The great fear of a possible dissolution of the euro has vanished. The compromise was reached and everyone seems to be happy and satisfied. As usual, members of the European Union discuss and debate while problems worsen and magnify, but, as soon as brink of a breakdown gets closer, an agreement is reached and life begins again. We are now used to this growth-through-crisis pattern in Europe, and therefore we accept compromises with a sigh of relief. Relief comes from the fact that we managed to avoid the abyss. Speculation raged until last Monday, financial markets were dancing and interest rates on our national debt went through the roof. Before the indiscretions and then the news of the agreements from Brussels calmed stock exchange anxieties and lowered the interest rate spread between Italian and German Treasury Bonds, returning them to levels that preceded the great storm.
The compromise can be considered satisfactory because it strengthens and makes more flexible the so-called “State-Saving Fund” (technically, the EFSF, European Financial Stability Facility) supporting countries in need, extending the maturity of loans and reducing their cost. Furthermore, EFSF has been granted an opportunity to participate in the recapitalization of banks and, in exceptional circumstances, it will have the option to purchase Treasury Bonds of any country. This is a big step forward, hopefully the beginning of a stronger and more effective European economic policy, although the still remarkable size of the fund (440 billion) would not be sufficient for tackling a prolonged crisis of larger countries such as Spain or Italy. In any case, given the ever-persisting divergences existing among the different European countries, we could not have expected better conclusion.
For this reason financial markets have welcomed the decisions that were made in Brussels, despite the inappropriate and unwarranted intervention of a well-known credit rating agency. Certainly, the price paid for over a year of discussions between France and Germany and between governments and the European Central Bank, is astonishingly high. If this compromise had been reached in a timely manner, one year ago, it would have cost less than half and all the tensions and risks that have hurt us so much in recent months would have been avoided.
We should not mistakenly believe that these monetary storms cannot return in the future. True, we made it safely through the current tensions, but no mechanism capable of absorbing economic shocks and planning the steps necessary to adjust imbalances and mediate tensions that inevitably arise between the discrete member States was created.
Unlike Europe, the United States possess these crucial intervention instruments. And it is actually the possession of such tools that makes the hypothesis of a U.S. bankruptcy quite implausible, despite a deficit much higher than the European one and the continuing dispute between Republicans and Democrats. Yet, there are only a few days left to August 2nd, the day on which, in the event of a lack of an agreement, the federal government spending would be suspended, thus signaling a de facto state of insolvency. Reaching a compromise will not be easy, as Republicans and Democrats have completely conflicting strategies in place to restore the country’s budget. The first want to slash spending. The second want to associate controlled spending with increased taxes for higher income categories and, above all, they fiercely oppose cuts in social spending programs such as healthcare for the poor (Medicaid) and healthcare for the elderly (Medicare). The agreement is made even more difficult by the approaching presidential elections and by the great influence of those who would actually decrease the tax burden (the so-called Tea Party Movement), which weakens the position of those in the Republican Party who are willing to mediate to reach a comprehensive package of tax increases and spending decreases. Facing such a grueling confrontation, American politicians are now converging on minor measures whose marginal impact will be insufficient to correct the astronomical US deficit. Thus, the debt ceiling will have to be raised beyond its current level in order to allow spending beyond August 2nd.
In the United States, as well as in Europe, then, the most popular strategy is postponing problems until exasperation is reached, with the difference being that, in America, no speculator attacks Treasury bonds and rating companies limit themselves to generic warnings, which shake politicians but do not move financial markets an inch. Decision-making sluggishness is by far the greatest risk to be overcome in order to keep European and American democracies afloat. The main difference is that the strength of the American political system allows for smooth sailing, while the European system keeps drifting through mighty storms.