The Truth About the Crises: USA and Europe

If someone were to ask me what I thought was at the heart of what caused the monstrous sovereign debt of the USA, — having studied and lived in Washington for 18 years — my instinctive response would be, “It’s federalism, love!” If, on the other hand, someone were to ask me to explain the problem of sovereign debt in Greece, Ireland, Italy, Spain, and Portugal I would reply — seeing as how I have lived in Rome for 43 years and I’m married to a French woman — with equal immediacy, “It’s the difference in productivity and competition in the eurozone, love!”

I believe that it is necessary to firm up these fundamental aspects, otherwise the “Atlantic” sovereign debt will end up being grouped together indiscriminately, as if it were all one and the same. The U.S. has a constitution that limits the powers of the federal government, itself, with respect to national defense and foreign policy. The other functions, also dealing with political economy and public finance, are powers delegated to Congress or –— especially in the realm of education, health, public welfare, and industry — to each of the 50 states. The president and Congress are elected in different ways, with different electoral systems and even by different electors. The government is not an expression of the parliament; it wields its own power, which is derived from its own electorate. Similarly, Congress responds to its electorate. So, the federal balance doesn’t come from a single financial law proposed by the White House, but from the appropriate House committee. The resident of 1600 Pennsylvania Ave, NW can reject it, but if it is backed by a significant majority, either he accepts it or he packs his bags and leaves the Oval office to his vice president for the rest of his term.

The level of public debt — now approximately 100 percent of GDP in the U.S. — has to be “authorized” by Congress, according to article I section 8 of the Constitution. If this authorization doesn’t exist, the secretary of the treasury has no power to issue the printing of government bonds. On August 2, millions of dollars worth of government issued bonds will expire; to finance them, more securities will be issued and, therefore, augment the “debt ceiling.” If authorization doesn’t happen, the federal government will be technically “insolvent.” It’s clear that behind this accounting issue there lays a battle of economics and politics (chiefly with respect to government intervention in the health care system).

It’s also clear that most likely this will result in an agreement that, for the Obama Administration, will be a sort of economic Waterloo. He’ll have to make a U-turn on the policy he announced during his electoral campaign and in his inaugural speech. In the event that Congress does not formulate an agreement, Obama will have to begin planning an early exit; after default, there will be many unpleasant surprises in store, with extreme effects on the stability of the nation.

The European problem is of another nature altogether. We aren’t taken with ideological differences about economics at the center of a single state (albeit federal). The problem here is differences in economic strategy between states that gave rise to a single currency. It has been difficult to digest the foremost consequence of the irreversibility of the euro: those who were used to being naughty — governments, parliaments, bureaucracies, business, families, individuals — had to be more cognizant of the others so as to not be squashed by their dominant productivity and competitive advantage. Those who didn’t immediately acknowledge this thought they could halt their mounting debt with the help of a Good Samaritan (the EU) who eventually would come to their rescue.

This situation is well-described in a story that will be published in the next issue of the magazine, Discussion on Estonian Economic Policy. It was written by two professors from the University of Greifsweig — one of the oldest in Europe, founded in 1456 — situated on the Baltic, on the border of Estonia. The article explains that the eurozone, of which Estonia recently became a member, is at risk, due to the profound differences in economic policy and practice (particularly with respect to work and business). “The funds obtained to alleviate the sovereign debt of this or that state are just band-aids. Or aspirins in the cases in which it would be best to see a doctor (…).”*

*Editor’s Note: the original quote, accurately translated, could not be verified