PARIS, July 18 (UPI) — This is how it must have felt in late July 1914 as Europe careened blindly into a war that would shatter its wealth and its culture and nobody knew how to stop it.
The world we have known since the end World War II, of ever-broadening economic prosperity, is poised for implosion. The global economy has proved over the past three years to be a resilient beast but even it cannot survive the simultaneous collapse of Europe and the United States, its two dominant components.
We are two weeks away from an American default on the world’s greatest, most liquid and essentially most stable source of the debt and credit that fuel the economy of the whole planet. And yet the prospect of default has gone from unthinkable to unlikely to possible and is now teetering on the brink of the probable.
We may be a week away from a collapse of the eurozone and the chaos then unleashed would leave the European Union in shreds. The world’s two largest economies would crumple together, like Sherlock Holmes and Dr. Moriarty plunging together in a death grip over the Reichenbach Falls. At least Arthur Conan Doyle had the good sense to bring Sherlock Holmes back to life. The world of the euro and dollar wouldn’t find reincarnation to be so easy.
As in 1914, there is nothing inevitable about this gruesome double stagger to disaster. Economic conditions have not brought us to this pass. This is a political crisis, brought on by obstinacy, ignorance and dogma.
The ignorance defies belief. We all saw what happened when Lehman Brothers collapsed in September 2008. A U.S. default would be like that, only a hundred times worse, triggering cascades of defaults and bankruptcies as the credit default markets unwound. Interest rates would soar worldwide. A new Great Depression would follow.
And recall that in this world of tight supply chains for our supermarkets, modern societies are perhaps six meals away from blood on the streets.
The dogma is extraordinary. Those Republican congressmen and their Tea Party chorus who say that a U.S. default is needed to tame the beast of Big Government are terrifyingly sure of themselves, even though their leaders know the risks.
“I don’t think anybody in the world really believes that the United States is going to default on our debt,” Speaker of the House John Boehner, R-Ohio, said on Fox News last week. “But given what is going up in Europe, something could spook the market, missing Aug. 2 could spook the market and you could have a real catastrophe.”
There is no shortage of reasonable solutions. The “grand bargain” that Boehner and U.S. President Barack Obama have discussed, which would secure $4 trillion in cuts over the coming decade, is one. The proposal of the Debt Commission, led by former U.S. Sen. Alan Simpson, R-Wyo., and Erskine Bowles, White House chief of staff under President Bill Clinton, is another.
As Bowles told the National Governors’ Association last week:
“We can’t grow our way out of this. We could have decades of double-digit growth and not grow our way out of this enormous debt problem. We can’t tax our way out. The reality is we’ve got to do exactly what you all do every day as governors. We’ve got to cut spending or increase revenues or do some combination of that.”
The obstinacy on display defies belief. Politics is about compromise and building consensus but the current U.S. Congress spurns such qualities as weakness.
On the other side of the Atlantic, the same obstinacy and ignorance are on display, although there is a little less dogma. German Chancellor Angela Merkel has had repeated opportunities to craft a deal that would recapitalize the banks and secure the debt of Greece, Portugal and Ireland. Their total debt is easily manageable, totaling around 7 percent of European gross domestic product.
The mechanisms of a solution aren’t complicated. A true euro-bond, in which all eurozone countries become jointly and severally responsible for the debt, would have resolved the crisis overnight had it been applied two weeks ago.
But that was before the markets got spooked by Merkel’s antics and her refusal to tell German voters the truth: that their country’s $200 billion a year trade surplus, itself an underlying cause of the euro crisis, can only be sustained if Germany uses its financial strength to hold the eurozone together.
So now Italy, with its $2 trillion in sovereign debt, is itself on the line. The result is that in government treasuries and top banks and investment houses, contingency plans are being drafted for a euro collapse.
There is increasing speculation of the eurozone splitting between a solvent Teutonic north (Germany, Holland, Finland, Austria) and an instant devaluation of an insolvent south (Italy, Spain, Portugal, Greece). Nobody knows into which camp France might fall.
The good news is that unlike July 1914 armies and battle fleets aren’t being mobilized. The bad news is that if the double collapse of dollar and euro takes place, the armies would be needed to maintain some kind of order at home. But that would only work if the governments can continue to pay and feed the troops.
By MARTIN WALKER
18 July 2011
Martin Walker is the Editor Emeritus of UPI
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