Monday, 25 July 2011

Political games are exacerbating both Atlantic debt crises

These are not exactly inspiring times for leadership in the Western world. On both sides of the Atlantic, a potential catastrophic default is looming largely as a result of short-sighted political manoeuvring. This is leading some to question whether the 20th century democratic institutions we have built our societies around are adequate to handle the challenges of this century.

In the United States, Republicans are holding hostage an authorisation to raise the amount of money the US is authorised to borrow – normally a routine housekeeping operation done by every congress – until the Obama administration agrees to massive cuts in government spending. The Democrats have offered to give them those cuts, but only if they are accompanied by an increase in taxes on the wealthiest Americans and the closure of corporate tax loop holes. The Republican leadership, terrified of the reaction of their base voters to any tax increase (even if it will have no effect on 98% of Americans) have refused the offer.

If the United States does not raise the debt ceiling by 2 August, it will go into default. This would almost surely have a disastrous effect on the worldwide economy. This weekend UK Business Secretary Vince Cable said that the "rightwing nutters" who are holding the debt ceiling authorisation hostage for their short-term political gain are a bigger threat to the world economy than the problems in the eurozone.

But conservatives in America aren't the only ones playing with fire in order to reap short-term political gain. The same kind of thinking seems to be guiding Cable's coalition boss. Over the past week UK Prime Minister David Cameron and his ministers have been saying that the UK intends to exploit the current eurozone crisis in order to "maximise what we want in terms of our engagement in Europe."

What he is referring to is the upcoming EU treaty changes that will be necessary to establish greater financial centralisation in order to save the euro currency. Although the UK is not one of the 18 countries that use the euro currency and would be unaffected by the treaty changes, all 27 member states would still need to approve them. Cameron intends to go into the meetings threatening to veto the measures necessary to save the euro unless he is given concessions that would loosen the UK's ties to the EU, concessions that have nothing to do with the eurozone or the current debt crisis.

The comments came as a surprise to many observers. Europe is on the precipice of an economic disaster, and a collapse of the euro would be devastating to the British economy - especially given that 40% of British trade is with the Eurozone countries. Urgent action is needed to save the euro. And yet Cameron would play with his ability to vetoe the measures to save the common currency as if it was a chess piece. And for what? At this point that is unclear. He hasn't outlined what concessions are so urgently needed by Britain to make this dangerous strategy worth it. It is clearly an attempt to assuage the hardcore eurosceptic wing of his party, for whom disengagement with the EU is the number one goal. And since he promised the public a referendum on any EU treaty changes in the future, he is also trying to placate the Eurosceptic British public in case he does have to call such a referendum.

It's remarkably similar to what's going on in America, where the conservative political leaders are playing with fire in order to appease their ideological base. And they both risk massive self-inflicted wounds if their political brinksmanship results in a failure to prevent economic collapse. Both sides made political promises to their base that showed a lack of foresight - be it "no new taxes" or "an ironclad referendum lock".

The eurozone issue has exposed a deep rift between the British Conservatives and their governing coalition partners the Liberal Democrats. Deputy Prime Minister Nick Clegg on Thursday blasted Cameron's Europe strategy, saying:
"I don't think it is right at all for us to immediately start speculating: 'Oh can we get this back, can we get this back, can we demand this price, can we demand that pound of flesh?' This is about us working with our eurozone colleagues because it is massively in our interests to do so…If this is constantly seen through the old-fashioned prism of a sort of zero-sum game – that if something goes wrong elsewhere in Europe we gain – we really are going to grab the wrong end of the stick. It is not a zero-sum game. We really are in all this together when it comes to Europe. What happens in the eurozone has a direct effect on employment, on prosperity, on living standards in our country."
As the world waits to find out what will end up happening over the next two weeks, leaders on both sides of the Atlantic seem incapable of taking the necessary action to pull us back from the brink because of short-term and self-defeating political pressures. The same can be said for German Chancellor Angela Merkel, who has let domestic political resistance to saving Germany's Southern neighbours render her frozen in inertia as the crisis has unfolded.

So what is the solution? Is the public to conclude that the structure of our current political institutions is just not up to the challenges we face today? It is a troubling prospect, but with the massive failure of political institutions we have witnessed during the crisis, these are questions that are going to be increasingly asked.

1 comment:

Anonymous said...

There is so much politics here and no real leadership. Everyone is concerned about getting re-elected rather than doing what is needed to save the global economy. It makes me completely lose faith in democracy.