Market turmoil in Europe has eased a bit and the U.S. economy
is looking healthier than expected as the global elite converge
on the Swiss ski resort of Davos for five days of speeches,
meetings and cocktail parties. But as German Chancellor Angela
Merkel rightly noted at the forum yesterday, world leaders have
yet to act on the lessons of a financial crisis that began in
2008 and has yet to really end.
In the U.S., political leaders are focused almost exclusively
on the short term, to the detriment of the long. The bank
bailouts of 2009, together with various kinds of stimulus -
- insufficient as they may have been -- helped fend off a
full- blown depression and at least partly insulated millions
of Americans from economic pain. But the bill for such measures
has to be paid. With a presidential election coming and the
banking lobby fully recovered, the U.S. isn’t likely to make
any progress toward a realistic plan to contain government
debt or repair a financial system that remains highly
vulnerable. Last year’s budget deal will trim only $2.1
trillion over 10 years, just a fraction of what’s needed.
In Europe, meanwhile, the region’s most powerful leader
-- Merkel -- is focused on the long term to the detriment
of the short. She and her ideological brethren at the
European Central Bank are pushing for a fiscal compact
that would rein in government debt in the 17-nation euro
area. They are placing this laudable goal ahead of urgently
needed measures such as a reckoning of how much strapped
countries can actually afford to pay, a recapitalization
of European banks and the construction of a credible
financial firewall to protect solvent governments against
contagion. As a result, uncertainty is paralyzing markets,
weighing on the global economy and threatening a breakup of
the euro that could make Merkel’s long-term plans irrelevant.
The challenges facing the U.S. and Europe stem from the
same phenomenon: The financial elite, investors and taxpayers
alike have become too dependent on government to protect them
from the consequences of their actions. At the same time,
they haven’t been willing to pay the full cost of the services
government provides. The most visible symptom is a buildup
of sovereign debt larger than any the developed world has seen
since the aftermath of World War II. This week, the
International Monetary Fund projected that by 2013, the
average gross debt burden of developed countries will exceed
110 percent of annual output, a level that represents a
serious drag on future economic growth.
Reversing this process will be extremely difficult. It
requires society to decide who will pay, a task complicated
by growing inequality and political polarization visible in
the standoffs between Democrats and Republicans in the U.S.,
and between Germans and Greeks in the euro area.
No group can solve the problem alone. Future retirees will
have to accept benefits less generous than what they’ve been
promised. Bankers will have to give up the taxpayer subsidies
that boost their profits and paychecks. Everyone will have to
live with higher taxes, smaller government or both. Plans
already on the table, including the $4 trillion Simpson-Bowles
deficit-reduction package in the U.S. and the creation of
collectively backed sovereign bonds in the euro area, would be
steps in the right direction.
The Davos Epiphany should be: The western civilization is on
the verge of a catrastrophic failure to balance its short-term
and long-term interests. There are considerable financial and
economic challenges around the globe. This is another wakeup
call. Hope they realize it.
