The truth about the crises in the US and Europe in Il Sussidiario primo agosto

Economics & Finance
FINANCE/ The truth about the crises in the US and Europe
Giuseppe Pennisi
lunedì 1 agosto 2011
(photo Fotolia)
Approfondisci
THIRD WAY/ A second financial crisis if we don't learn from the last one
EUROPE/ The Greek Problem and more
CRISIS/ Living Under the Volcano of Debt (1)
vai al dossier Economic & Financial Crisis
If someone were to ask me what the crux of the problem of US sovereign debt was, the response that would come to me spontaneously (having studied and worked in Washington for 18 years) would be: “It’s federalism, my boy!”. If, instead, one were to ask me to explain the problem at the heart of the sovereign debt of Greece, Italy, Spain and Portugal, I would respond with equal immediacy, given that I was born and live in Rome and have been married to a French woman for 43 years, “It’s the difference in productivity and competitiveness in the Eurozone, my boy!”.

I believe it is essential to grasp these fundamental aspects. Otherwise the “Atlantic” sovereign debt would end up in a cauldron where everything is indistinguishable. The United States has a Constitution that limits the functions of the Federal Government to national defense and foreign policy. The other functions (even in the area of economic policy and public finance) belong to Congress or (especially in the areas of education, health care, and social and industrial strategies) to each of the 50 states of the Union.

The President and Congress are elected in different ways, with different electoral systems and even different electorates. The President is not an expression of the Parliament, but gets his own authority from the electoral college. Likewise, Congress responds to its voters. For this reason, the federal balance sheet is not born with a financial law proposed by the White House, but inside the relevant Committee in the House. The tenant of the house at 1600 Pennsylvania Ave can reject it, but if it is approved by the appropriate majority, either he accepts it or he packs his bags and leaves the Oval Office to his Vice-President for the rest of the term.

Analogously, the level of public debt (now around 100% of US GDP) has to be “authorized” by Congress, on the basis of paragraph 8 of Article 1 of the Constitution. If they do not authorize it, no Secretary of the Treasury can use a decree to begin issuing Treasury bonds.


August 2 is the deadline for bonds totalling several million dollars. To refinance them, they need new emissions and, thus, a new raise of the debt ceiling. The last raise was authorized on February 12, 2010. If there is no authorization, the federal government will be technically “insolvent”. It is clear that underlying the battle over, essentially, accounting, lies a battle of economic policy (principally relating to federal intervention in the matter of health care)
It is also clear that the agreement that could be made would be a turn-around for the Obama Administration since it would be a shift in the plans he announced during his election campaign and inaugural address. If they do not come to an agreement (Congress has the whip in hand), Obama will have to think about an early move-out. After insolvency, there will be ugly surprises in terms of the budget.

The European problem is completely different. We are not caught up in differences in economic philosophies within a single country (even with a federal structure), but in differences in economic strategies between countries that gave life to a monetary union. The main consequence of the irreversibility of the euro was not processed at the time. Those who had grown accustomed to naughty behavior—governments, parliaments, bureaucracies, businesses, families, individuals—should have been more virtuous than others to avoid being crushed by the others’ increased productivity and competitiveness. Those that did not take the path of virtue thought that they could staunch their debt by hoping that the Good Samaritan EU would come sooner or later.

An essay that will appear in the next issue of the magazine “Discussion on Estonian Economic Policy” describes the situation well. Two professors from the University of Greifsweig (one of the oldest in Europe, founded in 1456, located on the Baltic Sea near the border with Estonia) wrote the piece, which is only available in German at the moment. The essay documents that the Eurozone—that Estonia just entered into—is at risk because of the marked differences in economic policies and procedures (notable in the areas of work and business). The agreements reached to staunch the sovereign debt of this or that country are just Band-Aids. Or aspirin in cases that should require a surgeon.

The Estonians are thinking about this. It would be good if we could join them.

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