America and Europe Sinking Together

Written on July 6, 2011 by Ángeles Figueroa-Alcorta in Americas, Europe, Foreign Policy, Political Economy

By Gideon Rachman

In Washington they are arguing about a debt ceiling; in Brussels they are staring into a debt abyss. But the basic problem is the same. Both the US and the European Union have public finances that are out of control and political systems that are too dysfunctional to fix the problem. America and Europe are in the same sinking boat.

The debt debates underway in the US and the EU are so inward-looking and overwrought that surprisingly few people are making the connection. Yet the links that make this a generalised crisis of the west should be obvious.

On both sides of the Atlantic, it is now clear that much of the economic growth of the pre-crisis years was driven by an unsustainable and dangerous boom in credit. In the US it was homeowners who were at the centre of the crisis; in Europe, it was entire countries like Greece and Italy that took advantage of low interest rates to borrow unsustainably.

The financial crash of 2008 and its aftermath dealt a blow to state finances, as public debts soared. In both Europe and the US this one-off shock is compounded by demographic pressures that are increasing budgetary pressures, as the baby-boomers begin to retire.

Finally, on both sides of the Atlantic, the economic crisis is polarising politics, so making it much harder to find rational solutions to the debt problem. Populist movements are on the rise – whether it is the Tea Party in the USor the Dutch Freedom party or True Finns in Europe.

The idea that Europe and the US represent two faces of the same crisis has been slow to sink in because, for many years, elites on either side of the Atlantic have stressed the differences between US and European models. I have lost count of the number of conferences I attended in Europe, where the debate was between two camps: one that yearned to go for US-style “flexible labour markets” and another that was passionately defending a European social model that was defined against America. Europe’s political debate was similar. There was a group that wanted to see Brussels emulate Washington and become the capital of a true federal union; and there were those who insisted that a United States of Europe was impossible. What both sides shared was the conviction that economically, politically and strategically, the US and Europe were different planets – “Mars and Venus”, as Robert Kagan, an American academic, put it. Read more…

As published in www.ft.com on July 4, 2011.


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