Europe's Structural Reforms Are Serious
Euro zone has reached a consensus while U.S. remains divided
November 7, 2011
The markets are tumbling, the euro is crumbling, but I'll say it anyway: Europe is doing a better job handling its debt crisis. Visiting the IMF and World Bank fall meeting in Washington, two former members of the European Central Bank joked about whether it is better to have a plan that the financial markets do not fully buy into or to have no plan at all—as they felt applied in America. They have a point. You can't go anywhere unless you get on the road. Europeans have been en route for a while, Americans are still running warm-up laps on the parking lot. Yes, they have a debt commission, but who actually expects an outcome? It is more likely to increase acrimony than produce results.
Europe, by and large, has reached a societal consensus that decades of profligacy have dealt a near fatal blow to the continent; countries will now have to live within their means to allow for a sustainable future. In the United States, on the other hand, the belief in some sort of financial exceptionalism is still alive and well. According to the invincibility-school-of-thought the United States debt is not subject to the brutal laws of the financial markets because it is (still) the world's reserve currency that can denominate debt in its own currency. And therefore, one side of the political spectrum believes that growth will pay for any stimulus spending while the other side contends that growth will pay for any tax. In reality, both have some immediate positive effect on growth, but also a long-term negative effect on the balance sheet of the country. Yet, neither side in this debate is willing to abandon its long-held beliefs for the sake of fiscal sanity. And even some of those who claim to favor balanced budgets only usurp the new framing to hide their hostility toward the state as such.
It will need a societal consensus on the basics of financial sustainability for decisive political action to be possible. In Europe, this process has long started. Many countries will have reduced their budget deficits to 3 percent by 2013 or 2014; some countries will even reach a primary budget surplus next year.
So, everything hunky-dory in Europe? Well, not quite. There are questions about austerity: Has the strategy worked to pass back-loaded austerity bills in the big countries in order to be able to take more radical steps in countries close to bankruptcy? And then there is this question: Can an incomplete monetary union that has no single nation state to back it up, respond decisively in times of crisis? This question may ultimately prove to be key, but it is a question about governance, not debt. Europe's structural reforms are serious.