THE STASH MARCH 16, 2009
That's one of the questions I grapple with a bit in my profile of Larry Summers this week. In addition to some ongoing developments that make you wonder, there's evidence from the recent past that our political system isn't ideally suited to dealing with financial and economic crises. The example I cite in the piece is the successuful U.S. loan package to Mexico in 1995, which wouldn't have happened if Congress had its way.
But however you feel about that, it's hard not to conclude that our political institutions are far, far better at dealing with these crises than their European counterparts. Paul Krugman has a really insightful riff on this in his column today:
Europe’s economic and monetary integration has run too far ahead of its political institutions. The economies of Europe’s many nations are almost as tightly linked as the economies of America’s many states — and most of Europe shares a common currency. But unlike America, Europe doesn’t have the kind of continentwide institutions needed to deal with a continentwide crisis.
This is a major reason for the lack of fiscal action: there’s no government in a position to take responsibility for the European economy as a whole. What Europe has, instead, are national governments, each of which is reluctant to run up large debts to finance a stimulus that will convey many if not most of its benefits to voters in other countries.
You might expect monetary policy to be more forceful. After all, while there isn’t a European government, there is a European Central Bank. But the E.C.B. isn’t like the Fed, which can afford to be adventurous because it’s backed by a unitary national government — a government that has already moved to share the risks of the Fed’s boldness, and will surely cover the Fed’s losses if its efforts to unfreeze financial markets go bad. The E.C.B., which must answer to 16 often-quarreling governments, can’t count on the same level of support.
In some ways the Europeans have too much democracy, in other ways too little: Each national government is pretty responsive to its citizens, which is why none of them is moving. But because there's no pan-European authority that has broad, democratic legitimacy, there's paralysis on that level, too. It really does make our political system look functional by comparison.