The global economy has never really recovered from the recession. Over the last couple of months two potential crises have been unfolding in two very different countries. Both of them looked to be in danger of defaulting on their huge debts and triggering a cascade of disastrous consequences (like those that followed the collapse of Lehman Brothers in 2008).
The first of these, of course, was Greece. There have been months of negotiations, austerity measures, demonstrations, predictions of the death of the Euro, and confusion. In the end, Europe decided that the Greek debt was “too big to fail” (yet), and the bailout that most expected was agreed. In fact, Europe is trying to think beyond the immediate crisis:
Bailed out – again. Eurozone throws Greece €109bn lifeline
Bailout fund turned into much more ambitious instrument in deal hatched following months of dithering
European leaders have sealed a new €109bn bailout for Greece and erected defences against the debt crisis spreading to Italy and Spain by turning the eurozone’s 15-month-old bailout fund into a much more ambitious instrument resembling an infant European monetary fund.
Whether this contains the European situation remains to be seen of course. But Greece is by no means out of the woods yet:
The deal, hatched at an emergency summit in Brussels of eurozone leaders, following months of dithering and division, also entailed large losses for Athens’ private creditors, making it almost certain that Greece would become the first eurozone country to be deemed to be in some form of default on its sovereign debt.
The second country facing a debt default crisis is America. America established a theoretical “debt ceiling” in 1941, and has been steadily raising it ever since (it currently stands at $14.294 trillion). Republicans seem determined to block the current ritual ceiling rise, which would cause America to default on its debts, almost certainly destroying whatever confidence is left in the dollar and its role as the world’s reserve currency. After several weeks of brinksmanship and frustration, Obama appears to have been forced into a bold but risky gamble:
President’s debt offer: risky but could be win-win
It’s hard to know which is more surprising: a Democratic president pushing historic cuts in spending, including Social Security and Medicare. Or a Republican-controlled House refusing to accept the deal and declare a huge victory for long-sought GOP goals.
Political orthodoxy has been turned on its head ever since President Barack Obama stepped up his call for a bipartisan “grand bargain” to raise the national debt ceiling and avert a default on U.S. obligations. The deal would include $4 trillion in deficit reduction over 10 years, mainly through steep spending cuts but also including up to $1 trillion in new federal revenue. …
Some pundits and political insiders say Republicans should leap at the offer. But there’s a hitch: The new revenue — mainly from overhauling the tax code and lowering rates by eliminating or limiting a broad swath of loopholes, deductions and tax breaks — presumably would violate a no-net-tax-hike pledge that scores of Republican lawmakers have signed.
Mostly for that reason, House Republicans so far have rejected Obama’s overture, despite the interest shown by Speaker John Boehner. Some pro-Republican analysts seem bewildered.
… If Congress approves a version of the “grand bargain,” Obama can run next year as a president who began taming the runaway deficit, extracted concessions on higher taxes from Republicans and put Medicare and Social Security on a possible path toward greater stability. If congressional Republicans block the plan — and especially if the Aug. 2 debt ceiling deadline is missed — Obama might persuasively argue that he tried his best to strike a compromise, at some political risk to himself.
A high stakes game of chicken indeed!
Europe has acted to contain the Greek situation, but for how long? Will Republicans accept Obama’s (possibly poisoned) chalice, or will they really drive America over the edge and in to turmoil just to spite him? Even if we dodge both bullets this time the underlying problems are still there, and they’ll be back. And then what about the next crisis, and the next one, and the next? It’s hard to escape the conclusion that the world’s economy is teetering on the brink of a precipice.