Euro piquePosted: 25/06/2012
By Dr Dana Allin, Senior Fellow for US Foreign Policy and Transatlantic Affairs; Editor of Survival
Last week was another bad one for the euro, with the eruption of a particular brand of pique that I’m frankly surprised we haven’t seen more of. At the G20 meeting in Mexico, Jose Manuel Barroso, president of the EU Commission, reacted badly to a Canadian journalist’s question about why North Americans should ‘risk their assets’ to support the Europeans. ‘Frankly’, replied Barroso, ‘we are not here to receive lessons in terms of democracy or in terms of how to handle the economy. This crisis was not originated in Europe … this crisis originated in North America and much of our financial sector was contaminated by, how can I put it, unorthodox practices from some sectors of the financial market.’
Barroso was right, of course, and he was also spectacularly wrong. He was right about the origins of the crisis, and he might have added something about long-running imbalances of American over-borrowing against Chinese over-saving that fed the housing bubble. But this would have raised the awkward parallel problem of chronic imbalances within the eurozone, such as those that fed Spain’s real-estate bubble. Except in the relatively minor case of Greece, government spending had little to do with it.
In any event, if Europeans continue to march obdurately towards a cliff, the fact that American mortgage lending and financial-market innovations may have started them in that direction does not constitute much of an alibi. The Obama administration has tried to convince the German government of Angela Merkel to act more decisively, and generously, against the crisis; but Merkel was not budging much at a European mini-summit on Friday.
This is, potentially, a rich field for transatlantic resentment. For a long time, the common view in the US has been that Europe’s slow-motion catastrophe is the single biggest threat to Obama’s re-election. (This idea was strongest when growth seemed to have been restored to the domestic economy, but still holds sway even after US jobs growth slowed.)
There are bigger stakes, of course, than Obama’s re-election. Europe’s economic and attendant political eclipse is certainly the biggest pending threat to Western unity and coherence. As Erik Jones and I argue in a new Adelphi book, after a decade of terrorism, war and economic crisis sapped American confidence, the Obama administration has made a decent start on redrawing a more sustainable, but still quite robust and assertive, world role for the United States. But this strategy depends crucially on having capable partners, and the strategic weight of the European partner is now very much in doubt. To the extent that Europe remains mired in financial crisis and economic stagnation, it will be more or less dead weight.
Meanwhile, the European crisis has entered American politics in a highly ironic fashion. Through the past year of Republican presidential primaries, candidate after candidate accused Obama of wanting to turn the US into a version of ‘socialist’ Europe. But the threat to Europe is not socialism, or even excessive government spending. (As Jones and I also write, the fiscal component of the crisis was really significant only in Greece.) The irony is that on the crucial question over economic stimulus versus fiscal austerity, the Republicans’ thinking is very much in line with that of Europe’s most important leader, Chancellor Merkel.
Indeed, Mitt Romney’s economics adviser Glenn Hubbard made this explicit in a recent guest commentary in German financial newspaper Handelsblatt, in which he accused the US president of giving Germany the wrong advice. ‘The debate over fiscal policy in the eurozone is part of the global problem of excessive debt creation,’ Hubbard writes. ‘While the US president advises the Europeans to lay on more debt-financed spending, he is presiding over an unparalleled peacetime deficit in the US.’ Hubbard’s article prompted another somewhat petulant reaction at the G20 summit, this one from Obama. ‘We have one president at a time’, Obama said at a press conference, ‘and one administration at a time. And I think traditionally the notion has been America’s political differences end at the water’s edge.’
On the substance of the matter – how Germany needs to restore confidence in the euro – Obama is, I think, correct. On the niceties of transatlantic politics, however, he sounds a bit quaint.