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Buck Stops in Washington, Not in Berlin

Irwin M. Stelzer

The G20 nations are gathering tomorrow in Los Cabos, Mexico, to “deal frankly with the current problems in the world, particularly Europe,” according to the gathering’s host, Mexico’s outgoing president, Felipe Calderón. Not too soon for Americans, who have three reasons to worry that what is called “contagion” will carry the eurodisease to our shores.

First, they worry because President Barack Obama has told them they should. The president fears, or says he does, that turmoil in Europe will abort the US recovery by creating pressures on the global financial system.

Second, Americans know that our recovery is both sluggish and fragile. A report last month showed job creation slowing and the unemployment rate ticking up, and last week’s data report showed that retail sales are falling. With consumers accounting for two-thirds of all economic activity, continuation of a downward trend in their spending could indeed turn the weak recovery into a more-than-minor recession, especially if the shock waves from a European meltdown lap on US shores.

Third, Americans have seen their personal wealth wither, and are eager to hold on to what is left of their assets. The net worth of a family right on the middle step of the nation’s wealth ladder came to $126,400 in 2007. Over the next three years that family watched its wealth shrink to $77,300 as house prices collapsed. That same family’s annual income fell from $49,600 to $45,800. Little wonder that this shocked middle worries where the next blow might come from, and fears that Europe just might prove to be that source.

Underlying all this is election-year politics. Obama claims he inherited a poisoned chalice and has suffered blows not of his making. George W Bush did initiate a wildly expensive prescription drug programme while at the same time cutting taxes; the Japanese tsunami did interrupt manufacturers’ supply chains; and Europe’s inability to get to grips with its problems is making American stock markets skittish. Obama’s challenger for the White House lease, Mitt Romney, insists Bush’s profligacy, Japanese floods and European woes have less to do with the current state of the American economy than the president’s failed policies, especially his close to $1 trillion stimulus package.

All of this political toing and froing means that it is no easy thing to make an informed guess as to the likely effect on the American economy of a continued failure of the eurocracy to do more than kick an already battered can down the road to ruin. But let’s try.

The idea that a European recession will cause a reduction in American exports to the region is correct: sales of made-in-America stuff to Europe declined by 11% last month, and Starbucks is reporting a decline in the amount of caffeine it is able to persuade Europeans to pump into their blood streams. But the notion that softening demand in Europe was responsible for the decline in jobs growth and the uptick in the unemployment rate last month has little grounding in the hard reality of empirical data.

Although exports have been contributing to America’s recovery, we remain a nation not highly dependent on peddling stuff to foreigners. To the extent that we do, our leading customers are Canada and Mexico, not widely considered to be European countries. Last year, total exports accounted for a bit less than 14% of our GDP, 22% of which went to the EU—or 3.1% of GDP. Last month, the month of the miserable jobs report that the president wants to pin on the EU, the 11% drop in our exports to that troubled area came to a mere 0.3% of our GDP. If anyone outside the White House believes that such a trivial drop caused job creation here to slow, he has yet to emerge.

Nor is there reason to believe that an upheaval in the European financial sector will necessarily hit its US counterpart. America’s banks have passed through stress tests that make those imposed on Europe’s banks look flaccid; America’s banks are far better capitalised than their European counterparts, and awash in deposits; America’s banks and money funds have sharply reduced their exposure to European banks. And America’s policies towards its financial sector seem more likely than Europe’s to prevent cascading problems.

A look at the two sets of policies shows why. The failed 100 billion bailout of Spain’s banks was a bit of a Ponzi scheme. The EU lent Spain money—source of funds unspecified—which the Spanish government is to use to shore up its banks, which will likely use the funds to buy their government’s debt. So government debt goes up by 100 billion, taking it to a level at which repayment is virtually impossible. No wonder this shuffling of paper failed to impress markets. In America, by contrast, the government poured $700 billion of real, albeit taxpayer, money into the banks through the Troubled Asset Relief Program (Tarp) and—something the eurocracy (read, Germany) cannot be persuaded to do—guaranteed bank and money fund accounts to the tune of $250,000. Result: no run on the banks of the sort that is now under way in Greece and, to a lesser extent in Spain and Italy, as depositors seek safety in other eurozone countries and, for those who can, in British pounds, Swiss francs, American dollars and other safe-haven currencies.

None of this means that America will remain completely unaffected if the eurozone collapses or comes close to doing so. After all, the rippling consequences of the demise of Lehman Brothers proved that we do not completely understand all of the interrelations of the world’s financial institutions. But it is more rather than less likely that the future course of the American economy will not be set in Berlin, or tomorrow in Los Cabos. It will be up to the voters—a group often not consulted in Europe—who do have a choice of paths to prosperity: the Barack Obama road that ends in Washington and the state capitals, or the Mitt Romney road that runs through the private sector.

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