Europe's Impotence Is America's Good Fortune

The Rocky Horror Debt Show in Europe is diverting investors’ attention from the United States. But America’s political establishment is just as paralyzed as the Europe’s.

The effect of surprise is contained within narrow bounds: For the umpteenth time, the stabilization of America’s national finances has failed, and once again Democrats and Republicans make sure the other party gets the responsibility for the debacle. In actuality, a Congressional super committee was supposed to present a bipartisan-developed austerity package, yet the budgetary relief has been called off due to a lack of viable ideas. The U.S. political system has, it seems, crossed the point of no return.

So what? an unruffled contemporary could ask at this point, referring to the trends in the bond markets. Are the low returns that Washington has to offer investors not the best proof that the creditworthiness of the American debtor is intact? Besides, the U.S. is damned to save as it is: The failure of the negotiations namely means that automatic spending cuts go into effect Jan. 1, 2013. The national budget will be stabilized even without a Hollywood-style happy ending on Capitol Hill.

Apart from the fundamental objection — that there is no reason for calm when the legislature of the world’s largest economic power is working on its self-elimination with an almost admirable tenacity — this rosy view of things succumbs to reality. With $15 trillion in debt corresponding to the yearly economic output, the U.S. is not far from the Italian debt level of 120 percent of gross domestic product. To hold the debt level stable, the U.S. must save around $4 trillion in the next four years; through the automatic cuts beginning in 2013, only $1.2 trillion will be cut. Merely driving a lawnmower over government expenditures will not be enough.

It is also questionable whether this lawnmower will be used at all. Washington is now thinking out loud about how the automatic cuts, half of which are supposed to hit the defense budget, could be mitigated. Every dollar counts in the transpacific trial of strength with China, warn friends of the U.S. military. Should the cuts be deployed, the lights will go out within every other government institution — from the FBI to the school system to air traffic control — because the really big budgetary items — pension and health insurance — are exempt from automatic cuts.

Luckily, this vexatious debate is taking place at a point in time when the whole world stares mesmerized at the Rocky Horror Debt show in the eurozone. The main reasons for the present low U.S. returns are neither Barack Obama nor John Boehner but rather Angela Merkel and Mario Monti. The catch in this matter is that the bond markets are no good as prophets. Let’s remember: Until a few months ago, Italy had no problem with issuing bonds. And suddenly the confidence of investors was lost.

What will now happen in Washington? Most likely, not much: The political deadlock could last until the presidential election in November 2012. After that, there are two scenarios: Either the Democrats and Republicans will continue on as before, or in the eight weeks between the election and the end of the year, they will succeed in agreeing to a comprehensive reform program that stabilizes expenditures in the social sector, creates a streamlined tax system and offers entrepreneurs incentives to invest.

In view of the events of the past months — one thinks of the ignoble infighting about raising the U.S. debt ceiling — the chances for agreement are not favorable. This cart is stuck too deeply in the mud. But there is no doubt that saving is necessary. The only open question is whether the U.S. is able to save on its own or if investors must force it to do so.