July 21, 2011 8:09 pm

Spasm or spiral? The west’s choice

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How will Europe and the US react to the twin crises they face
Matt Kenyon illustration

The other day a bright young diplomat from China set me an examination question. My first thought was that it sprang from that admirable Chinese trait of searching out enduring patterns in the clatter and chaos of events. Then it struck me that anyone watching the train crashes on either side of the Atlantic should be asking something similar.

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The US faces an unsustainable debt burden alongside sustained political paralysis. Strategic decision-making is held hostage to ideological polarisation. Democrats and Republicans may well escape a calamitous default with an 11th-hour deal on the debt ceiling. But a sticking plaster will not bridge the rancorous divide over tax and spending that piles deficit on deficit.

In Europe, the stakes have been higher still. The European Union’s core project, the single currency, has been buckling under the weight of sovereign debt and political discord. Solidarity has been lost to resurgent nationalisms. Germany’s Angela Merkel says that 60-odd years of European integration is under threat. Yet the leader of Europe’s most powerful nation has seemed frozen in the headlights of indecision.

So here is the question: do these twin crises represent one of those damaging but short-lived spasms that have periodically disturbed the advance of the wealthy economies? A rerun of, say, the 1970s? Or are the shocks of an entirely different order – a harbinger of accelerating decline as the west surrenders two centuries of global hegemony?

Relative decline is unavoidable. The rise of the rest, though, is not a problem if the west grows at a half-decent pace. To the contrary, a buoyant global economy is a positive sum game. The danger arises when strong growth elsewhere is accompanied by stasis in the west – when a spasm turns into a spiral.

The pessimistic case starts with the financial crash of 2008. This was the event that crystallised the new geopolitical order. Hitherto such events had belonged to developing nations – to Latin America or to Asia. This one was made in America.

The sacred text of liberal capitalism known as the Washington consensus was shredded. As the US and Europe tumbled into recession, it was left to the likes of China, India and Brazil to avert a slump.

The psychological impact has been profound. The west has lost its audience in the rising nations as the banking crisis has become a sovereign debt crisis. For outsiders looking in, this is about more than economics. They  see a failure of liberal democracy.

Serious fractures have appeared in the European project. The threat to the single currency could have been averted by the exercise of collective political resolve. But Europe’s politicians have run scared of disgruntled national electorates.

The markets have punished them for their timidity, turning a debt problem on the eurozone’s periphery into an existential threat to monetary union. The crisis will pass only if the agreement reached at this week’s summit signals that Ms Merkel, France’s Nicholas Sarkozy and the others have finally come to terms with the logic of the euro: the debts of one are the debts of all.

When the commander of America’s military forces is asked what he considers the biggest threat to national security, Admiral Mike Mullen answers that it is the federal deficit. The US is the world’s biggest debtor. If it wants to remain the pre-eminent military power, it has to repair its finances.

The demographic pressures on health and welfare spending promise to make things even worse. Yet Republicans denounce tax increases and liberal-minded Democrats scorn cuts in entitlements.

Behind the paralysis in Washington and prevarication in Berlin lies a troubling thought. Political systems in thrall to 24-hour rolling news have lost the capacity to make difficult choices. Globalisation imposes wrenching change and simultaneously saps the ability of governments to adapt. Politicians find it easier to argue about taxing the rich or cutting Medicare and about central bank bond purchases versus default than to confront the consequences for western societies of the profound upheaval in the global economy.

So it is tempting to say all is lost – that a political and economic model built on western primacy is cracking under the strain of the shifting balance of international advantage. The American dream and European welfare state are bending to the competitive winds of globalisation.

Tempting but premature. It is too early to despair. What makes the crises in Washington and Europe so infuriating is the fact that, for all they demand hard decisions, they are susceptible to political solution. The missing ingredient is leadership.

A bipartisan deal in Washington which restored tax rates to the levels prevailing during the 1990s and constrained the growth of health spending would go most of the way to fixing America’s public finances. A political bargain in Brussels that leapfrogged financial markets by switching Greek, Irish and Portuguese debt into eurobonds would rescue the eurozone.

There is nothing preordained about American decline. It is the world’s wealthiest country. Others may be catching up, but the US has huge advantages – technological, educational and cultural. Liberal democracy confronts a dangerous gridlock in Washington. It also supplies the ecosystem for innovation and entrepreneurialism.

Europe lacks the dynamism but has its own pluses. The absence of political leadership has not been a brake on German engineers. France boasts high productivity alongside outdated social structures. Italy produces great design. Spain, Portugal, Ireland and perhaps even Greece will eventually escape their debts. Britain still makes things.

The answer to my diplomat friend’s question is that the west still has a choice. Accelerating decline is an option, but not a certainty. Political leaders hold it within their power to fix things.

Two final thoughts. The west is not unique in its troubles. The rising powers, China among them, have plenty of problems of their own. That said, I reserve the right to resubmit my examination paper if Europe’s leaders are foolish enough to let the eurozone sink.

philip.stephens@ft.com

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