Up, down or sideways

Posted on October 31, 2011 | Atlantic Business Magazine | 0 Comments

Once again I am exercising editorial privilege in delaying a promised piece on rural development. The current macro-economic environment is just too important to ignore.

The U.S. is mired in what seems to be a hopeless political gridlock which is sapping business and consumer confidence. Greece will and must restructure; capital markets must be assured that Spain and Italy will not. And we desperately need pro-growth policies in Europe and America.

The world really is at a crossroads. Solutions exist to diminish the European and U.S. debt mountains as well as to stimulate growth in both jurisdictions and indeed the world. Tragically, implementation (or even pursuit) of these solutions is being held back by a failure of political leadership. President Obama seems only intent on political grandstanding and campaigning for a second term in office. Europe’s leaders know the future of the EEC and the Euro are at risk but have no idea how, or apparently any desire, to pursue the necessary actions to ensure economic stability.

In the U.S., a potion of short, medium and longterm measures is needed. The president’s Jobs Plan is all short-term. Its initiatives, like a payroll tax holiday, are not wrong-headed, but they need to be coupled with the sorts of messaging that would accompany the following: immediately approving the Keystone pipeline extension; reversing the NLRB decision on the Boeing plant in Carolina; freezing the implementation of Dodd-Frank financial regulatory reform; instructing Fannie Mae and Freddie Mac to support the refinancing of all mortgages, provided the borrower has demonstrated a consistent record of keeping their obligations current and has the prospective income necessary to continue to do so; accelerating the approval process for new nuclear plant construction; opening up previously restricted areas for oil and gas drilling (subject to sensible rules); and curbing the far-reaching bureaucracy of the EPA. The president also needs to be honest with Americans about the government’s inability to maintain the current scope of Medicare and Medicaid, increase the retirement age for social security benefits, simplify the tax code, introduce a consumption tax, reduce corporate tax rates and eliminate tax expenditures.

What’s important is to give business and the consumer the benefit of stability, the sense there is a long-term plan to manage the country’s affairs in a responsible manner.

Turning to Europe, European electors need to understand that while the prospect of bailing out a previously prof ligate state, like Greece, is politically unpalatable, the prospect of a disorderly default would be very painful for everyone.

In fact, such consequences could impose a deep recession on all of Europe. They need to allow Greece to restructure, wiping out, say 50 per cent of its debt. Those that hold such debt would be held harmless by the EFSF (a pan-European institution) and guarantee the sovereign obligations of Spain and Italy, albeit for a fee. In return, all those countries which were provided with such support would have to immediately implement progrowth policies like labour mobility, a reduction in payroll burden, a uniform retirement age across the EEC (Germans, not able to retire until age 67, can’t be expected to subsidize Greeks retiring at 55 or any age younger than 67). Europeans need to get tough on tax collection where tax avoidance is culturally in-bred and limit the size of government spending to a common level of national GDP.

Would any of this be popular? No, but that’s the point – this isn’t about winning a popularity contest. The patient is in intensive care and needs to be told by those to whom he is entrusting his care that he is likely to die unless painful remedies are implemented. The good news is that a full recovery can be expected at the other end.

So am I hopeful? I do honestly believe we will get to the right place in both Europe and America in the end but I worry the current slate of politicians on both sides of the Atlantic will rely on things getting worse as a pre-requisite to their being able or willing to sell the right remedial policies to their voters. Here’s hoping I’m wrong.

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