“A man’s got to know his limitations”
King Cnut is remembered by history for pulling up his throne on the beach, ordering the sea back and getting his feet wet. His attempt to assert royal power over the forces of nature was a soggy failure. Policy makers in Europe and the US are currently engaged in a similar exercise; standing at the seafront ordering the economic tides to recede. They are unlikely to have any more success than the old king.
In Europe and the US the issue has become sovereign debt. In Washington the problem is the rapidly growing amount of it. That is also the problem in Madrid, Lisbon, Dublin, Athens, Rome and, scarily, now Paris too. In European capitals the debt issue has been exacerbated by the additional question as to what extent a shared currency means shared debt liability.
Last week saw bad news on both of these fronts in the war against sovereign debt. In Europe borrowing costs for the two biggest debt basket cases, Italy and Spain, shot to ten year highs, over the 6% economists deem sustainable. On Wall Street the stock market saw its worst falls since the dark days of 2008 and the US lost its AAA credit rating for the first time ever. The economic tsunami threatened to wash the world back into recession.
The Cnuts of our time in Washington and Brussels were quick to take to the beaches and order it back. Sounding a little like ‘Sunset Boulevard’s’ Norma Desmond President Obama said: “This is the United States of America. No matter what some agency says, we will always be a triple A country”. In Europe Olli Rehn, the EU’s Economic and Monetary Affairs Commissioner, declared the rising borrowing costs for euro members “incomprehensible” and “not justified by the economic fundamentals”. Rehn sounded an unsuitably macho note when he warned that “the political will to defend the euro should not be underestimated”. Yet no one doubts the will of the EU leaders to save the euro as it is currently constituted. It is their ability to do so that is now in serious doubt.
This clash between the will and the ability, the politics and the economics, the upheld hand and the advancing tide lies behind much of the current chaos. The simple fact is that for all Olli Rehn’s Nietzschean strength of will, a choice will have to be made between kicking some deficit countries out of the euro or putting taxpayers in surplus countries like Germany on the hook for their debts. While in the US, Barack Obama’s outraged assertion that the US is big and that it is only the credit rating agencies that got small, will not change anything. The fact is that a country which has seen its debt grow from 6 trillion dollars in 2001 to nearly 15 trillion dollars and proposes to add another 2 trillion to that total can be justifiably said to have a debt problem.
This is not to say that politics is powerless in the face of economics, it used to be called Political Economy after all. But the politicians aren’t trying to battle impersonal economic forces; they are trying to will away the economic consequences of their very consciously taken decisions.
The spiralling US debt is a problem and markets are right to be worried about it given the inertia of the politicians for years. This is a situation deliberately created by President Obama, his almost equally free spending predecessor, and the pork barrel crazy US Congress over several terms. The euro is doomed in its present form and it was the politicians who created it and ignored its terminal flaws when they did so.
Even in the short term the politicians and not the markets are to blame. Wall Street crashed but what else did anyone expect after the non-deal on debt cobbled together by Congress? Borrowing costs in Italy and Spain rocketed but what did people expect when Italy’s austerity measures were revealed as highly suspect and Spain’s prime minister called an early election?
The economic forces which are now conspiring against the wishes and wills of politicians were, though, set in motion by politicians who felt they were invincible. When Angela Merkel talks of her desire to assert “the primacy of politics over the markets” she is seeking to assert the primacy of a world without consequences over a world with consequences. She and her fellow governmental leaders want to continue inhabiting a dream world. It’s time to wake up.
Historical revisionists have gone to work on Cnut and now believe that he went to the seaside knowing full well he would fail and that he was actually trying to demonstrate to his awestruck followers the limits of his power. Our current leaders look to be sincere. Yet they have taken decisions for expedience sake and are now looking to hold back the tides of economic consequence with sheer willpower. Expect some very wet and ruined shoes in Washington and Brussels before too long.