Bleak House

Will Europe's crisis get worse before it gets worse?

One of the world's most respected finance ministers gave me his take on the eurocrisis in the wake of this past weekend's IMF meetings in Washington in a single word: "Bleak." Moments, later, in a separate conversation, frustration showed on the face of one of the IMF's top officials. He muttered his exasperation with the attitudes of top eurocrats, particularly those "with German accents." They failed to recognize, in his view, that their monomaniacal focus on austerity was sowing the seeds of its own political destruction. The people of southern Europe will only be squeezed so hard, he suggested, before they reject the deals, pending bargains, and economic prescriptions that Europe's northern powers are counting on to save the eurozone.

At a party thrown by JPMorgan, former U.S. Federal Reserve Chairman Alan Greenspan reportedly opined that the European monetary experiment was doomed from the start due to the divergent views and national characters of the disparate countries participating in the venture.

Then, over the weekend, the Dutch government, one of Germany's most important allies in making the case for austerity, fell. And in France, the first round of the presidential election both presaged the almost certain ultimate victory of Socialist François Hollande over incumbent Nicolas Sarkozy and, more ominously, showed the strength of Marine Le Pen's far-right National Front party.

As the past week has shown, Europe's crisis lives on, seemingly more fueled than ended by high-profile "solutions" that have provided more questions than answers. In fact, the European financial crisis has been a case study in compounded mismanagement.

While the expectations of most of those with whom I spoke who participated in this weekend's discussions was that the Europeans have sufficient tools to avert catastrophe for the foreseeable future, there was also a clear sense that risks are nonetheless growing. Recession and the pain of belt-tightening would likely produce populist backlash on both the left and the right. Long-term recession in the south seemed certain. And if the malaise triggered bank failures, it might be every man for himself: Not all governments would pull together in bailing out financial institutions headquartered outside their immediate borders. Further, if a failure triggered a problem with a big American bank such as Morgan Stanley, the most often whispered victim, the bet was that neither the U.S. president nor Congress would have the appetite for an election-year bailout. "They'd let it fail," said a former top Obama administration official, expressing the view that this is what would appeal to the public at large.

For a moment, it almost made one wish for the good old days of George W. Bush. The ex-president left behind a wake of problems worldwide, notably associated with his administration's misguided prosecution of its "war on terror." But when the markets teetered late in 2008, he and his Treasury secretary, Hank Paulson, stepped in and not only acted relatively quickly but marshaled the kind of collective action from the U.S. Congress that the body seems more or less incapable of unless it has a gun to its head. My guess is that in the future, the picture of the Bush presidency is going to moderate considerably, and his team's imperfect but ultimately decisive and fairly effective intervention in the markets during his last days in office will be counted to his credit.

In the same way, flawed as President Barack Obama's stimulus package a few months later may have been, it too is likely to look wise next to the eurozone's approach, especially if, as seems likely, the eurodithering both produces long-term social pain and triggers instability or a resurgence of Europe's intolerant, nationalist right.

Another event I participated in last week, a conference featuring several dozen major institutional investors, offered a slightly different take on the drama in the eurozone. To be sure, there was a universal sense that Europe's leaders and the international community at large were foolishly playing with fire in their mishandling of the crisis. As one participant in the conference said, "There is an old rule of debt crises. If the debt can't be paid, it won't be." What he, a longtime research director for large investment funds, meant was that overly indebted countries needed to default, devalue their debt through inflation, or negotiate a deal that lowers or postpones their obligations. Debt crises invariably involve haircuts for someone.

There was also a widely held sense among the investors that the crisis might blow up in a way that would produce cascading bank failures and also, as a secondary but significant consequence, would undo Obama's reelection prospects. But they too saw the crisis as one of choice. The relative ease with which one of the several Eurobond proposals might be implemented was discussed and made clear, and therefore many in the group believed that after the muddling, perhaps in the face of the imminent possibility of bank collapses, European leaders might finally listen to reason.

This sentiment led a number of the investors at the event to conclude that they may be underweighted on the upside when it comes to Europe. The thought was that if catastrophe were indeed going to be averted, then some assets, like big blue-chip German and other Northern European equities, might be undervalued. It might also be worth holding stock options to buy them should a more positive scenario play out.

In other words, while the majority of investors were, like the majority of senior officials I spoke to this weekend, very worried about Europe's current trajectory, they still believed there remained a possibility that in the end, self-interest and rationality might force Europe's leaders to do what thus far they have been unable or unwilling to do: live up to their responsibilities and serve the interests of their people. But that, of course, is far from a safe bet.


