On either side of the Atlantic, the scene is the same: dramatic closed-door negotiations; days and nights of brinksmanship and finger-pointing; fears of debt spirals competing with fears of default.
What is different is the reaction to each. The American economy is the largest in the world, its government the biggest spender and heaviest borrower in the world. The consequences if the United States were to default on its debts would be incalculably greater than if Greece were to, harming not only its own borrowing ability but the whole structure of international credit. If the “full faith and credit” of the United States of America is not a safe bet, after all, what is?
And yet, with a possible default just days away, investors seem unperturbed. The interest rate on American 10-year bonds remains among the lowest in the world, and has been falling for months. It is tiny, perennially penniless Greece that has the financial markets in an uproar. This week’s meeting of European leaders is being pitched as a last chance to avert disaster, with agreement on a bailout (a second, actually) far from assured.
Of course, the two situations are not the same in one respect. The American debt crisis is wholly invented, an artifact of political disputes between and within the Democratic and Republican parties. Though present deficits and future debts are widely acknowledged to be too high, no one seriously doubts America’s ability to meet its obligations in the short term, while the long term offers plenty of time to make the needed adjustments.
If there is any prospect of default, it is because of the peculiar American requirement that the Congress must separately vote to permit the government to borrow more, having already voted to run a deficit. Usually routine, this year’s vote was seized upon by Republicans as a means of pressuring Barack Obama to consent to draconian spending cuts, a plan that was going swimmingly until the President, in a cunning move, agreed—to most of their demands, that is, but not all. As the deadline approaches, Republicans find their own intransigence increasingly contrasted with the President’s statesmanlike moderation. Never mind whether either is strictly true: should it come to a default, they will wear the blame for generations.
But then, the European debt crisis is no less artiﬁcial, in a way. Greece may have reached the limits of its borrowing capacity, but again, no one doubts that sufficient funds could be scraped together from other sources to bail it out if need be. The question is whether this is wise and, if so, who should do it. And the answer in either case is: ask Germany.
The Germans have every right to be skeptical. Why, their citizens ask, should they be forced to rescue the Greeks from their own fecklessness? What are the consequences, moreover, of setting such a precedent? What incentive do other debtor nations have to come to grips with their own fiscal problems, if by failing to do so they can force the rest of Europe (read: Germany) to come to their aid?
But the consequences of even a partial default are as dire. As satisfying as it may be to insist that private creditors take a “haircut,” that sets its own precedent. It isn’t only Greek bonds from whom creditors might then flee, but those of other, similarly situated countries—why wait, get out while you can—their debts soaring still further out of control as interest rates rose. In the worst case, Greece might become the first in a wave of defections from the euro, ultimately bringing the whole European project crashing down.
And this is the crucial difference between the two debt crises. Whatever its current political impasse, the United States retains the advantage of having both a single currency and a single sovereign debt-issuer. There is a unified fiscal authority, to complement a unified monetary authority. (Most states are legally forbidden to borrow, and even where this constraint is evaded, are in no practical position to abandon the dollar.) Investors can therefore have confidence that, one way or another, the U.S. government will find a way to make good on its debts.
The euro experiment, by contrast, was an attempt to unite several sovereign debt-issuers under a single currency—a unified monetary authority, superimposed on a welter of competing and conflicting fiscal authorities, quite insubordinate to Brussels. As such, the seeds of the euro’s current crisis were sown at its inception. To be sure, the Maastricht Treaty on monetary union laid down stringent conditions for entry: a deficit of no more than three per cent of GDP, a debt-to-GDP ratio of no more than 60 per cent, and so on. But these were soon breached, and having failed that first test of their resolve, Europe’s leaders found they had little credibility on which to draw in future crises. As, for example, now.
It’s all very well to talk, as some have, about allowing member states to borrow on a common European credit line. But it does not address the underlying problem: if Germany was prepared to finance other countries’ debts in this way, it would be just as prepared to make periodic bailouts. It may no longer be possible to put off the choice that Maastricht tried to finesse. Either Europe must proceed to a unified fiscal authority, implying a unified political authority, i.e. full federation, or it must give up on the euro.