Britain has been gripped by the Murdoch drama. What threatened to become a political crisis has become something of a political triumph, with the standing of parliament greatly enhanced. Most, if not all, of the credit for this is due to Ed Milliband. For him this has been as the Falklands to Thatcher. We must see if he can use the advantage he has gained against a shaken, but still intact coalition.
The nation is now out of the thrall of News Corp, giving a curious sense of relief, felt far beyond political circles. The fall out will rumble on for months and years, but the nation, though shocked, is both safe and liberated. This is just as well. There is a real crisis waiting in the wings where the threat is vastly greater. It is centred in the euro zone and now also in the U.S. We will start across the Atlantic.
Moody is threatening a downgrade and has put America’s rating under review. This is because the White House and the Republican majority in the House are locked in a financial argument which could, if not resolved, cause a U.S. default in August. Nobody dares think of what that could mean, but the UK, whose economy is very closely tied to that of the US, needs to be thinking deep and fast. The problem is part financial but only in part. The federal budget deficit is out of control and the accumulation of debt is eye popping, but all of it is within, just, the county’s capacity, if its economy fires on all cylinders.
The real problem is the fact that the country is joined in an economic civil war which has its roots way back in the founding of the nation. What size, what price and what authority should be invested in the United States? What freedom to choose and decide should be retained by individual States and the free individuals who live in them? This is what the Tea Party is about and it was the theme which gave the Republicans their mid-term success. On top of that is the flawed Republican idea that you can spend and cut taxes at the same time, which will somehow close the gap between revenue and expenditure (it has not). This is challenged by the equally flawed Democrat notion that you can pay for excess spending by taxing the rich. The crisis deepens because two opposing dogmas argue, while the ship drifts in dangerous waters; it is worse because both are wrong. The US is without any credible economic strategy to get its economy back in balance. It is without a political strategy to define what the United States actually is.
This is quite enough to worry us all but it is not all we have to worry about. The Euro zone is no nearer doing what it has to do to save its big idea, as both Ireland and Greece are downgraded to junk and Italy and Spain begin to look increasingly at risk. Just as in America, there is in Europe an ideal and a reality which do not match.
In Europe however, it is clear what is needed and sooner or later it will have to happen.There has to be a pan-euro zone finance ministry which alone is empowered to borrow on behalf of all the countries in the currency. It would then lend such funds to member countries and could iron out regional imbalances by charging different rates of interest. All this it would do under the edict of a prudent and realistic economic policy. Countries would still be free, within limits agreed by the finance ministry, to sell their own bonds, but the markets would be told that there would be no central guarantee for these instruments and that countries would be allowed to default on their own bonds without prospect of rescue, as are individual States in the USA.
The surrender of sovereignty by euro zone countries would be real and important, but there is no other way to run a currency. Financial union without political union is impossible. The problem is that all this would have to be done within the framework of existing treaties, because there is little chance that referenda in all the countries involved would deliver a Yes vote. Unfortunately this will mean a lack of democratic legitimacy to the arrangements, whatever they are and however they are described, which may impede effectiveness. As in America, there is a financial crisis with a political question; how much economic power should regional and nation states cede to a wider union for the greater good?
Finally it is certain that Greece, Ireland and Portugal will have to undergo debt re-structuring which will involve partial default and the market bearing significant, but not total, loss. This may even happen to Spain and Italy. That will seriously undermine the balance sheets of most of our banks. The Treasury has not been caught up in the Murdoch drama. Just as well. It will need all its powers of concentration in the weeks ahead.