One Week to U.S. Default

By Elizabeth Pond

The United States’ expenditure to the tune of $25 billion on rebuilding economic rivals in war-devastated Europe was an astonishing act of enlightened self-interest. In 1950, the determination of France, Germany, Italy, and the Benelux countries to put aside past enmities and "pool" their sovereignties to form the European Community was truly astounding. In those days indeed, Western democracies rose above domestic political quarrels in order to set up economic foundations that could lead to collective prosperity.

It comes as a surprise that the sense of enlightened self-interest that used to serve the members of the transatlantic alliance so well seems to have largely disappeared.  In recent months, both the U.S. and Europe have repeatedly failed to cobble together new plans that could prevent potential economic collapses. This year, there has been a race to see which side of the ocean could self-destruct first in a financial game of chicken. As of now, it’s the U.S. that seems more likely to succeed in driving its economy over the cliff.

Normally in such contests, rational calculation would persuade the U.S. to preserve the world’s trust in its central role in the global economy. Normally, common sense would convince the Europeans to respond to crisis by pushing forward toward even greater integration.

Indeed, the 11th-hour rescue of Greece a few days ago suggests that Europeans have finally resolved to save their common currency and keep the European Union alive by granting more power to the EU institutions. In mid-July, the threat of a financial contagion spreading from periphery countries to the EU's third-and fourth-largest economies—Italy and Spain—compelled an end to Europe’s dithering.

Suddenly eurozone finance ministers, the European Central Bank chief, and private holders of Greek bonds looked into the abyss and blinked. They pumped another €109 billion ($156 billion) into the Greek economy; cut the interest rate on rescue loans from 4.5 percent to 3.5 percent and extended maturities from 7.5 years to 15-30 years for Ireland and Portugal as well as Greece; and authorized the fledgling €440-billion European Financial Stability Facility (ESFS) to dispense precautionary credit and recapitalize struggling banks in the eurozone.  Though presented as incremental, the deal is a major step forward. Even though one isn’t supposed to call the EFSF a European Monetary Fund, the new emergency funds Eurobonds, or bondholders’ "voluntary" participation in easing the conditions of Greek debt a "haircut" that reduces the loaners' yield, that’s exactly what they are.

Luckily for the EU, officials from 17 squabbling nations have finally given priority to long-term European interests over domestic electoral tactics. Strengthening one's own national voice within the intramural European debate again won out over exiting the euro or even voiding the European Union. German Chancellor Angela Merkel has emerged from passivity to fight for the approval of her grumpy taxpayers to this new bailout, proclaiming that “whatever we pay out at this point in time, we will receive back many times over.”

And not only that. The EU states actually tied their package together by a civilized 9:30 p.m. instead of the usual stop-the-clock 6 a.m. and expect more rounds to come as reluctant officials inch further toward expanding the zone's new fiscal authority.

Meanwhile on the other side of the Atlantic, alarm bells are going off. Gold has soared to $1,616 an ounce, stocks have fallen, and Wall Street has made doomsday contingency plans to shift money out of Treasuries, but the political deadlock continues.

Council on Foreign Relations Senior Vice President James Lindsay's acid comment that until now "[n]o Western major power in recent memory has taken a manageable fiscal problem and turned it into a crisis" was in vain. So too was his elaboration that a US default could "inflict significant—and wholly unnecessary—harm to America's ability to wield and project its power in the world" by forcing defense cuts; adding $1 trillion to interest payments over a decade; crippling America's ability to "negotiate agreements or build alliances." This would, he said, discredit democratic governance around the world, convincing friends and foes that the U.S. really is in decline.

Nor did European friends' consternation over America's impasse make the crisis seem any more urgent in Washington. The Economist gasped while watching Washington "scheme, stonewall and fulminate." The Financial Times rebuked the "astonishing, deplorable and unacceptable way" the U.S. was conducting its affairs and called ever-louder comparisons between American and Italian political dysfunction an insult to Italy.

Further, FT columnist Gideon Rachman compared Tea Party anti-tax zealots to Marxist, Maoist, and jihadi zealots. And FT columnist Clive Crook confessed that after six years of living in the U.S. he has shifted from being a "militant anti-declinist" to being "impressed by Washington’s determination to prove the pessimists right." He concluded that "Congress and the White House have lately taken fiscal irresponsibility to a new level." The constitution's checks and balances are producing not the founding fathers' "intended delay, deliberation and compromise," but "paralysis" and "gridlock."

Are we living through "one of those damaging but short-lived spasms that have periodically disturbed the advance of the wealthy economies?" asked another FT columnist, Philip Stephens. "Or are the shocks of an entirely different order—a harbinger of accelerating decline as the west surrenders two centuries of global hegemony?"

The Chinese, he pointed out, are already posing that question.


Elizabeth Pond is a Berlin-based journalist who writes about transitions and the author of The Rebirth of Europe.

[Photo courtesy of Flickr user brownpau]

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