The EU/US Non-Aggression Pact

There is now a profound political gulf separating the US and Europe over how to deal with the Bank crisis. I don’t think it’s an exaggeration to say that a certain post-war concensus, the one that said ‘The US is in charge’, has now broken down.

But that doesn’t mean either side is quite ready for the simmering hostility to break out into the open just yet. So, just as Hitler and Stalin had a Non-Aggression Pact, now the G20 has one as well. Just as then, our Dear Leaders will shake hands and smile for the cameras as they solemnly promise to respect and help each other. Behind the scenes preparations for economic hostilities are in full swing. And as before both people’s will gain nothing from being set against one another.

For the Europeans the Pact pact extolls the virtues of cutting budgets and even dresses it up with talk of dates and percetages. But for the Americans, the pact equally trumpets that the ‘world cannot afford another detabilizing event of the Lehman kind’. Meaning that if a Big Bank were put in jeopardy of failure by, let’s say, a nation defaulting on its debts, or even another pustule of US real estate debt bursting, then no matter what amount of extra debt it would entail, that and more must and would, be thrown at the problem. And only after, would we resume the pious talk of cutting the, by then, almost unimaginably larger debts. And of course that talk would again be couched carefully and exclusively in terms of the even worse state of public spending and the even greater need to reign in the rampant excesses of the welfare state.

So that’s ‘Peace with Honour’ assured again. The problem, as with the first time, is that the pact does nothing to change the fact that the two sides have polar opposite needs and wants.

Interestingly, I think the US may be in the slightly weaker position. Now before any cousins reading this start to feel their pride offended, let me explain. Europe’s banks are, quite possibly, in an even more parlous state than America’s. And, of course the US is the reserve currency and therefore can print and borrow far more than anyone else And US debt will always be seen as the safe haven. Right up to the moment when suddenly it is not, that is.

But I think it is these very strengths that put America in a weaker position, at this juncture. The goverining class of America wants to use more stimulus spending and more bail-outs to grow out of this recession. To some extent I belive America’s leadership are collectively suffering from what used to be, in the Cold War, called ‘Blow Back’. Which is when dissinformation and propaganda promulgated by one part of your side, starts to come back around and be picked up as the truth by some other part of your own side. I think the US is suffering from blow back about the likelihood of recovery, the strength of the signals of that recovery and the ability/inclination of its own banks to actually be part of a team effort – as opposed to just looking out for themselves exclusively.

The problem for Mr Obama is that the US cannot grow out of recession on its own. It’s own people have been conclusively shown, by the failure of the stimulus measures so far, NOT to be able to consume enough on their own for the US to grow out of recession, on its own. Thus Mr Obama is desperate for Europe to join his stimulus effort. I think he has been genuinely wrong footed that Europe, led by Germany, has refused to dutifully follow orders. Obama would like to be able to simply tell Europe to print or borrow whatever it takes in order to stimulus spend another trillion Euros and bail its banks another trillion. He would also like to tell Europe/Germany to stop competing so successfully with American export efforts and to do a deal more buying – preferably of US products.

Without Europe following this plan, I don’t think Amercian can grow out of recession. This is what I mean by weakness. America needs Europe to play join its gang. If it doesn’t, America is in trouble. And this America IS in trouble.

And what of Europe’s position? Might Europe bend to US pressure? Well, anything is possible of course. But there are strong self-preservation reasons for Europe NOT to comply. Europe doesn’t have the reserve currency. The Euro, as the Bond market has already shown us, would blow up long before the dollar, if Europe were to continue to print and borrow. Europe is not as tightly bound together and so endless bail-outs of weaker States by stronger ones would blow the Union apart. The US union of its States is more tightly bound. Thus for Europe, pain has to be inflicted and borne at the level of its States.

Does Europe need America to abandon grwoth and join austerity. I don’t think it does. And this is what makes Europe’s position, at this juncture, stronger. For austerity to work Europe ‘only’ needs the cooperation of its own people. Austerity is a much more self-contained solution. Europe can go it alone. But if it does so, not only does Europe not help Amercia with its chosen plan, but it actually makes the US plan less likely to work.

Europe’s plan allow it to agree to disagree with the US. There are some in the US, however, who may come to see Europe’s actions as an actual attack on US interests.

Europe and the US have made different political calculations. European nations have calculated that they might be able to hold enough of their people to enough austerity for long enough to get through the eye of this storm. A lower risk strategy they think, than risking the death of the Euro and the rupture of the union. I think they are wrong to think austerity will solve their bank debts or that they can hold austerity together for long enough. But that, I believe, is the conclusion they have come to.

The US has quite a different political calculation. I believe the US government is afraid of its people. I believe they are afraid to talk openly about austerity. Certainly Obama would take a massive risk, and I think a suicidal one, to talk of austerity before the Mid Term elections in November. Even after that it will be incendury to do so.

The poor of America are already dirt poor. Obama may fear to lose votes from them, but America’s political class generally, is not afraid of the poor. It is the Middle Class that America’s political establishment is mortally afraid of. To ask them to accept austerity, to put on hold their ‘American Dream’ of comfort and prosperity, is political suicide.

The only way it can be done at all is to try to do it via the States. Try like hell to make it seem that it is the States who are bankrupt and who are bankrupting the Middle class. It is what the Federal Government will have to try, if it comes to it. And I think it will.

But not before tensions between Europe and the US get much more openly hostile.

4 thoughts on “The EU/US Non-Aggression Pact”

  1. This is a very interesting post.

    Can you have austerity and print money at the same time? Now that most people are sure that a double dip cannot be avoided, then this seems to be the new plan, especially for Europe. Europe needs to announce the austerity to keep the bond markets slightly happier. It is also a good time to try and trim the public sector, which does seem to have grown too big in my opinion.

    There is an interesting article in the Telegraph from Mr Evans-Pritchard which has a similar theme.

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7857595/RBS-tells-clients-to-prepare-for-monster-money-printing-by-the-Federal-Reserve.html

  2. Golem XIV - Thoughts

    You certainly can have austerity and print. You just have to make sure you only give the printed money to the banks and not to people who you neither know nor care about. Simples!

    i think it is now beyond question that the US HAS NO CHOICE but to print againa and on a scale we have not seen yet. I think it will fail. I also think the US may chose to engage in another war for resources.

  3. The original plan seemed to be to print money in order to avoid austerity. That didn't work, so now we have to print money and have austerity. I don't think that people will accept this so easily, especially if the money is going to the banks. The kind of cuts that they have announced in the UK will be impossible to implement – but they know this. The tactic is to announce 25% with the hope of getting 10%.

    I agree that the US will have to print a lot. The melt down of the Euro has made this a certainty. The irony is lovely to behold. The US gives the banks lots of money – they use this to speculate on the Euro and make a packet. This causes the Euro to go down in value – thus forcing the US to print even more. Talk about out of control.

  4. Golem XIV - Thoughts

    Negative feedback. Otherwise known as howl round. And that is what is about to happen.

    The US is out of control. I think there are enough print monkeys in positions of power around Congress and round Obama that they will go for a new and bigger print/borrow. And soon.

    How soon? Keep an eye on the interbank rates. As US banks start to pull in their lending and hoard their cash even more, that's the signal.

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