asian markets Friday morning opened in the tank: the Nikkei index tumbling more than 2.5%, Sydney down 3.5%, Seoul a whopping 6.2% and Hong Kong’s Hang Seng was down more than 600 points, or just over 3%.

What caused this? With President Obama on vacation and the U.S. Congress in
recess, this week’s unjoyful ride was prompted by fears out of Europe, which
is struggling with many of the same issues as the U.S.: a debt crisis
that needs to be fixed lest it overflow into full blown inflation and
currency crises, mixed with an unhealthy dose of double dip recession.
Austerity, as they call it on this side of the pond, doesn’t come easily
when you have no central government to bail out the states ­ as the U.S. did
a year ago.

German Chancellor Angela Merkel traveled to Paris this week to meet with
French President Nicholas Sarkozy. Their plan for stricter fiscal controls
and quicker steps to tax harmonization between the European Economic
Community’s 27 members was quickly met with derision by the markets, in part
prompting the falls.

There are obvious remedies that could be taken that would immediately calm
the markets, such as issuing Eurozone bonds, akin to U.S. Treasury bonds,
that would be underwritten by all 27 countries. Another round of painful
cuts and tax increases could also ease the crisis. But, as in the U.S., the
problem isn’t fiscal; it’s political.

Richer European countries such as France and Germany are unwilling to issue
Eurozone bonds because it would, as Sarkozy said, put them “in the position
of guaranteeing debt they do not control.” France and Germany don’t
particularly want to underwrite new platinum cards for debt-stricken Greece
and Italy unless they guarantee that they would only use them judiciously.
Lacking any real enforcement to these pledges, it would be like promising
Santa they’ll be good.

As in the U.S. much of the political quandary comes from the essential
question: how big a role should government play in people’s lives? Europe
has a much bigger social net than the U.S., one that it can ill afford these
days. The debt-stricken states have already slashed benefits enormously ­ to
an unprecedented degree. But the richer states are now in the position of
having to ask themselves what they need versus what they want. Does London
need 32,500 police officers? Should the French retirement age be 60? And can
Germany afford a promised overhaul of health services? The answer to all
these questions this summer has been no. But even more painful cuts may soon
be needed if European leaders can’t convince the markets that they can
successfully defend the Eurozone.

As in the U.S., the cuts have been painful, but easier done than tax hikes.
Don’t get me wrong, most of Europe has taken a much more sensible approach
to deficit reduction than the U.S.: almost every country has enacted a
mixture of cuts and new tax revenues. But this is akin to various states
raising taxes in the U.S., whereas raising EEC-wide taxes has been more
controversial. One proposal put out this week by Merkel and Sarkozy met
immediate stiff resistance in Britain. The two proposed a financial
transactions tax across all 27 European countries ­ a move that would cost
British financial institutions nearly $22 billion as 70% of all European
financial transactions happen in the U.K.

So, without new taxes, new debt or new savings, the European Union is left
in much the same place as the United States: on class five rapids without
any paddles.