As Europe Turns

Apr 23 2012 @ 12:20pm

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The French election and the collapse of the Dutch government might be seen as just more events reverberating from the long, dark tunnel of Europe's post-2008 financial collapse. But one senses something more. Voters are not just revolting against incumbents; they are turning decisively against German-imposed austerity. The Netherlands, after all, was not a profligate state before the crisis. It was a well-run, budget-balanced, free market economy. And the collapse of its government over budget cuts was caused by a revolt on the far right:

Rutte's hopes to clinch a deal to cut the target below the EU's 3 percent target evaporated on Saturday, when his most important political ally, populist euroskeptic Geert Wilders walked out of the talks, saying a slavish adherence to European rules was foolish and would harm the Dutch economy.

That view is shared by some, such as the government's own Central Plan Bureau, and opposed by others, such as Dutch Central Bank President Klaas Knot. "We don't want our pensioners to suffer for the sake of the dictators in Brussels," Wilders said.

When Geert Wilders is protesting the debt spiral – in which cutting debt leads to lower growth which leads to deeper debt – it's no wonder that even Holland, a pioneer of fiscal rectitude, is likely to break the 3 percent of GDP EU rule for budget deficits in the coming year; and not worry too much. As for Britain, where the Tory government I support embraced immediate fiscal austerity to avoid a pummeling by the financial markets, the best that can now be said is that a double-dip recession has been narrowly avoided – because growth in the first quarter of 2012 is forecast to be … 0.1 percent. The country's AAA rating is also increasingly at risk, after a full-bore austerity regime. The future?

A leading think tank has warned that growth will be at an annual average of just over 1pc until 2016, hitting George Osborne’s plan to tackle the country’s debts because of the impact of slow growth on tax revenues. The Centre for Economics and Business Research (CEBR) said unemployment, currently at 2.65m, will rise to around 3m and stay there for at least three years.

The target for structural budget balance has been set back past the Coalition's original five year goal. The Tories will have to seek re-election after brutal austerity without having made a real dent on the actual debt problem. And if US political deadlock continues past the November election, the impact of sudden sweeping austerity in the US will likely tip Europe into an even deeper crisis.

Are there any lessons for the US? There are two. The first is that what we are seeing is Screen shot 2012-04-23 at 12.06.55 PManti-incumbent rage and Obama could be in for a shock this November. The second is that what we are seeing is anti-austerity rage, because it isn't just forcing people out of jobs, but because it isn't even helping to bring down the debt. I wish this weren't true, because the inherited debt has to be tackled. But the evidence pouring in would suggest that Romney would import European policies into the US, and would thereby tip the US into a second recession, perhaps worse than the first, given the continuing collapse of Europe.

I don't like this conclusion. I start from the belief that government should run surpluses in good times so that they can have some fiscal lee-way for stimulus in bad times. Readers know I deeply oppose government debt outside of structural investment, i.e. unsustainable entitlements and unsustainable empire. But if premature or excessive austerity actually deepens debt, as seems to be happening in Europe, then the equation changes.

I guess what I'm saying is that if this US election is fought around amnesiac discontent at an incumbent during tough economic times, then Obama will lose. Which is why Romney's strategy appears to be entirely that argument. But if the choice is between drastic European-style austerity on Romney lines, with the burden carried primarily by the poor and working poor, and Obama's emphasis on more long-term structural cost-cutting, infrastructure investment and more revenue from the rich now, then the equation shifts.

I may be wrong, and it doesn't thrill me, but my bet is that the West is moving leftwards for pragmatic reasons. And that America will not be immune. Pendulums swing, and the long free market period of 1979 – 2007 is giving way to a more government-based management of the unintended consequences of the right's initial success and subsequent over-reach. And if Obama doesn't use Europe as a warning sign for what Romney would bring to America, he'd be missing out on an important opportunity.

(Graphs from Knoema.)