Sunday, May 6, 2012

European Elections: Things Just Got Wilder

Today’s election results in France and Greece are bad news for the Obama campaign.  The narrow victory of Francois Hollande over Nickolas Sarkozy in the French presidential election throws a serious monkey wrench into the machinations of Mr. Sarkozy and German Prime Minister Angela Merkel to prop up the euro.  Although Mr. Hollande promises to meet with Ms. Merkel at the earliest possibility, he is on the record as pledging to renegotiate the accord.

In early reporting in the wake of Hollande’s victory, Voice of America reports an observation by Charles Kupchan, a Europe expert at the Council on Foreign Relations in Washington.
“He’s called for renegotiating the fiscal pact,” says Kupchan, referring to the economic agreement forged by the European Union to stabilize the euro currency.

“Hollande’s call to reopen that pact, and to focus more on stimulus than austerity, will certainly win him some support in France and in other European countries—notably Italy, Spain, Greece, Portugal—but it could spell trouble with Berlin,” Kupchan adds.
The bravado of this commitment will be made hollow if he follows through on his campaign promises to raise taxes on the rich, freeze fuel prices, increase welfare payments, and hire 60,000 new teachers.  Squeezing the already sluggish French economy to achieve these goals will only weaken it further.

Also today, Greek voters gave a stunning rebuke to the ruling PASOK socialist party, whose share of the vote dropped from 44% three years ago to 14% today.  The center-right New Democracy party took first place, but with a paltry 20%—half its previous total.  Fringe parties made great gains at the expense of these major parties, further exacerbating the political chaos.

Greece has been caught between the devil and the deep blue sea since it agreed to intense austerity as the price of a bailout from the European Central Bank and its patrons.  As long as it puts remaining in the Eurozone ahead of national economic health, the Greeks are facing decades of increasing poverty. 

The fragmented results mean that New Democracy will be hard-pressed to form a coalition government—and it doesn’t have much time.  The new government faces an immediate test next month when it will have to decide whether to approve another €11 billion in spending cuts for the 2013-4 budget to keep the bailout funds flowing.

Even before Sunday’s voting, both Spain and Great Britain had officially slipped back into recession.  Criticism of the austerity-centered euro rescue plan had already been increasing in volume, as predicted, from the Mediterranean periphery of Europe.  But now, with Hollande’s ascension to the Élysée Palace, Germany’s key partner in the euro protection scheme is threatening to unwind the precarious deal negotiated just last December.

In the global context, this means that Europe will continue to struggle with fiscal stability and economic stagnation, and that a continent-wide double-dip recession is a real possibility. 

This is good news neither for the global economy nor for the United States.

Prospects for the U. S.

Here in the U. S., the economic news was already dim.  Job growth continues to be sluggish and far off the pace of every previous recovery since the Depression.  Real unemployment is still in double digits, the official rate notwithstanding.  And although manufacturing and exports are up—normally good news indeed—dramatic weakening of the European economy threatens, at least in the short run, to drive up the dollar and depress American exports.

Economists left and right are increasingly vocal in warning of a powerful shock to the domestic economy looming right after the election, if the Bush tax cuts expire and the federal budget cuts negotiated last year in the debt ceiling imbroglio kick in.  We see little evidence that either the Congress or the Obama administration has the will to address the problem—not surprising, given the looming presidential and congressional elections.

Writing last month in the Christian Science Monitor, Howard Gleckman, resident fellow at The Urban-Brookings Tax Policy Center, writes,
There [is], however, one small problem: Such policy by paralysis would likely wreck a still-fragile economy.  A new analysis by my Tax Policy Center colleague Dan Baneman finds that letting the Bush/Obama tax cuts (including the payroll tax cut) fall off the cliff would increase taxes on an average American household by $3,000 in 2013 alone.  That’s a steep 5 percent cut in after-tax incomes.
Eighty-three percent would see their taxes rise, and among those making about $60,000 or more, just about everyone would face a tax hike.  Those making between $50,000 and $75,000 would pay about $2,200 more, while those making more than $1 million would pay $175,000 more.  The top 0.1 percent, whose income averages nearly $7 million, would pay a whopping $480,000 more.

