The Sky Is Falling — But Only on Your Country

Debt Crises in Europe and the USA

It’s an absurd situation. A large part of the American public is convinced that Europe is in economic decline. Many Europeans, on the other hand, believe that the United States is facing imminent economic collapse. It all goes to show just how much the global debt crisis is shaking confidence in the old industrialized world. But the causes and the solutions for each are far different, and the predictions of cataclysm are nonsense.

When Barack Obama was elected president, many Europeans thought he was “one of us,” and the United States would somehow become more socially democratic and/or European. Big mistake. Obama and the Democrats may resemble the European model of the social state more than the Republicans do, but that only makes it harder for Democrats to win elections. No, America is just as conservative as it has always been, and what’s even more worrisome, continental Europeans and Americans now have more problems than ever before understanding one another when it comes to existential issues.

This shows something impressive about the government. In Washington and New York there are surprisingly many people that are absolutely convinced that Europe is in decline. The looming Greek bankruptcy is cited as proof of the old thesis that the euro can’t work, and the monetary union will fall apart. Germany’s latest economic successes are only an aberration that doesn’t change the overall picture. Europe, over-regulated, too far in debt, antiquated and despondent, isn’t America’s partner any longer. That’s at least according to the right wing.

Amazingly, Europe’s view of America is nearly an exact mirror image: Very few people don’t share the view that the United States is a superpower in decline. They gratefully adhere to formulas of a “post-American world” as advanced by U.S. author Fareed Zakaria. Financial crisis, mass unemployment and de-industrialization provide sufficient evidence of that.

Then there’s the insanity of the squabble over raising the debt limit. Congress is willing to risk a technical bankruptcy of superpower USA — now, if that isn’t a sign of decline. When the mostly American rating agencies lower the creditworthiness of Greece or Spain, it’s seen as an attack on Europe. If they do the same with the United States, it’s seen as another sign of American decline.

The truth is, the debt crisis is a global phenomenon of epic proportions that affects America and Europe in the same way. Never before in history has the industrialized world been so deeply indebted during peacetime.

That’s relevant to the financial crisis, but it’s more due to decades of procrastination in dealing with problems, putting action off to a later date. In contrast, the rising economic stars of China, India and Brazil shine brightly. China is America’s biggest creditor, having displaced Germany from third place among World Bank participants.

Nonsense from the Prophets of Doom

The European and American debt problems are completely different in nature. The crisis in the euro periphery — that now may also include Italy — is acute and certainly must be dealt with quickly. The danger remains that Greece may precipitate a global panic. But if the crisis can be controlled, Europe emerges in pretty good shape.

America, in contrast, still has time. The current competition in Congress over radical budget cuts is damaging mainly because the cuts will endanger growth. If no action is taken, the future looks dim, and the USA faces bankruptcy within 15 to 20 years. Economists can rapidly agree how that may be avoided — cutbacks in defense spending, in Medicare and in Social Security, along with tax increases to help make the cuts more palatable. It’s an unpopular mixture that most politicians want to avoid if at all possible.

A model calculation done by the Peterson Institute in Washington shows what is involved: Using realistic assumptions, they predict that by 2035 the European Union would be spending 5.7 percent of GDP to service their debt. In the United States, it would be 13.2 percent and in Japan 19.1 percent. The rule of thumb is a democracy can withstand 10 percent, maximum.

Many prophets right now are predicting bankruptcy for the United States, Germany and other countries as unavoidable. Such prognostications are nonsense. The debt problems are solvable if politicians are prepared to solve them. But that’s a big “if.”

The USA still has a highly productive, innovative national economy it can use to grow out of many of its problems. Europe’s long-term problems are limited, provided it deals quickly with its short-term problems. Germany, for example, can’t lose sight of the fact that it can only continue on its successful path as long as the euro still exists. That’s why it’s worthwhile for Germany to monetarily support the European Union.

And finally, to the ratings agencies: They’re Europe’s bad boys. One may argue about the timing of when they hand out their report cards, or they may wonder why policy doesn’t just liberate itself from its self-imposed dependency on them. The fact, however, is that despite all their shortcomings, there is currently no better way to measure the ability and the willingness of debtor nations to repay their creditors. Those who close their eyes to that fact ultimately do themselves the most harm.