USA, Euro: Crunch time
- 20 July 2011
- From the section US & Canada
It is a day of cunning plans. Here in the USA (I am in Arizona) politicians have come up with a plan to head off the USA's imminent technical debt default.
Meanwhile in Europe, French President Nicolas Sarkozy and German Chancellor Angela Merkel are holding an impromptu summit to decide what should happen at the emergency eurozone summit tomorrow.
Gaining ground in Brussels is the idea of slapping a E30bn tax on Europe's banks in lieu of forcing them to take losses on Greek debt.
The attraction of the US plan is that it lays the basis for a bilateral approach to deficit reduction; it will therefore probably fail. The attraction of the eurozone plan is that it, like all other mini-plans in the last two weeks, avoids a "credit event" in the global banking system.
Again, I do not give it much chance of achieving that.
As a result, while it is still possible to avert a simultaneous cataclysm, of a Eurozone crisis and an American technical default, it is alarmingly still possible for a mixture of denial, ineptitude and the ticking clock to trigger it.
In the USA it is fashionable to write off the Republican Party stance on debt as a mixture of cynicism and craziness. Even the pro-small-government Economist newspaper wrote this month: "The Republicans are playing a cynical political game with hugely high economic stakes."
However, as I've tanked along Interstate 40 in the past few days, it is obvious - as with every US trip - that President Barack Obama's fiscal stimulus has not worked in the way it was intended: the persistent high jobless rate, the low job creation, the tattered and boarded-up businesses, the echoing quiet of a Walmart branch, the newly homeless middle class people you run into testify to this.
The American state has waded into anti-crisis economics with an $800bn fiscal stimulus and $1.7 trillion monetary stimulus, but the boost they have provided is faltering.
The traditional Keynesian answer is more stimulus. But America is hitting its debt ceiling for a reason. Lenders, remembering previous crises where the USA has allowed inflation and currency depreciation to pass on the costs to US bondholders (by wiping out the value of foreign investments) will not go on lending forever.
The warnings by ratings agencies, that the USA could lose its AAA rating, actually come in two flavours: one reason is temporary, and about the current shenanigans; a second reason is this long term doubt as to whether lending to the USA is gold plated.
For "monetarist Keynesians", who focus on interest rates and the housing market, the USA's high debt (headed for 100% of GDP by 2021 and 190% by 2035) and high deficit are counteracting any benign influence quantitative easing may exert.
The housing market here, as attested to by the abandoned mobile homes that litter the canyonsides of New Mexico and Arizona, is still negative, and the banks are not even yet selling many of the homes they have foreclosed on.
To kickstart the economy (and this is true globally as well as in the USA) you have to have some kind of "credit event" that writes off the value of distressed assets and brings down the real - as opposed to notional - costs of borrowing, and then reopens access to credit: from small and medium enterprises to homeowners the endemic problem in the USA is lack of access to investment credit.
And then you have to get the sovereign debt and deficts down, in order to bring the risk free borrowing rate, which underpins all borrowing, lower. That is the argument of the unorthodox Keynesians, as well as the Republican right.
But like everything else in the USA, the debate cannot be had on the level of technicality and logic, but is overlaid with ideology.
Greek debt crisis
So the "gang of six" compromise which emerged this week sees a $4 trillion fiscal contraction, delivered by spending cuts and a tax rise of $1 trillion, accompanied by income tax cuts designed to appease the GOP. As a plan it is elegant, but its inner logic is difficult to divine.
In Europe there is a different problem. Everything is technocratic and "above" politics, but nothing seems to work.
Greece is quietly slipping towards default. It missed its deficit reduction targets because it simply cannot collect the taxes it has promised to. The politicians are coming round to the idea of a selective default; even beginning to accept what the ratings agencies and the markets tell them - that this will trigger wider losses in the EU banking system.
But the European Central Bank (ECB) will not countenance that.
So the plan to tax EU banks E30bn is today's latest version of a get-out clause. It avoids a technical default but it does impose pain on the private sector. Simon Nixon of the WSJ has explained how this might work (no politician has, of course, bothered to come on the airwaves and explain it).
But it will not help Greece grow its way out of crisis, and so it merely staves off the moment when default and possible eurozone exit occur. All big investors are scenario planning and asset positioning for this event, the International Monetary Fund (IMF) meanwhile has issued a "will somebody bloody well do something"- type statement. Obama has phoned Merkel, etc etc.
The fact is, one way or the other, somebody is finally going to have to take a hit for the toxicity of the 2000s decade. It will be a mixture of the worker, the pensioner, the public service consumer, the taxpayer and the banker - and all politics right now is about what the mix should be.
Though today is just another muddle-through-day, the simultaneous attempts to muddle through on both sides of the Atlantic symbolise the basic problem - the anti-crisis measures adopted in 2008/9 are not working, they are running out of energy, no new model of growth can emerge until there is resolution.
The state - which saved the free market in 2008 - is simply not strong enough in some parts of the world to take the strain.
Unfortunately, while those parts of the world could have been limited to Greece and Iceland, and maybe California, with deft political action, instead we are now looking at the potential breakup of the euro and (it is weird to be writing this in the 107F heat of Arizona) the loss of its AAA credit rating by the biggest economy on earth.