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Main Content
Those Who Live in Glass Houses Should Not Throw Stones
Washington’s tendency to look far away for causes to their own troubles
Last Friday the U.S. Senate sank the $447bn stimulus package the Obama administration had brought on the table to get the federal economy going again.
The bill, starkly opposed by the Republicans, would have encouraged spending by axing taxes on the middle class and small businesses and would have been financed by a 5.6% tax on millionaires.
The stakes are high. Obama will be facing a presidential election in 2012 and the economy will be the number one issue on the agenda. With the unemployment rate stuck at 9.1% for the fifth month in a row, it’s hardly surprising Republicans are resorting to obstructionist practices, understandable only in the context of an upcoming electoral campaign.
Pointing the finger to Europe’s woes is the easiest way to get the attention of the Americans off the real problem.
Voicing the blind anger of the American John Doe, Obama has been urging leaders in the Eurozone to take responsible actions to address the sovereign debt crisis and to act fast.
“They have not fully healed from the crisis back in 2007 and never fully dealt with the challenges that their banking system faced.” Obama said.
An economic blow from Europe is the last thing the U.S. economy and Mr Obama now needs.
Already in the past few months, repeated speculative attacks on the PIIGS (Portugal, Italy, Ireland, Greece and Spain) countries have caused a devaluation of the euro against the dollar, which makes it difficult for U.S. firms to sell their goods in Europe while European products sold in the U.S. come with a cheaper price.
He could not have been more explicit. “Europe is not going to be able to export its way out of this problem” Obama said and added “the problems Europe is having today could have a very real effect on our economy at a time when it’s already fragile.”
Indeed Europe’s failure to get a grip on its debt crisis would represent a substantial electoral setback for Obama; and the Republicans know that well.
Not only Obama’s economic vision is still associated with the European social model but also the two sides of the Atlantic are so closely intertwined that if one does bad the other gets all the fallouts. Europe still accounts for a third of the world’s economic output and is a major U.S. export market.
But it’s the financial markets which are keeping Obama up at night. The U.S. Treasury Secretary Timothy Geithner has recently attended a meeting of the Eurozone finance ministers. It was the first time in history an American had been invited to attend such a gathering. The picture Geithner painted was an apocalyptic one where failure to master the Greek-led crisis is likely to result in “cascading default, bank runs and catastrophic risk.”
The U.S. financial system is exposed to European banks. According to a survey by the Fitch rating agency, around half of the overall assets of the U.S. money market industry have direct exposure to the European banking system. In turn European banks are exposed to the debt of the PIIGS countries up to their necks. Default in one of these countries would trigger a domino effect which will have deep repercussions on the global economy in much the same way as the U.S. sub-prime crisis did in 2008.
The U.S. economy would not have the time to get back on track as the current crisis is barely over.
No wonder Washington feels authorised to lecture European leaders on how to deal with the sovereign debt emergency- an attitude many in Europe don’t like. Austrian Finance Minister Maria Fekter said that it was “peculiar” to see a country with an aggregate debt higher than the euro area giving lessons to others.
The U.S. is hardly a model of virtue and austerity. By the end of 2012 total government debt at the state, local and federal government level in the U.S. will attain 120 percent. The U.S. fiscal deficit in 2011 was near 9.3% of GDP.
Besides, the United States rely on foreign buyers (such as China) who own 40% of their debt with the obvious advantage that the Federal Reserve can print money to buy its own debt and lower the value of the dollar boosting the exports and reducing the level of the American debt.
It looks like the pattern of a country that has been living above its means all along. The United States is the country where the worst crisis in eight decades originated and yet they keep opposing a global governance of the financial sector which was at the root of the turmoil.
German Chancellor, Angela Merkel made the point clear when she declared: “It can’t be that those outside the Eurozone, who have pressed us time and again to take comprehensive action on the debt crisis, are at the same time working to resist the introduction of a financial transaction tax. I don’t think this is acceptable. We must ensure that financial market actors share in the costs of fighting the crisis.”
Of course Europe must manage to successfully address its sovereign debt crisis by bolstering the financial capacity of the European Financial Stability Fund and by getting on with a recapitalisation of the continent’s banks. On the other hand the U.S. must take responsibility to stabilise the financial sector on a global level by accepting to tax financial transactions.
Republicans had better consider this point before sinking Obama’s plan again; Obama, as president of the world’s dominant power should have the intellectual honesty to admit that the U.S. is not just the victim of troubles originated far away be them the European debt crisis or the rise in energy sources prices because of the Arab Spring revolts.