Fear Athens Less and Washington More
12:00 AM, May 19, 2012 • By IRWIN M. STELZER
Not the clearest logic, since the mechanism by which Europe’s problems would be transmitted across the ocean remains elusive. Our banks are in far better shape in terms of capital and liquidity than their EU counterparts—indeed, they are winning new customers as European banks pull out of the U.S. market as part of their retrenchment strategies. American money market funds have reduced their exposure to European banks. The American economy is growing, not rapidly but growing, while the EU economy is headed into recession. The headline unemployment rate in America is about two percentage points less than that in the EU, and even woefully overextended California is in better shape than, say, Spain, if you want to look beneath aggregate data. Exports account for a relatively small part of America’s GDP, 15 percent, and exports to the EU are far less important than exports to Canada and Mexico. So a recession induced drop in European demand for U.S. goods would not be a terribly significant drag on U.S. output.
Still, many Americans believe in the contagion theory: today Europe, tomorrow the United States. The best explanation I could get from Wall Streeters for the persistence of this fear goes something like this. Investors in equities are poised at the exit. No one wants to be the last man not standing. They will hold onto their shares until the first sign of trouble, and then bolt for the door. A European event might provide that sign. The selling wave will drive down share prices and paralyze business investment and household spending here in the U.S.
So the story goes. My own view is that we Americans would do better to heed Voltaire than Hollande, and tend to our own garden. The rather tenuous connections that get us from Greece’s problems to an American recession should be less of a worry than home-grown political developments. At the end of the year America once again hits its statutory debt ceiling of $16.4 trillion, and will be unable to borrow to meet expenses unless that ceiling is raised. Earlier this week Republican House speaker John Boehner made clear that his party will not support an increase in the ceiling unless the Democrats agree to equal or greater spending cuts. Which they won’t. Unless voters break the stalemate by turning over the White House to Mitt Romney and give the Republicans a majority in the senate, or alternatively reelect Obama and turf enough Republicans out to give the Democrats control of the House, we will enter 2013 with divided government. With several moderates in both parties having lost primary fights or retiring, the center cannot hold—or even exist. Left leaning Democrats intent on maintaining or expanding the welfare state will face off against right-leaning Republicans opposed to any and all tax increases. The result would be a lot more troubling for America than a Greek default.