Are Conservatives Unwittingly Promoting the Euro in America?

November 23, 2011 9:15 AM

The euro area debt crisis has many paradoxes, but surely one of the more ironic ones is that as the 17 members in the euro area desperately search for a solution to their travails, American conservatives are determined to ensure that the next euro-type crisis will erupt in the United States. The GOP is thus running the risk, not of learning from others' mistakes, but repeating them!

Among the multiple crises in Europe, none is more serious than the under-institutionalization of the euro area itself. With no central fiscal entity to act as financial backstop to restore confidence and channel resources to troubled member states, a quick solution is impossible. The vast majority of spending—not to mention 90 percent of Europeans' self identity—resides at the member state level in the euro area, which lacks a sufficiently strong central authority with a capacity to mobilize a credibly-sized rescue package.

The wealthier countries like Germany view any implied "transfers between countries" carried out by a central government as taxation without representation. For the same political reasons, the debts of each sovereign euro area member remain distinct. If this sounds familiar to an American, it could be because it echoes the problems facing the United States in its infancy, when there was resistance to pooling the debts of the various states into a single debt instrument. But what Alexander Hamilton, the first United States Treasury Secretary, achieved for the US war debts run up by each state in 1790—consolidating them and having them absorbed by Washington—is an unrealistic option in Europe, at least for now. Another critical political difference is that unlike the war debts incurred by US states during the Revolutionary War, the outstanding debts of individual euro area members have not been incurred to achieve a common cause. A political narrative of seeing such debts "honored in common" by all euro area members consequently does not exist.

In short, the euro area suffers today from an excessive reliance on "states' rights" and far too little central government. Who would have thought that Chancellor Angela Merkel of Germany, in trying to convince reluctant fellow Christian Democrats of the virtue of more integration by preaching "not less Europe but more," would be the Alexander Hamilton of Europe today? If Saint Ronald Reagan had been European in today's crisis, would he have joined Chancellor Merkel or would he have repeated his famous formulation that the most misleading words in the English language are, "We have come from the government, and we are here to help!"

In the United States in 2008–09, there was fortunately something called the federal government. Led by Treasury Secretaries Henry M. Paulson and Timothy Geithner, it mobilized the financial power and institutional capacity to put together a plan that was too small to prevent a deep recession but at least avoided the kind of Great Depression that would result in Europe from a euro break-up. The difference in the financial firepower of the central European authority (the European Commission) and the US federal government is obvious, as illustrated in figure 1.

Figure 1 US federal government expenditures 1792-2009 (percent GDP)

We have got to go back to before World War I to find a non-war-related federal government share of the total US economy comparable to today's EU budget. This was, in other words, well before the Great Depression and the introduction of Social Security and other parts of the automatic stabilizers that make up today's social welfare state.

We need to look no further than the Road Map for America's Future put out by Representative Paul Ryan (R-Wisconsin) for a plan that would take America back to the fiscal golden age of Calvin Coolidge's US federal government. Federal spending on automatic stabilizers like Social Security, Medicare, Medicaid, and non-defense discretionary government spending will be cut down towards today's "euro area levels," though not at levels in many of the euro area countries. These levels would be insufficient for a central government to deal with a serious financial crisis involving imbalances among member states.

Another conservative GOP policy suggestion—"ending the Fed"—which since 1917 has been responsible for monetary policy in America, evidently intends to shut down the other federal government institution crucial for ensuring that the United States in 2008–09 did not suffer an economic collapse.

If America's conservatives succeed in the fiscal and monetary policy agenda, the United States would be left with fewer institutional tools with which to fight another financial crisis. The US dollar would effectively become the euro.

In the Republican debates and on the floors of Congress, one often hears members of the GOP say they do not want the United States to become an economy like Europe. Ironically, their policies would push the country in exactly that direction. If American conservatives have it their way, the world better prepare for the "euro area with nukes."

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Jacob Funk Kirkegaard Senior Research Staff

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