Europe and the U.S. are under pressure from unsustainable debts created by the baby boom generation. After the Second World War they have come to take for granted an ever higher standard of living that was only possible on the back of the accumulation of debt and generous provision of social security. The capitalist-democratic model has created a society in which people lay claim to wealth without having to sometimes forego an increase in wealth today in order to guarantee welfare and prosperity in the long run. Nowadays, politics and economics have one thing in common: they are both geared toward satisfying short term desires without thinking about the sustainability of the political-economic system. This leads to the conclusion that the West needs to enact structural reforms, even though these will inflict pain on society today, in order to ensure pensions can continue to be paid in the future, health benefits can be given to those in need and economies can remain innovative and competitive.
Politicians and voters in Europe say the economic crisis has made them aware of structural deficits, but this didn't ensure nations taking decisive action. Europe dithered, after which three countries needed life-saving, while a fourth - Cyprus - will probably need a lifebuoy as well. Two weeks ago, the Eurozone was bound for a head-on collision with an iceberg - one made of nervous bond markets - and only at the last minute did Europe steer clear by presenting plans to keep the Eurozone afloat - at least for the time being. Initially, markets reacted positively, but soon reality set in: the package is just a continuation of the tactics - it cannot be called a strategy - Europe chose to apply from the beginning. Politicians only jump the hurdle they see right in front of them without anticipating hurdles still to come.
Nevertheless, Europe is taking a road that is heading for further integration. Decisions have been taken that were unimaginable a couple of years ago. Talk about introducing Eurobonds and appointing a European finance minister is ever more common. On the other hand, anti-European sentiment runs high. Populist parties are popular and a country like France may be talking about lofty European ideals, but at the same time it closes borders and opts for a mercantilist approach to protecting its own companies.
This clash between Euro-skeptic populism and pro-European forces will ultimately decide Europe's future. The first signs of the outcome will show themselves as leaders try to get the rescue deal past their national parliaments. One thing is certain: the current plans are not enough to save Europe. The next move toward further integration must be made in the next six months as European growth slows, the IMF questions French fiscal health, Italian leaders face new political and legal challenges, Spain risks rating downgrade and Cyprus reveals itself as the next country in need of rescue.
Whereas European political divisiveness is not surprising given many diverging national interests at play, the political chaos in the U.S. is less comprehensible. One would have expected that Democrats and Republicans would have been able to put aside their differences and to present a credible deal for the debt ceiling impasse weeks earlier, instead of waiting until the last minute. But the Tea Party movement within the GOP resisted compromise and President Obama remained at the sidelines for too long.
The final deal is feeble. It looks too much like the muddle-through scenario Europe is acting out, offers no healthy balance between spending cuts and extra revenue, and offers plenty of opportunities for parties to reenter the trenches and start a new war once the opportunity to renegotiate presents itself.
The debt ceiling deal will offer some much needed air, but eventually an atmosphere of thin air will emerge again. Politics has become dysfunctional and a structural solution to the problems is still out of sight. Therefore, markets will stay on edge and will be in for a dive if the U.S. will be coughing up more bad economic stats.
Most troublesome is that a precedent has been created. It is now acceptable for politicians to kidnap the American economy and world markets for political reasons. Therefore, it is even possible that at the beginning of 2013 - when the debt ceiling needs to be raised again - a new nuclear war will start between Republicans and Democrats with no one standing at the end (at best one party might eke out a Pyrrhic victory).
In both Europe and the U.S. politicians seem to be constantly at each other's throats, and mostly they present plans to make grander plans instead of offering a balanced, intelligent and credible strategy. Others are profiting from this. China has made inroads into Europe by offering countries assistance. Slowly but steadily it is increasing its political and economic weight in Europe. Americans too have to take Chinese attitudes and opinions into account; China's position at the table of power is getting more prominent by the day.
Although China owns too much American Treasuries to be able to make a credible threat to dump American government bonds altogether, the U.S. is financially dependent on China - and China can profit from this by nodding and steering America into the direction it wants via diplomatic, political, economic and military channels. The Chinese have lost faith in America's government and its economic stewardship as they see the giant stumble on its feet. And they're not alone. American allies will also increasingly scratch their heads and wonder if they still can rely on this politically confused, economically vulnerable, and insecurel giant. They could decide to bet on other horses too; horses that will be the political and economic giants of the future. If China has a soft economic landing and Europe and the U.S. will weaken, China will turn out to be the victor of the debt crisis.