For US and Europe, governance by brinkmanship
The US and Europe are handling their fiscal crises with political brinkmanship, resulting in piecemeal solutions. The US seems to have adopted German Chancellor Angel Merkel’s much maligned step-by-step approach to problem-solving. Politically, that may be the only choice.
For years Europe has been pilloried by politicians and commentators for its perceived mismanagement of the euro crisis. Always a day late and a euro short, the old continent was addicted to last-minute temporary fixes, to piecemeal and half-hearted approaches. Analysts chided the European Union for its lack of leadership and incompetence. So systemic was the dysfunction among the EU’s 27 member countries, or so the narrative goes, that it could never happen in a determined nation-state like the United States.
Well, think again.
Welcome to the land of cliffs and other obstacles, in which crisis management looks frighteningly similar to Europe’s. So similar indeed that the British magazine The Economist found it appropriate to call the Jan. 1 “fiscal cliff” deal, “America’s European moment.”
If anything, that’s an understatement. It is not just a point in time when America looks like Europe. The future will provide for an extensive pattern of similarities with Europe. Like it or not, coming into stark relief is the truly transatlantic nature of this crisis – the parallel way in which these two different democratic systems grapple with identical problems, and perhaps even learn from each other.
Notwithstanding differences in economic structure and governance, the heart of the problem in Europe and the US is the same: Citizens are demanding services from their governments that they are not willing to pay for. Politicians have increasingly filled this gap by incurring debt. Demographic change and the shift of economic vibrancy away from mature western democracies dramatically aggravate the problem. In theory, the solution is clear: Improve competitiveness and growth potential, introduce fiscal prudence and reduce government services.
In practice, reform is exceedingly hard in societies in which every bit of change will be resisted by some pressure group. In Europe, it’s even harder because the continent has a common currency, but lacks centralized institutions to steer fiscal policy among the 17 countries that use the euro. Therefore, the sole way of making change happen in Europe is “on-the-brink.”
Only when politicians look into the abyss, will they do what they would otherwise find too difficult to do. And they will do so repeatedly as long as the legislative package in front of them is never too big. Consequently, big-bang solutions are not possible, and may not even be desirable, given the needed impetus of crisis for political action.
Following this practice of governance by brinkmanship, the United States has Europeanized its crisis response by artificially erecting a number of cliffs, obstacles, and deadlines. No comprehensive solution is sought on any of these occasions. Every time a small solution is found, the public also recognizes that the big can has been kicked down the road. In the US, yet another showdown is just around the corner – raising the debt ceiling. The Congress seems to have adopted German Chancellor Angela Merkel’s much maligned step-by-step approach to Europe-wide problem-solving.
This approach has serious downsides. Decisionmaking under the pressure of deadlines does not allow for an EU member country’s legislature to study and deliberate about the proposals that come down from EU headquarters in Brussels. They can barely read before they vote. The reaction of legislators in Congress is exactly the same as in any parliament in Europe: They are howling.
If it makes it any easier, they can share the pain. And they can do so across the ideological divide since almost all major reform legislation in Europe and the US requires more than party-line votes. In essence, the crisis on both continents has to be addressed by what is called a grand coalition in the parliamentary system or cohabitation in the French presidential system. No surprise here: Large majorities are needed to change the basic social deal that society rests upon.
The difficulty of reaching broad agreement explains why both Europe and the US are working in crisis mode, with even the sequence of reform looking astonishingly similar on both sides of the Atlantic.
Southern European governments have been heavily criticized in the US for stymying growth by increasing taxes on the front end of the reform effort while postponing to the tail end reforms that increase competitiveness. This critique made sense from an economic, but not necessarily from a political perspective.
Need proof? Just look at the United States: Taxes are going up while the infinitely harder work of cutting spending is still avoided. Fiscal responsibility along with a solid growth strategy is still a distant dream while the tax increases look quite European. It may just be the way our Western democracies work through such monumental challenges, step by step, cliff by cliff.
If so, we can hope that America mirrors Europe in one more way: It will eventually recognize the need for structural and competitiveness reform, as Ireland, Portugal, and to some extent Spain, Italy, and Greece have done by year three of the crisis. America will set out to fix potholes, decaying bridges, and decrepit public transportation systems while reducing its debt over the long term; it will understand that it needs to improve its education system, especially vocational training, to support what could become an industrial renaissance; it will need to help its small- and medium-sized companies to become more competitive in the global marketplace.
To keep financial markets calm, the US will have to at least point out a timetable and plan for these steps.
So, is Europe ahead in the reform race? Yes, in some structural reforms, but not in other ways. America has its advantages over Europe: It has cleaned up its banking sector and its real estate market; it sits on a new growth engine called unconventional oil and gas; and it is, after all, a nation-state with the tools to act, at least theoretically.
Therefore, let’s be generous and call it a tie.