Daily Archives: October 12, 2012

When President Barack Obama was awarded the Nobel Prize at the end of his first year in office it was a strange bet on the future – perhaps he would be a peacemaker one day. Today’s announcement awarding the prize to the EU is an even stranger bet on its past.

The EU did build peace where there had been war and then drew Eastern Europe into an enlarged Europe. All would have been good reasons for a Nobel Peace Prize at the time. But those historic successes just make its dismal present look even more threadbare. Far from being a morale booster at a time of austerity, it is a grim reminder of just what bad times the European vision has fallen on.

That vision has been debased through the internal discord of an unresolved euro crisis that has exposed the region’s lack of political will at home. But the Nobel is awarded for what the recipient has done abroad. Here the Nobel committee is eloquent in its silence because, put bluntly, there is no European foreign policy today to speak of.

On issue after issue, from the Middle East peace process to the Arab Spring, from Iran to relations with China or a region such as Africa or Latin America, Europe is less than the sum of its parts. It has its own EU embassies now and no international meeting is complete without a clutch of national and Brussels officials, each in turn jumping up to speak “for Europe”. This is a circus of process and protocol with usually dismal results.

In a forum such as the UN in New York, there is an effort to allow one ambassador alone to speak for Europe on many issues and, while that has reduced the spectacle of a parade of speakers, it too has a price. What is said is, even by UN members’ standards, often bland to the point of absurdity in order to earn consensus support from all EU ambassadors.

On Turkey, the prize committee claimed that “the possibility of EU membership for Turkey has also advanced democracy and human rights in the country”. More relevant surely is that opposition inside Europe to Turkey’s membership has increasingly made it look elsewhere for friends and partners. And where is the leadership on the Arab Spring that Europe exercised so powerfully in its support for the transitions in Eastern Europe after 1989? Where economic assistance and soft power might have given Europe a powerful role, it is instead consumed by its own economic crisis.

On the Iran nuclear negotiations, the EU has a formal lead role but you would not know it, as policy is still made out of Washington – and increasingly it seems Jerusalem. Whenever US efforts to advance the peace process in the Middle East falter an observer might hope to see Europe, a major donor to the Palestinians and friend of Israel, step in, but again the will to lead is absent and internal European divisions, between those who favour Israel and others with greater Palestinian sympathies, are apparently irreconcilable.

This is Europe’s dilemma: even when not stricken by a fundamental crisis in its economic governance, it is a market, a society and even a culture more than it is a polity. It has reminded us of shared values and a shared history and has in good times bathed us in a common prosperity and in the warmth of shared citizenship after centuries of conflict.

But boldness and bravery in waging peace abroad, in the service of human rights and democracy, are the very antithesis of the values of this usually comfortable and complacent EU. On China, for example, an EU human rights agenda takes second place to the competition between different members to win trade and contracts. Now at a time of extreme economic discomfort, when conflict has displaced complacency, courage seems even more absent from Brussels than usual. Nobels are not forged from an obsession with process and procedure. The best go to brave individuals and institutions that have often defied their times and peers to open a path to peace. Many have courted unpopularity and controversy as they have done so. The Nobel sets that record straight and celebrates the best in human leadership.

So this Nobel seems a bizarre and sentimental tribute to Europe’s past that further shames its present. Only a Nobel for economics would have seemed stranger.

These are awkward days for deficit hawks who believe the US economy can return to health only if the nation puts its fiscal house in order. They are about to get their wish.

At the beginning of next year, the federal budget deficit is scheduled to shrink with a loud thud. Unless Congress does something to avert it, more than $600bn in tax increases and spending cuts will automatically come into effect. That is equivalent to about 5 per cent of the entire US economy, more than projected growth in gross domestic product next year.

The problem is that if America falls off this “fiscal cliff,” as it has come to be known, the nation will plunge into recession. That is because the meaures will withdraw too much demand from the economy too quickly, at a time when unemployment is still likely to be high. The Congressional Budget Office projects that if America goes over the cliff, real economic growth will drop at an annual rate of 2.9 per cent in the first half of 2013, and
unemployment will rise to 9.1 per cent by the end of next year.

As Spain and Great Britain have demonstrated, launching fiscal austerity at a time when a nation’s economic capacity is substantially underutilised causes the economy to contract. This makes the deficit and cumulative debt even larger in proportion to the size of the economy. Rather than reassuring investors, the result spooks them even more.

Ironically, America is about to fall off the fiscal cliff because Democrats and Republicans in Congress have been unable to agree on a plan for long-term deficit reduction – and this failure will trigger automatic spending cuts in January. Meanwhile, the temporary tax cuts enacted by former President George W. Bush in 2001 and 2003, and extended for two years by President Barack Obama, will run out on December 31st, as will the president’s temporary jobs measures – a payroll-tax holiday and extended unemployment benefits.

To make matters even more draconian, the alternative minimum tax – originally aimed at the rich, but never adjusted for inflation – is scheduled to hit some 30m middle-class Americans next year, while Medicare, the health programme for the elderly, is scheduled to slash payments to doctors by nearly 30 per cent.

In a rational world, deficit reduction on this scale would occur only when the economy was once again healthy – when unemployment had dropped to below 6 per cent, for example, and economic growth returned to at least 3 per cent. These would be sensible triggers. But hyper-polarised Washington has not shown itself capable of rational behaviour.

Indeed, Democrats and Republicans have been so much at each others’ throats that whenever one side senses the other wants (or fears) something more, the party that doesn’t want or fear it as much has a bargaining advantage in Congress’s ongoing game of chicken. This explains why the nation is heading over the cliff.

Congressional Democrats have concluded that Republicans are more afraid than they are of going over it because the pending tax increases will fall most heavily on America’s wealthy, and half the spending cuts would come out of the defence budget.

So most Democrats have decided to wait it out in order to maximise their bargaining power in negotiations over how to reduce the long-term deficit. They want a deal that raises taxes only on America’s wealthy and without substantial cuts to Medicare, Medicaid (the health programme for the poor) or Social Security. This is the opposite of what Republicans want.

Democrats also assume that, once the Bush tax cut has been terminated, Republicans will be unable to resist an offer to reduce taxes on the middle class (those earning $250,000 or less). After all, Republicans have pledged to vote for any and all tax cuts. Once Democrats get the best deal they can, they will make it retroactive to January 1st.

As a practical matter, then, negotiations over America’s budget deficit will drag on into the new year, right over and beyond the fiscal cliff. And because everyone will know that the final compromise is going to be retroactive to the start of the year, the cliff won’t feel like much of a cliff. In practice, it will be more like a hill whose slope remains uncertain but will almost certainly be gradual.

With any luck, by the time significant tax increases and spending cuts take permanent effect, unemployment will already have dropped and growth will have accelerated. In other words, the irrational and irascible American political process may come up with a timetable for reducing the budget deficit that’s surprisingly sensible.

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