This post, originally published May 14, 2012, has been updated to consider recent events.
President Obama's press conference this past Friday to explain the link between the Euro crisis and the American economy shows once again, "It's The Economy, Stupid" -- the phrase that propelled Bill Clinton's election still resonates, but with one major caveat. The phrase should now be "It's the Euro Stupid". If President Obama looses his bid for re-election it will probably be because of the economy but not America's economy.
How do you put on a bumper sticker, "I saved GM but had no power over the Euro?"
In fact the situation has only gotten murkier since I wrote the following piece on May 14th. The Spanish banks might have been bailed out this weekend but there is still the problem of Greece's possible withdraw from the Euro Zone, and Italy's finances. And then there is the severe under capitalization of the European banking system with major banks holding large quantities of public and private assets of the countries that are having the most difficulties.
So how do you say on a bumper sticker or on a TV commercial that Europe is America's largest export partner and that China is Europe's largest export partner so that if the European economy dramatically weakens, America's export sales to both markets decline and as a result, American job growth will decline as well.
A nation's foreign policy should be based on defending the nation's national interests abroad. However, in the new interlinked world of global markets where the United States is no longer economically shielded by its self-reliant continental market, institutions are not in place that would allow America to defend itself.
Market globalization is forcing nations to expand the concept of defense beyond the military to include economics, but national politics whether in the U.S. or Germany has not caught up to this reality. The United States is involved with and protects Europe militarily through NATO and through actions such as in Bosnia or as the behind the scenes real power in the Libyan conflict. Yet for the United States to be involved in the Euro crisis would be seen as not only overstepping the boundaries of sovereignty but politically unacceptable both in Europe and America.
Remember the Euro bashing by the Republicans in the primaries and Mitt Romney's statement that, "Europe must save itself, (that) the United States will not give a single cent to help it solve its crisis." Somewhat of an interesting comment from the same man who wanted greater American involvement in Libya. And a comment not so dissimilar from the America Firsters of the late 1930s.
Ironically, a month before Romney made this statement, when the European banks were about to face a massive liquidity crisis that could easily reach the United States, the Federal Reserve cut nearly in half the rate foreign central banks pay to borrow U.S. dollars. While the Fed never said the plan was meant to target Europe, the implication was there. Implicit in the Fed's action was a signal to the marketplace that Fed Chairman Ben Bernanke understood the relationship of the EU crisis to the American Economy and how vital it was for the U.S. to support the European Central Bank.
We are now operating in a period of time politically, diplomatically and economically without a global protocol, without a set of rules to deal with the new forces caused by market globalization. The protocols we have were set up for a post World War II world; structures such as the UN, and NATO are useless in dealing with today's economic contagion. The monetary institutions established at the end of World War II, the IMF and the World bank were set up to essentially help debtor nations with international payments i.e. work out plans and provide loans to developing countries for capital programs.
Since institutions and rules do not exist to protect America from the contagion of the Euro crisis we need again to rely on the non-elective arm of the government, the Federal Reserve, to try to do this in a piecemeal fashion.
This past week both Goldman Sachs and Pimco forecasted that the Fed would continue its policy of monetary easing by doing a QE III. A policy which, if followed through, will theoretically stimulate spending in the U.S. to make up for some of the lost international demand and will lower the dollar, which will help American exports. Of course a lower dollar will also make European products less competitive and thus aggravate the economic crisis in Europe further.
Relying on the Fed to protect America from a global economic crisis during an election year is politically the easy thing to do. And frankly it is one of the few tools America has at the moment to try to shield its economy as much as possible. But in the long term it is harmful to our concept of democracy. The constitution does not give the Fed responsibility for foreign policy and the Fed does not have a congressional mandate to act beyond our borders.
What needs to be done urgently is for America to lead in the creation of new domestic and international rules that deal with globalized economic contagion. Conceiving and doing this is not going to be easy, especially when the American political system is deadlocked. But it must be done and it has been done before. In an eerie similarity to the late 1940's, Harry Truman, who like Obama faced relentless political criticism at home, led in establishing the institutions to deal with the contagion of that time.