How Europe could cost Obama the election

COULD EUROPE cost Barack Obama the presidency? At first sight, that seems like a crazy question.



By Niall Ferguson (Debate)

Published: Sat 16 Jun 2012, 8:47 PM

Last updated: Fri 3 Apr 2015, 3:42 PM

Isn’t November’s election supposed to be decided in key swing states like Florida and Ohio, not foreign countries like Greece and Spain? And don’t left-leaning Europeans love Obama and loathe Republicans?

Sure. But the possibility is now very real that a double-dip recession in Europe could kill off hopes of a sustained recovery in the United States. As the president showed in his anxious press conference last Friday, he well understands the danger emanating from across the pond. Slower growth and higher unemployment can only hurt his chances in an already very tight race with Mitt Romney.

Most Americans are bored or baffled by Europe. Try explaining the latest news about Greek politics or Spanish banks, and their eyelids begin to droop. So, at the end of a four-week road trip round Europe, let me try putting this in familiar American terms.

Imagine that the United States had never ratified the Constitution and was still working with the 1781 Articles of Confederation. Imagine a tiny federal government with almost no revenue. Only the states get to tax and borrow. Now imagine that Nevada has a debt in excess of 150 per cent of the state’s gross domestic product. Imagine, too, the beginning of a massive bank run in California. And imagine that unemployment in these states is above 20 per cent, with youth unemployment twice as high. Picture riots in Las Vegas and a general strike in Los Angeles.

Now imagine that the only way to deal with these problems is for Nevada and California to go cap in hand to Virginia or Texas—where unemployment today really is half what it is in Nevada. Imagine negotiations between the governors of all 50 states about the terms and conditions of the bailout. Imagine the International Monetary Fund arriving in Sacramento to negotiate an austerity programme.

This is pretty much where Europe finds itself today. Whereas the United States, with its federal system, has—almost without discussion—shared the burden of the financial crisis between the states of the Union, Europe has almost none of the institutions that would make that possible.

The revenues of the European central institutions are trivially small: less than one per cent of EU GDP. There is no central European Treasury. There is no federal European debt. All the Europeans have is a European Central Bank. And today they are discovering the hard way what some of us pointed out more than 13 years ago, when the single European currency came into existence: that’s not enough.

Indeed, having a monetary union without any of the other institutions of a federal state is proving to be a disastrously unstable combination. The paradox is that monetary union is causing Europe to disintegrate—the opposite of what was intended.

Perhaps the most shocking symptom of the crisis on the so-called periphery is youth unemployment. In Greece and Spain, more than half of all young people are out of work.

Privately, senior politicians and businessmen now admit that Europe would be in a much better position today if the monetary union had never happened. If there had been no euro, there would have been no borrowing bonanza on the periphery and no property bubble in Spain. And if they still had the drachma, the lira, the peseta, and the escudo, the weaker European economies could simply devalue their way out of recession, as they used to, rather than try to cram down wages, slash spending, and hike taxes.

The trouble is that the costs of a monetary breakup would in all likelihood be even greater than the costs of a transition to American-style federalism. On June 17 many Greek voters will cast ballots for parties that reject the austerity conditions imposed on their country under the terms of two bailouts. True, a clear majority of Greeks say they don’t want to leave the eurozone. But it’s hard to see how a Greek government could ditch austerity without being forced back to the drachma.

What makes all of this so terrifying is that it vividly recalls the events of the summer of 1931. It’s often forgotten that the Great Depression, like a soccer match, was a game of two halves. If the first half was dominated by the US stock-market crash, the second was kicked off by a European banking crisis.

Nobody expects all of that history to repeat itself. Europe’s population is older today and much less militaristic. Nevertheless there are disquieting signs of a populist backlash in many countries—and not just in Latin Europe. In the Netherlands and Finland, right-wing parties win votes by denouncing both Europe and immigration. In the upcoming French and Greek parliamentary elections, the far right will also do well, as will the hard left.

Today’s populism won’t lead to war. But it is making the task of governing Europe progressively harder every time an election is held. In Europe there is now no such thing as a two-term leader. In the age of austerity, the incumbent always loses.

So, after more than two years of procrastination—known universally as “kicking the can down the road”—Europe has reached the moment of truth.

It’s binary. Either German Chancellor Angela Merkel has to bow to the logic of her predecessor but one, Helmut Kohl, who always saw monetary union as a route to federalism, or it’s over—and the process of European disintegration is about to spiral out of control. Put another way: if Europe’s leaders try kicking the can one more time, it will turn out to be packed with explosives.

So what is to be done? If Alexander Hamilton were alive today, he’d advise the creation of a federal system much more like the US Constitution than the unworkable Articles of Confederation. That would mean three things: a European banking union complete with Europe-wide deposit insurance, the recapitalisation of ailing banks with funds from the new European Stability Mechanism, and some kind of scheme to convert part of national debts into euro bonds backed by the full faith and credit of the EU.

So far the Germans have been willing to entertain the first option while strongly resisting the second and third. The trouble is that such arrangements strike Italians and Spaniards as—to quote one key decision maker in Rome—“quasi colonial.”

My best guess is that all this brinksmanship will ultimately end with the Hamiltonian solution: fiscal federalism and, ultimately, a United States of Euro Zone. An important step was taken in this direction over the weekend, with the announcement that 100 billion euros will be made available to bail out Spain’s ailing banks. This was a major victory for the talented Spanish Economy Minister Luis de Guindos, who cleverly asked for more than twice what the International Monetary Fund deemed necessary, and got away with far fewer conditions than were imposed on neighbouring Portugal when it sought a bailout. The mood in Madrid was one of relief, even confidence. But there are all kinds of hazards along the way, not least the impending Greek and French elections. Meanwhile, the world waits—and braces—for a European Lehman Brothers moment.

Europe’s agony threatens to inflict a double-dip recession on the United States as well as slow down growth significantly in big emerging markets like China. Remember, exports to the EU account for 22 per cent of total US exports. For some big American companies like McDonald’s, Europe accounts for as much as 40 per cent of total sales.

The most recent US jobs numbers were lousy: employers added only 69,000 jobs in May, and the unemployment rate actually rose. Manufacturing activity has also slowed. Consumer confidence is down. And, despite last week’s rally, the US stock market has given back nearly all the gains it made in the first three months of the year. This is partly due to mounting worry about the fiscal cliff facing this country at the end of the year. But it is mainly a consequence of Europe’s “viral spiral.”

As for the political consequences of a US slowdown, it doesn’t take a Ph.D. in political science to see why the White House is worried. Even when people were still talking about recovery, President Obama was neck and neck with Mitt Romney on his handling of the economy, the No. 1 issue in voters’ minds. Back in 1980 Ronald Reagan asked Americans the question that ensured Jimmy Carter was a one-term president: “Are you better off than you were four years ago?” Asked the same question in last month’s Washington Post–ABC News poll, just 16 per cent of Americans said they are.

The law of unintended consequences is the only real law of history. If the disintegration of Europe kills the reelection hopes of a president Europeans fell in love with four years ago, it will be one of the supreme ironies of our time.

© Newsweek


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