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In Current Crisis, It’s Not Just The Economy

Filed by KOSU News in World News.
August 11, 2011

Three years ago, the global economy was brought to the brink by a near meltdown of the international banking system. Now we’re in trouble again, but this time our economic woes stem largely from the actions of governments. Escaping from this crisis is more of a political challenge than a financial one.

That doesn’t necessarily mean it will be any easier.

The decision by Standard & Poor’s to downgrade US credit last week had less to do with the size of the U.S. budget deficit than with the inability of Democrats and Republicans to work together to reduce it. In explaining its move, the ratings agency cited concerns about the “effectiveness, stability, and predictability of American policymaking and political institutions.”

Similar critiques apply in virtually all the countries affected by the current crisis. Take Spain, another country whose credit has been downgraded.

“One lesson from both the U.S. and Spain is that internal politics can greatly complicate economic progress,” says Fernando Fernandez, a former IMF economist now teaching at the IE Business School in Madrid.

Politically polarizing debates over how best to reduce a budget deficit, Fernandez points out, have played out in Spain as well as the United States, and with similar results.

“That [fight] has paralyzed policymaking here for two years and has made the Spanish crisis longer and more costly,” he says.

Spanish Politics Polarized

There is wide agreement among Spanish economists, for example, that their country can promote economic growth and reduce unemployment (currently at 20 percent) only after it enacts painful and unpopular reforms in the labor and banking sectors.

But for such a program to succeed and overcome opposition, some cooperation between left and right wing parties would probably be necessary, and the prospects are not good.

“[Achieving] consensus between the parties here has become a mission impossible,” says Vicente Jimenez, managing editor of El Pais, Madrid’s leading newspaper.

Italy faces similar political challenges. European leaders made it clear to Prime Minister Silvio Berlusconi last week that his government could expect financial support from his neighbors only if he promised to support a balanced budget amendment. Berlusconi agreed, but securing that amendment will be a major task for him and the rest of the Italian government.

The 2008 financial crisis required banking experts to unravel complex financial instruments like credit default swaps and collateralized debt obligations. The negotiation of the 2011 eurozone crisis, by contrast, has featured tough political rhetoric.

Calls For Tough Political Decisions

One of the most outspoken public figures has been Jose Manuel Barroso, president of the European Commission. Barroso opened a summit of European heads of state last month with a call to the richer countries in the euro monetary zone to show solidarity with the poorer ones, for the sake of European unity.

“They [European leaders] have said they will do what it takes to ensure the stability of the euro area,” Barroso said. “Well, now is the time to make good on that promise. … Leaders need to come to the table saying what they can do, and what they want to do, and what they will do, not what they cannot do or will not do.”

The basic problem in the eurozone is the indebtedness of countries on the periphery and their heightened difficulty getting banks to finance that debt on terms that will not prove too burdensome. It is difficult, but it is not complicated.

“If there is a solution, it will be a political one,” says John Auther, managing director of the Lex column in the Financial Times.

“If politicians can work out a way of convincing the world that the full eurozone stands behind all the countries at the periphery,” Auther said in a recent video commentary, “then there need not be in a crisis in those sovereign credits. But obviously that is a huge political task.”

And getting bigger by the day. Politicians in Berlin are making clear they oppose the use of Germany’s good credit to shore up their weaker neighbors. That could present an obstacle to the resolution of the euro difficulties. The German parliament will need to approve a eurozone rescue effort, just as the Italian and Spanish parliaments will need to approve the reforms on which their aid is conditioned.

Before this is over, policymakers and government leaders may be yearning for another crisis that can be solved by technocrats huddling in conference rooms. A crisis whose resolution depends on political courage and a willingness to compromise could just be too much to bear. [Copyright 2011 National Public Radio]

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