America and Europe Sinking Together

06 July, 2011

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. America and Europe are in the same sinking boat.

The debt debates underway in the US and the EU are so inward-looking and overwrought that surprisingly few people are making the connection. Yet the links that make this a generalised crisis of the west should be obvious.

On both sides of the Atlantic, it is now clear that much of the economic growth of the pre-crisis years was driven by an unsustainable and dangerous boom in credit. In the US it was homeowners who were at the centre of the crisis; in Europe, it was entire countries like Greece and Italy that took advantage of low interest rates to borrow unsustainably.

The financial crash of 2008 and its aftermath dealt a blow to state finances, as public debts soared. In both Europe and the US this one-off shock is compounded by demographic pressures that are increasing budgetary pressures, as the baby-boomers begin to retire.

Finally, 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 USor 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. I have lost count of the number of conferences I attended in Europe, where the debate was between two camps: one that yearned to go for US-style “flexible labour markets” and another that was passionately defending a European social model that was defined against America. Europe’s political debate was similar. There was a group that wanted to see Brussels emulate Washington and become the capital of a true federal union; and there were those who insisted that a United States of Europe was impossible. What both sides shared was the conviction that economically, politically and strategically, the US and Europe were different planets – “Mars and Venus”, as Robert Kagan, an American academic, put it.

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.

The US struggle to control the costs of Social Security and Medicare will seem very familiar to European leaders, who are also battling to cut spending on pensions and healthcare. Many Europeans used to believe that American politicians had a huge advantage because they were operating in a truly federal system. Some still argue that the only way to stabilise the euro in the long term, is to move towards a “fiscal federalism” modelled on the US. However, at the moment, the politics of Washington are even more dysfunctional than those of Brussels. The seeming impossibility of having a serious debate about debt and spending (let alone actually solving the problem) makes the notion that the US political system is a model for Europe look laughable.

Of course, there are still marked differences in the debates on either side of the Atlantic. The dollar has a solid history of credibility behind it. The euro has been around for little more than a decade. The political division that is most responsible for paralysing the European system is between nations. But there is no parallel in the US debate to the bitter divide between Greeks and Germans. In Europe, the idea that tax rises might be part of the solution to soaring debts is uncontroversial. In America, Republican opposition to the very notion of tax increases is at the centre of the political argument.

Fixated by their own problems and differences, Americans and Europeans have been slow to see the connections between their twin crises. But analysts in the rest of the world are much more likely to spot the common trend. 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.

Chinese critics of the west see the dilemmas of Europe and the US with the cruel clarity afforded by distance. However, their pride and confidence risks glossing over the extent to which the rise of China, India and the rest has depended on a prosperous and confident west. If the western illness worsens, there will be a temptation to try new and more radical cures. Those may include a drive towards protectionism and capital controls. If globalisation goes into reverse then China may experience its very own economic and political crisis.

 

 

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America and Europe Sinking Together

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