On top of massive spending cuts, this year-end train wreck would result in a deeply austere budget.  Taxes would increase by 2.5 percent of Gross Domestic Product in a single year, the Congressional Budget Office estimates.  Nominal spending would fall for the first time since 1955.  With interest rates already close to zero, the Federal Reserve could do little to offset this fiscal austerity.

The deficit would fall, all right.  The Congressional Budget Office figures the deficit would decline from 7 percent of GDP this year to 3.7 percent in 2013 and to a very manageable 1.5 percent by 2015. 

It would, that is, if the economy didn’t collapse.

The Chinese Complication

On the other side of the globe, the once-golden Chinese economy has entered a period of slowing growth, a situation fraught with potential global dangers of its own.  Just seven weeks ago on the CBS Money Watch website, freelance business analyst Constantine von Hoffman, referred to the key role played by Chinese government lending both domestic and international in staving off further economic downturn.
Much of this money went to assets that are of dubious value and created a massive version of the U.S. real estate bubble.  Because China is the world's largest creditor, the bursting of that bubble will play out differently than in the U.S. or other developed economies.  For one thing, Beijing doesn't have to borrow money to pay off debts.  However, it also will have less money available for buying less debt from other nations, likely making it harder to finance government debt.

The good news for the U.S. is that China's slowdown means less demand for many commodities, including oil.  That should result in lower gas prices. Unfortunately, Chinese demand for American natural gas also is likely to decrease.  The People's Republic also will have less need for other U.S. exports, such as heavy machinery and business services.

Ultimately, a slowdown in China's economy is worrisome for the U.S. because it would contribute to the broader decline in demand around the world.  That could trigger a global recession, undermining the American economy just as it starts to recover. 
This analysis, of course, doesn’t address how the coming European recession will exacerbate the impact of China’s slowdown, nor exactly where the U. S. fits into these global dynamics.

Slowdown also appears likely for India, as well as Brazil and don't even mention poor Russia.

It’s a shame we Americans are still in deep denial about the precariousness of our fiscal situation.  Alexander Hamilton, champion of government debt as an instrument of domestic credit generation, would blanch at the out-of-control financial position of our combined public and private debt.  When we grid this against the burgeoning European debt and a decreasing Chinese capability to buy up even more of it, it is difficult to see any positive outcomes as long as we are all officially committed to business as usual.

And while many of us are deeply concerned about a potential outbreak of runaway currency inflation—a de facto declaration of bankruptcy—our collective unwillingness to even speak of this very real possibility gives an even more surreal tinge to the current political campaigns in the U. S. than normal.

All of these factors point toward a serious slowdown in the American economy over the next year, and with that the increasing likelihood that Barack Obama will follow Jimmy Carter and George H. W. Bush as a one-term president.

California Sticks Its Head in the Sand

Here in California, the irony is that the governing Democrats are implementing a very Greek-like austerity scheme, clumsily tarted up with pretensions of grandeur in schemes for a high-speed rail system and “green jobs.”  Already since taking office in January, 2011, Governor Jerry Brown has signed off on billions of dollars of budget cuts.  And even though he and his public sector union allies are pushing a “millionaires’ tax” increase on the November ballot, no one is under any illusions that it would, should it pass, actually balance the state budget.  Like the poor Greeks, Brown and the legislature will be back, hat in hand, looking for either more money or forced to implement more austerity.

Only there will be no Angela Merkel or Mario Draghi to offer us a deal.

Like the Democrats in Washington, California’s state leaders resolutely avoid solutions that might actually help.  The central global problem is fiscal uncertainty.  The actual economy is fine in what it’s generating now and even more so in what awaits us in the wings.  The prospective productivity increases—the key to prosperity—that new technologies in almost every field promise are incredibly exciting and offer a potential round of wealth expansion as powerful as the post-World War II era.

