A couple months ago, I had a conversation with a financial adviser who I respect highly. He told me he feared another major correction in the stock market. He saw trouble in Europe and felt it would spill over to this side of the Atlantic. I responded that I felt Euro dysfunction has already been factored into pricing on the market. He saw something I did not see.
My wife will tell you that I am an optimist who has too much faith in such things as people making good decisions, our leaders doing the right thing, technology creating solutions that make our lives better and markets responding properly to new information in appropriate ways. She argues that she is not a pessimist, but rather is a realist.
I think she is correct in her assessment of my optimism. When the global financial meltdown accelerated almost four years ago, I knew there was sufficient wisdom to avoid the worst of it. I became increasingly frustrated that politics trumped economics, and stupidity trumped wisdom. I began to write as a cathartic way to relieve my growing frustration with a crisis in global leadership. Unfortunately, I have not stopped writing.
It seems that we are going through Global Financial Meltdown Part II, and for almost identical reasons. This Groundhog Day in global markets is arising because of an explosive mixture of incompetence, poor leadership and the politics of mutual destruction, and outright hubris. Last time around, it was on this side of the Atlantic, and Europe lamented about how unenlightened the fragmented politics of the United States has become. This time, the shoe is on the other foot.
This ability to transform economic and political dysfunction into an export industry has taken root in Europe. Their body politic is as divided as ours, but for different reasons. They are not a European Union with a two party system, each bent at discrediting the other, but a loose coalition of nations united by a single currency. Their mutual distrust of such a fragile economic coalition ensures their economic union is weak, without the tools of economic policy necessary to bolster weak economies and capital flight. Their political coalition is wary of such countries as Germany, and remember especially vividly World War II.
I saw this in the form of an interview from an articulate Greek woman who argued that Germany will have to bail Greece out because Germany is afraid if Greece goes, Spain and Italy are next. Her nation’s theory is that Europe may be willing to sacrifice Greece, but not Spain and Italy. She felt that was just as empowering for her country to be the first domino nobody wants to fall, just as “too big to fail” may have been enabling to the big investment houses that brought us down over here.
This argument of the deterrent effect of mutually assured economic destruction is as dysfunctional economically as its counterpart in the Cold War was in the global politic. However, it highlights an important contrast. Both sides of the argument make sense.
Merkel’s economic policy of austerity is valid, just as the Republicans make a valid, if perhaps ironic, economic point here. The public sector has been growing at an alarming rate, not necessary by producing more services we value, but instead by promising those fortunate enough to get public jobs good salaries and great pensions. The cost inflation rate in government, and the expected ballooning of these costs in the future as pension promises are fulfilled, will create an economic time bomb that only immediate and drastic measures can counter.
Recently elected French President Hollande also makes a valid point, though. We must stimulate our economies so we don’t try to grow out of an ever deeper hole. President Obama made this point, but he did not command sufficient leadership to set us on a path of private sector stimulus and public sector austerity. We shall soon see if Europe can learn from our failures.
What would be truly troubling is to discover that Europe takes the easy path that we took. We transformed a stimulus package into a way to buttress a public sector that instead needed to shrink before it crowded out the private sector that is the source of our export-led growth. Politicians realize public-sector jobs and public pensions are politically popular. Populist politicians pander to their public, and our economy is left poorer. Stimulus funds are squandered, and our economy spirals downward.
The Irish are voting today, and the Greeks will vote next month as an expression of whether to do the right thing or whether to past the buck, kick the can, and cast their die. The optimist in me would like to believe they will do the right thing and live up to their responsibilities. I also hold on to the belief that European leaders will get together, leave dogma at the door, and work out a solution of short-term infrastructure stimulus where it is most needed, and long-term austerity where there is the most political spend-thriftiness.
There I go again with my optimism. Maybe I should ask my wife, the realist.
Colin Read chairs the Department of Economics and Finance at SUNY Plattsburgh. Continue the discussion at www.pressrepublican.com/0216_read