The Reckoning

Peripheral Damage Goes Global, Part III

What can U.S. voters learn, if anything, from the U.K.’s disastrous austerity policies?


What will the latest act in Europe’s Greek tragedy do to America? Is the United States “exceptional” in its immunity to this chaos? Is the world’s most powerful democracy able to handle the fallout from the evisceration of the world’s first democracy? More mundanely put—has the slow, tepid U.S. recovery provided enough of a cushion to prevent America from being dragged back into a recession by the domino effect that a Grexit will set in motion?  

No, and yes. Here’s my logic. First, America’s economic problems are predominately political, not based on poor fundamentals. We remain a world-beater in terms of industrial efficiency, worker productivity, innovation, and ease of doing business (though we’re slipping in the last).

But we squandered the crisis in terms of forcing a more serious recapitalization of our banking sector, demanding certain performance targets in terms of lending by banks who, after all, would no longer exist except for TARP, and for failing to this very day to regulate the very markets in derivatives that helped turn the sub-prime pyramid scheme of the Bush years into a global financial crisis.

If you want to think of our bank’s capital requirements as the seawall in this crisis, then it is one built too shallow to stop a truly serious wave from wreaking havoc. In short, we remain highly vulnerable to the intricate contagion that would occur if one of the largest banks in Europe went down—say, Commerzbank (Germany) or BNP Paribas (France) or HSBC (U.K.). All are too big to fail—and the proof in that statement is because if they do fail, others will, too, without massive government intervention. Sound familiar?

Now, it may not come to this. The Germans and other supposedly prudent European leaders who have overdone the austerity cure are not suicidal. What’s more, they still have the means to muddle along for quite some time, even if they lack the political will to embrace the larger, more comprehensive solution.

(Mine looks like this: a two to three year stimulus with economic goals that must be met before it ends, incentives for peripheral investments in Greece, Ireland, etc., a “penalty box” system for EZ countries that break rules, and an honest conversation between German politicians and their electorate about the pros and cons of saving the world’s largest economic zone. In the long run, such an honest discussion can have only one result: an overt acceptance that Germany runs Europe and benefits greatly from doing so—and should pay for the privilege.)

So I’m cautiously optimistic that there isn’t a “Lehman” moment looming.

Since lower oil prices will only benefit the United States (in terms of an improved balance of trade), and U.S. trade with Europe, at 8 percent of total exports, isn’t a game changer, nor will it disappear—it will just diminish. We should be able to weather this.

Unless, of course, American voters fail to notice the lessons in Europe’s mess. What began as a manageable crisis in late 2009—the realization that the least important member of the Eurozone had lied about its spending—was allowed through hubris, timidity and ideological rigidity to turn into a global systemic risk.

The initial argument that the market would sort it out was idiotic (but true, in some ways—the market is, indeed, sorting it out!). The later, post-bailout German insistence on demanding ruinous, punitive reforms of the Greeks (and later, the Irish, Spanish and Portuguese)—in effect, that they enter a depression in exchange for bailouts, was a short-sighted and parochial. Austerity in a time of recession is a prescription for turning a recession into a depression. Keynes 101.

Will U.S. voters see the analogy in November? You can excuse them, perhaps, for not wanting to try. The Eurozone is, after all, a very unusual beast. But outside the Eurozone, the U.K. offers a far more convincing and apt metaphor. A powerful economy beset by debt, suffering the results of an oversized financial industry that had escaped serious scrutiny for decades, and a spike in unemployment caused by the collapse of banks that dabbled in exotic mortgage instruments. Again, will this ring any American bells?

The country in question, of course, is the non-eurozone U.K., and for the past four years it, too, has been in the grips of radical austerity. The result: a double-dip recession that will only worsen as its main trading partner staggers into the ditch. National debts can only be defeated if the economy grows. Deficits should be cut in good times, not bad.

There’s a bumper sticker for you, Barack. Run with it.