David Rothkopf

The Enemy Within

Since the end of the Cold War, America has been on a relentless search for enemies. But the real dangers are at home.

The United States is a bit like a 375-pound, middle-aged man with a heart condition walking down a city street at night eating a Big Mac. He's sweating profusely because he's afraid he might get mugged. But the thing that's going to kill him is the burger.

Since the end of the Cold War, America has been on a relentless search for enemies. I don't mean a search in the sense of ferreting them out and defeating them. I mean that America seems to have a visceral need for them.

Many in the United States have a rampant, untreated case of enemy dependency. Politicians love enemies because bashing them helps stir up public sentiment and distract attention from problems at home. The defense industry loves enemies because enemies help them make money. Pundits and their publications love enemies because enemies sell papers and lead eyeballs to cable-news food fights.

The Greeks, who once seemed to know a lot more about life than they do about fiscal management today, noted that for any drama to succeed it requires agon -- conflict. The same seems to hold true for politics and foreign policy. It's easier to run against a threat than it is to articulate a vision of where we should be headed and how to get there. Absent clear dangers, it's hard to persuade people to fund giant defense and intelligence establishments or to mobilize international coalitions. (Just add up how many international coalitions are primarily against things -- enemies, hunger, disease, climate change -- rather than for things.)

For the World War II generation, there were the Germans and the Japanese, vilified so much that even today they are the enemies against whom all others are measured. Then there were the Soviets, who were both dependably evil and happened to be a genuine threat. After the communist collapse, America tried to replace them but came up at first only with tin-pot bad guys like Manuel Noriega, Slobodan Milosevic, and "Baby Doc" Duvalier.

Then came the 9/11 attacks, and politicians simply crossed out the word "Soviet" in their stump speeches, replaced it with "terrorist" (despite the huge disparity in the nature and scope of the threats), and started scaremongering and spending like the good old days.

Now, as the United States winds down the wars that came of that, there seems to be a search for new bogeymen. In March, Republican presidential candidate Mitt Romney called Russia America's "No. 1 geopolitical foe," following up on his December complaint that Vladimir Putin is "a real threat to the stability and peace of the world." But in February he was warning against the risks posed by China's "prosperous tyranny." In March, it was nuclear North Korea, one of the "world's worst actors." Back in 2009, Romney wrote an op-ed calling Iran "the greatest immediate threat to the world since the fall of the Soviet Union, and before that, Nazi Germany," while in 2007 he called jihad "this century's nightmare."

Romney, of course, is not alone. Republican presidential contender Newt Gingrich similarly offered up the nearly hysterical assertion that Venezuelan President Hugo Chávez's "anti-American" alliances with Iran and within Latin America could present the biggest threat to the United States since the Soviet Union. (To be fair, it's worth noting that during the 2008 presidential campaign, Barack Obama also called Cuba and Venezuela "enemies.")

Of course, there are problems even with the more credible of these assertions. Putin may be anti-democratic, a troublemaker with a very misguided sense of how attractive his bare torso is, but his country is a shell of its Soviet self. Russia is in the midst of a demographic meltdown pretty much unprecedented since the Black Death, and the country is even sometimes cooperative with the United States on issues from nuclear weapons reduction to counterterrorism. China may be a rising power that often disagrees with the United States, but the two countries' economies are deeply interdependent. China has little history of global adventurism, and though it is a large country with a large economy, it is also still a very poor one focused on its own social problems. As for the Islamic fundamentalists, they fall into two categories: private actors who are dangerous but small (al Qaeda) and state actors who are dangerous but middleweight (Iran). They pose threats. They may view America as the enemy. But they are not big enough or organized enough to warrant organizing America's entire foreign policy around them as the country did during the so-called "Global War on Terror." The true damage they might inflict on the United States, while serious, is limited.

By far, the greatest threats to the United States right now are internal ones -- like that Big Mac. They don't come from terrorists. They come from political obstructionists and know-nothings who are blocking needed economic and political reforms, whether fixing a health-care system that poses a debt threat many times greater than the immense U.S. budget deficit or tackling the growing inequality in American society or overhauling the United States' money-corrupted, dysfunctional political process.

If America stopped searching for goblins under the bed, it might actually be able to reset its economic priorities and start investing in the things that would make the country stronger, more prosperous, and safer again, from infrastructure to energy security to better schools. What's more, Americans might find that a foreign policy that identified real risks but kept them in perspective and was more about deepening ties, finding common ground, and avoiding unnecessary conflict would work better than the tired us vs. them formulations of the recent past.

Paul J. Richards/AFP/Getty Images; Scott Sanders/BigStockPhoto