Europe’s Fiscal Cliffs
The recent failure to reach a consensus on the EU budget in Brussels came as no surprise. The battle lines had been drawn well before the impasse was declared official by EU President Herman van Rompuy. Those lines run, not surprisingly, between the countries desiring budget cuts and those pushing for increases. The former group is the minority who pay more into the euro budget than they get back; the latter are the majority who receive more than they contribute in Brussels. Finding a consensus on how to bridge that gap is as challenging as the effort to build a consensus between the Democrats and Republicans in Washington. Yet, the skirmishes in Europe with twenty-seven players involved are a lot larger and more unpredictable than the binary battle on Capitol Hill. This European budget impasse simply represents the continuing, sluggish story of EU decision-making.
Back in Washington, there is more hyped up drama surrounding budget discussions. The talk of a so-called impending “fiscal cliff” has taken center stage, with a clock counting down to December 31. But the battles in Europe and the U.S. are in some ways about the same equation: the numerator and the denominator of revenue and spending. What is at stake is also similar: the credibility of the decision-making process that is responsible for both sides of that equation.
In the U.S., the alleged cliff is depicted as a threat to the entire American economy if the ability to avoid significant tax increases coupled with severe reductions in spending fails in the wake of a stalemate on both ends of Pennsylvania Avenue. The specter of the so-called sequestration of the budget looms ever larger in the run up to the December 31 deadline. Despite calls for compromise from multiple sources, the clash of political posturing continues in a dangerous test of will, seemingly at the cost of the greater national interest.
In Europe, the debate over a multi-tier structure with varying degrees of integration in the core and periphery states poses critical challenges to the future of the EU, both as a concept and a process. The euro crisis has forced those countries in the euro zone to forge paths toward more political and fiscal integration, while some member states outside the euro zone may lean to renegotiate the terms of their membership or perhaps even opt out altogether. London is in the midst of this very debate in an atmosphere of increasing anti-EU populist sentiment. But that sentiment is also a contagious disease elsewhere throughout the continent. In Germany, the potential for a popular backlash against the perception of a bottomless fiscal pit in the EU is ever present. As Chancellor Merkel and her opponents look toward next September’s elections, they are well aware of that looming danger.
On both sides of the Atlantic, the confrontations standing in the way of a consensus can be depicted as a cliff over which political leaders may tumble in a failed effort to find common ground. On one level, the battle is over complicated financial equations, astronomical sums of money, and posturing over policy pronouncements. On another level, it is about trust, and often the lack thereof, between the leaders and their electorates, as well as in the political process as a whole. Whether one looks at public opinion polls or rating agencies, the doubts about the capability of governments to get a grip on long-term threats are growing. The recent American elections illustrate this trend.
Within days of Obama’s repeat win of the White House, the confrontations present between the parties prior to the November 6 elections were squarely back on center stage. Arguments over how to interpret the results of the election — was it a mandate for Obama, or merely a lackluster showing by a lackluster Republican — were symptomatic of an environment in which no one wants to yield territory before the next election.
In Europe, the cracks and fissures in the EU are visible not only in Brussels, but also in the national battles being fought over domestic fiscal dilemmas, as well as the cost-benefit analysis of the European project as a whole. The question of “what’s in it for us” is more prevalent now when it comes to both the privileges and the burdens of membership in the union. The emergence of political movements or parties capturing that very question is visible in Europe within those countries more dependent on EU support, as well as in the countries that provide the primary sources of income for the EU. The rise of resentments on either side — those who pay in and those who take out — is a problem for the entire EU.
The speed and temperature of these financial debates run parallel to election schedules. To make matters worse, all politicians seem to share an inclination to kick the can down the road in order to avoid a serious choice. Yet the U.S. situation has an additional sense of urgency driven by a self imposed deadline at the end of 2012 — before automatic tax increases and stringent budget cuts are imposed, i.e., the ‘cliff’ scenario. The EU may have some more time to untie its fiscal knots, but national clocks continue to tick with elections scheduled in Germany and Italy in 2013, to be followed by European Parliamentary elections and the nomination of a new EU Commission the year after.
On neither side of the Atlantic is there much relief for political leaders facing both the voters and hard choices. There is always some kind of cliff ahead. The continuous challenge for political leaders is not the cliffs they face — their job is to confront them — but rather their credibility among those they are allegedly leading and the credibility of the institutions they represent.
The EU’s cliff is not just the economic mess it is in now. There is another version, that being the need to overcome its problems in the name of its own future. The EU needs to inspire its millions of members with reasons to make adjustments, changes, and even sacrifices to move the European project forward. Oddly enough, the threats of some countries, like Great Britain, to withdraw from the EU club might even be a catalyst to better redefine the mission. Such a drastic change could also come with setbacks of its own after over a half century of forward motion, including further threats to the euro zone. However, it may well be that a short-term step back is the only way to push Europe toward its necessary long-term step forward.
The ability to reset the EU mission in the eyes of Europeans will depend on leaders who can articulate the case for Europe as both a process and a goal. In these times of economic uncertainty, the default for politicians is national interests first. We saw that same trend during the American presidential campaign with the sounds of both isolationist and triumphant messages.
In the end, cliffs are tests of political credibility. U.S. leadership is about to face that test on both sides of the political aisle. They may fail. Nevertheless, the U.S. will still be there afterward, if perhaps in worse shape. And Europe will still continue to exist even if the many leaders throughout the continent fail their tests as well. Either way, the question will remain of whether the choices currently being made are the correct ones and how will their consequences shape the next inevitable cliff down the road?