With former Dartmouth College President Jim Kim taking over the World Bank, rumors have short-listed Tim Geithner as his possible replacement in Hanover, N.H. If the Dartmouth board doesn’t mind uncomfortable ironies, the treasury secretary may soon be headed north. Last Monday, just 48 hours after Geithner scolded Europeans to act “aggressively” and deal with their long-unfolding debt crisis, the Trustees for Social Security and Medicare issued an annual report showing an ever-dimmer outlook for our entitlement programs.
My teenage daughters would call that moment “awk-ward!” And for the youth of America, the consequences of putting off overdue budget reforms become more palpable every day. While Medicare insolvency is forecast for 2024, the same as last year, Social Security goes insolvent by 2033 — three years sooner than previous predictions. “We’re not Europe,” the saying goes, and that’s a good thing, too. But Europe’s move into uncharted waters is serious. It will become more so over the summer — and seems more and more likely to set the tone for our own elections in November.
As part of last week’s G-20 meetings, European ministers successfully increased their “stabilization” fund to nearly $1 trillion. The International Monetary Fund has also expanded its emergency backstop to $700 billion. The only problem is that no one really knows whether this will be sufficient if things go south in a country the size of Spain or France. It’s like Roy Scheider’s epiphany in “Jaws”: By the time you realize “you’re gonna need a bigger boat,” it’s too late.
In Europe, the financial instability has now metastasized into widespread upheaval. Last week, the Dutch government collapsed amid deadlocked budget talks; in France, Nicolas Sarkozy is finished. After trailing in the first round of presidential voting, only a miracle could deliver the incumbent a victory in the runoff next month. Francois Hollande, the Socialist expected to prevail, has not only rejected the European Central Bank’s call for budget restraint, but wants to renegotiate the European Fiscal Compact as well.
No one likes budget cuts. Life would be simpler if money were free and debt had no consequence. But carrying government debts equal to the size of a country’s entire economy is dangerous. Ask the Greeks. Austerity may be difficult. In the long run, however, default, economic stagnation, and a devalued currency are far worse.
Even more pressing, Spain has entered a kind of financial limbo. The markets have pushed up interest rates on its sovereign debt, politicians work frantically to remake the budget, and big debts come due in the next six months. Everyone wants to believe that investors will continue to step forward to buy the country’s bonds, but the Spanish banks that have been big purchasers recently are just about tapped dry.
In America, as in parts of Europe, there is a sense that we’ve all been reduced to spectators. The second round of presidential voting in France takes place the same day as parliamentary elections in Greece; Ireland follows with a referendum on the Fiscal Compact in late May; French parliamentary elections take place in June, and the Dutch elections have been called for September.
Their debates should resonate with American voters as we contemplate the risks of unchecked spending and the expansion of the welfare state. One of the fundamental mistakes in Europe has been to blindly equate government spending with growth. But economic strength is about more than just this month’s unemployment rate or GDP numbers. It’s far more important to ask whether spending levels are sustainable, whether tax and regulatory policies are competitive, and whether we are leaving the next generation with more freedom and less debt — or the opposite.
Presidential elections in America are rarely about foreign policy. But events overseas will at least shape the campaign, which will focus public attention on the consequences of the record spending and deficits of the past three years. With President Obama proposing another $1 trillion deficit for 2013, the national debt is at a post-war peak and rising.
In the end of “Jaws,” the Orca proved to be a big enough boat — just barely — to kill the shark menacing the people of Amity. But a lot of damage was done in the process. With protests, riots, and governments coming down across Europe, let’s hope that we have seen the worst in the fight to save the euro. I’m not betting on it. If he’s really thinking about that job at Dartmouth, neither is Tim Geithner.