Kick the can? Or the economic bad habits?
WASHINGTON -- The world faces a near-perfect financial storm of unprecedented proportions. Europe and the United States face debt and deficit problems that are coming to a head at the same time, threatening to plunge both economies into recession.
There is a single unifying theme to this transatlantic crisis: a profound failure of economic governance on both sides of the Atlantic.
For Europe and the United States to get their fiscal houses in order, they must simultaneously fix the ways they tax and spend. Both America’s economic governance, with its roots in 18th century concepts of Congressional preeminence and federalism, and Europe’s unwieldy division of monetary and fiscal responsibility, barely a decade old, are not up to the challenges of a global economy driven by international capital markets that can mercilessly punish fiscal shortcomings.
The recent economic downturn exposed the fraudulence of the Greek government’s accounting, the lack of Portugal’s competitiveness, and the hollowness of Ireland’s real estate boom. Meanwhile, Washington’s spending to forestall a Depression pushed U.S. public debt to unsustainable levels.
Yet three years after this downward spiral began neither Europe nor the United States is on top of their problems. Greece faces almost inevitable default on its sovereign debt, with the danger it could pull down with it Portugal, French and German banks, and the euro. And America risks defaulting on its debt, raising the cost of credit for all Americans for years to come.
In the face of this crisis, European and American officials have repeatedly kicked the can down the road, putting off until tomorrow decisions that should have been made today. And they are likely to do so again this month.
When first faced with the Greek, Irish, and Portuguese debt problems, European leaders dragged their feet and then bought time with inadequate bailout packages. Debt restructuring and bank recapitalization to shore up the European financial system were postponed because they were too difficult. Now, facing new concerns about the solvency of Spain and Italy, Europe appears likely to take half measures that staunch the bleeding, but do not cure the patients.
Similarly, for several years Washington has faced a growing mismatch between spending and revenues. But as recently as last December’s budget agreement, the White House merely stitched together a compromise that delayed the day of reckoning. Now, facing the need to raise the national debt ceiling, Congress is scrambling to come up with a compromise that will simply get politicians past the next election, not create a framework for resolving the U.S. fiscal situation.
There is a dangerous mismatch between the need for both Washington and Brussels to make tough fiscal decisions and the needs of their economies.
The U.S. Constitution gives Congress the power to tax and to spend. But Congress frequently dodges that responsibility by failing to pass a budget. Rather, to demonstrate its symbolic commitment to fiscal forbearance, it has created a periodic vote to raise the national debt ceiling, which has needlessly created the current crisis. Moreover, the United States has heedlessly tied its hands in its search for new revenues. A national value-added tax, which would generate much-needed revenue, is off limits because in America’s federal system sales taxes are the jealous preserve of the states.
Europe created a single currency and a common monetary policy without a common fiscal policy to back it up. Without the power to tax or to raise money through the issuance of euro bonds, Brussels lacks the funds necessary to stabilize the European economy in a time of crisis or to fix the financial system by recapitalizing weak banks. It must resort to passing the hat among national governments, which has led to stopgap measures that fail to fix the underlying problems.
Both Europeans and Americans need to confront their economic governance problems head on.
A deal now under consideration in the U.S. Senate would give the president unprecedented ability to raise the debt ceiling, subject to Congressional disapproval, and would create a fast-track procedure for raising revenue and cutting spending. Both initiatives attempt to break the logjam on fiscal decision-making. But more is needed to bring revenues in line with spending, possibly including spending limits so successfully employed in Sweden and a European-style value-added tax.
Europe is inching toward some form of euro bonds and a collective oversight of the 27 member-country budgets. But the former must be more robust and the latter needs teeth if it is to be effective. The euro will never rival the dollar as long as Europe cannot issue securities comparable to U.S. Treasury bonds. And with Germany having added a balanced budget amendment to its constitution, much like 49 of the 50 U.S. states, Brussels desperately needs the counter-cyclical spending power Washington now enjoys.
Debt-ceiling fights and dangers of default make headlines. But they reflect underlying failures of economic governance that plague governments on both sides of the Atlantic. Until Washington and Brussels reform how they raise revenue and spend money, they are likely to continue to delay tough decision-making on fiscal policy, forestalling an immediate crisis while raising the likelihood of a cataclysmic perfect storm down the road.
Bruce Stokes is a Senior Transatlantic Fellow with the Economic Policy Program of the German Marshall Fund in Washington.
Photo by Orin Zebest.
The views expressed in GMF publications and commentary are the views of the author alone.