But the real risk for the global economy is in Europe. Spain and Greece are in depression, with no hope of recovery in sight. The eurozone's "fiscal compact" is no solution, and the European Central Bank's purchases of sovereign debt are at most a temporary palliative. If the ECB imposes further austerity conditions, as it seems to be demanding of Greece and Spain, in exchange for financing, the cure will only worsen the patient's condition.
Likewise, common European banking supervision will not suffice to
prevent the continuing exodus of funds from the afflicted countries.
That requires an adequate common deposit-insurance scheme, which the
northern European countries have said is not in the cards anytime soon.
While European leaders have repeatedly done what previously seemed
unthinkable, their responses have been out of synch with markets. They
have consistently underestimated their austerity programs' adverse
effects and overestimated the benefits of their institutional
The impact of the ECB's 1 trillion ($1.3 trillion), long-term
refinancing operation, which loaned money to commercial banks to buy
sovereign bonds, a bootstrap operation that seemed as peculiar as the
ECB's financing of sovereigns to shore up the banks, was impressively
short-lived. Europe's leaders have recognized that the debt crisis in
the periphery will only worsen in the absence of growth, and they have
even, sometimes, recognized that austerity will not help on that front;
nonetheless, they have failed to deliver an effective growth package.
The depression that European authorities have imposed on Spain
and Greece already is having political consequences. In Spain,
independence movements, especially in Catalonia, have revived, while
neo-Nazism is on the march in Greece. The euro, created for the avowed
purpose of fostering the integration of a democratic Europe, is having
precisely the opposite effect.
The lesson is that politics and economics are inseparable.
Markets on their own may be neither efficient nor stable, but the
politics of deregulation gave scope to unprecedented excesses that led
to asset bubbles and the rolling crisis that has followed their
And the politics of crisis has led to responses that are far from
adequate. Banks have been saved, but the underlying problems were left
to fester - no surprise there, given that, in both Europe and America,
the task of fixing them was assigned to the policymakers who had caused
them. In Europe, it was politics, not economics, that drove the creation
of the euro; and it was politics that led to a fundamentally flawed
structure that created ample room for bubbles, but little scope for
dealing with the aftermath.
To forecast 2013 is to predict how divided government in the US
and a divided Europe respond to their respective crises. Economists'
crystal balls are always cloudy, but those of political scientists are
even cloudier. That said, the US will probably muddle through another
year, neither pushed over the cliff nor put on the road to robust
recovery. But, on both sides of the Atlantic, the polarized politics of
bravado and brinkmanship will be much in evidence. The problem with
brinkmanship is that, sometimes, one does go over the brink.
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