There is little that any state can do about the fiscal uncertainty challenge, except do its best to reduce its debt exposure as prudently as possible.  Easier said than done, unfortunately.

Since state leaders face the unpalatable choice between tax increases that could derail our already anemic recovery and more budget cuts that can have the same result, you would think they would engage in a vigorous debate about what state government could be doing—or stop doing—to support economic growth.  It’s really the only way government can contribute to solving the problem.

But that is not happening—and hasn’t happened since the recession began in 2008.  The Democrats simply will not buck their financial base of unions, trial attorneys, and environmentalists.  The Republicans have all but taken themselves out of the game, and so provide no threat to which the Democrats might respond by engaging some of their proposals.

And the voters, who are actually responsible for what government does or doesn’t do?  Well, we continue our resolute schizophrenia, still wanting lots of expensive government services and being unwilling to pay for them.  Oh, sure, polls show taxing other people is popular; but, as Margaret Thatcher once famously observed, eventually you run out of other people’s money.

Oh, and since the global crisis is fiscal in nature, we can’t rely on financial or monetary solutions until we achieve a new international fiscal stability—something unfortunately not even yet on the horizon.

It’s the Economy, Stupid

What we can be doing is focusing on economic solutions, and that means finding non-fiscal means of promoting the stability upon which sustainable growth must stand. 

There are things we should stop doing.  These include forgoing selling bonds for the high-speed rail project and any other such luxuries, addressing the state’s public pension deficits, and shutting down our hubristic and costly experiment in singlehandedly reducing global warming through forced CO2 emissions reductions.

And there are things we should start doing.  These include ruthlessly lowering the cost of government by applying modern technologies and employment practices, assiduously reducing the regulatory burden to the barest minimum to protect public health and safety, and systematic investment in necessary physical infrastructure upgrades, including our water collection and delivery systems.

People are naturally creative.  We do not have any shortage of entrepreneurs and business people prepared to make and sell things people want the world over.  We do not have any shortage of demand for those goods and services.  We have enough collective brain power to solve any problem that comes our way.

What we have is a leadership crisis, and by leadership the Recovering Bureaucrat means both official and the unofficial leadership.  Demonstrably our official leadership is desperately clinging to the institutions of the past, doing everything they can to prop up useless and dying systems.  But the rest of us have no right to point fingers; we are the enablers of this failed leadership.

Sarkozy and PASOK lost in large part because they defended a Eurozone that cannot deliver on its promises without destroying Europe in the process.  Here in the U. S. President Obama, who also never delivered on his grandiose promises, faces the same fate; today’s news significantly increases the chances that he will be a one-term president.  Even the Chinese are heading into turbulent waters, because they cannot deliver forever on the promise of unbounded prosperity while suppressing political freedom.

And all of these failures spring from populations—China’s possibly excepted—that demanded the impossible of their elected leaders, populations unwilling to face and address unpleasant truths.

It’s difficult to predict when California’s turn will come.  The irrelevance of the state GOP means that we will have to wait for the emerging split in the Democratic Party between its statist wing and its (mostly ethnic minority) pro-jobs wing.  Those tensions increase daily, and although currently the statists still hold the upper hand, leading Democrats like Lieutenant Governor Gavin Newsom are becoming increasingly restless about the economic damage the statists are responsible for.

If and when the Democrats get a 2/3 majority in the state legislature, it will be only a matter of time before this simmering civil war breaks out into the open, for they will no longer have the Republicans to blame.  Their constituents will start holding them accountable, and the politically adroit among them will respond by championing the economy over the government.

In the meantime, if the looming double-dip recession hits, this may all be mere speculation, for if the population really gets angry, all bets are off.  Just ask Nicholas Sarkozy and Evangelos Venizelos, the PASOK leader.  Mr. Obama better prepare himself to follow their lead.

Something tells the Recovering Bureaucrat we ain’t seen nothing yet.

No comments:

Post a Comment