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America and the euro are in decline -- bad for America and good for the euro

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Ruminations, June 8, 2014

Is America in decline?
“Those who … suggest,” said President Barack Obama at the West Point commencement exercises, “that America is in decline or has seen its global leadership slip away -- are either misreading history or engaged in partisan politics.” We hope he’s right.

But often, perception is more important than reality. If one perceives that the United States is strong and decisive, one is less apt to challenge the United States’ leadership. On the other hand, if one perceives that the United States is weak and indecisive, one is more apt to challenge the United States.

Zhu Chenghu is dean of the National Defense University of the Chinese People’s Liberation Army and holds the rank of Major General. He met with Secretary of Defense Chuck Hagel in Singapore last week. After the meeting, Zhu told Hong Kong-based Phoenix Television that in a showdown between China and its neighbors, the United States might not be a reliable ally. “As U.S. power declines,” he said, “Washington needs to rely on its allies in order to reach its goal of containing China’s development.”

“U.S. power declines?” Wait a minute. Is Zhu misreading history or engaged in partisan politics? Or maybe, from his perspective, it’s an accurate assessment. He held up as an example the inability of the U.S. to project power in Ukraine. He probably sees the U.S. as speechifying while Russia and its Ukrainian cohorts seize land and power. He went on to describe the U.S. posturing as a “… kind of ED - an abbreviation for ‘extended deployment’ in military parlance - has become the male type of ED (erectile dysfunction) problem."

Russia’s President Vladimir Putin also believes that the West’s pre-eminent leadership is in decline, driven by "domestic socio-economic problems.” Well, it is accurate to say that we continue to have socio-economic problems that influence our foreign policy. An understanding of that situation has undoubtedly influenced Russia’s behavior in Ukraine and the lack of a coordinated, coherent response to Russia by Western allies.

Well, Russia and China think we’re in decline but so what? They never liked us anyway. Actually, it does make a difference. While it’s true that they have historically been hostile, they were careful as to how they would challenge us because they feared the United States and its allies. It appears that they fear us less today then they did in years gone by. And, if Russia and China fear us less (and our allies seem more hesitant to support us), then they will take more risks. And, if the more successful they are, the more they will have imitators.

One of the problems that Obama has had is that his actions undercut American commitments. His infamous “red line” comment about the use of poison gas in Syria amounted to nothing. The American commitment to provide a defensive missile system in Poland and the Czech Republic was reneged upon when Putin expressed his disapproval. And in retaliation for Russia’s aggressive actions in Ukraine, Obama promised threatening sanctions that have not – and will not – materialize. Now, there maybe good reasons for Obama’s failure to follow through on American commitments, but the growing perception is that the United States is an unreliable ally and leader.

A leader must have followers. Saudi Arabia and Israel are disinclined to follow America. Others – like Japan and Europe are beginning to develop their own foreign policies independent of the U.S. perhaps because they fear following a nation in decline. It will be difficult to reverse this trend – once set in motion, it can acquire the momentum of a runaway freight train.

But America has been in decline before and we have remedied it. Without rehashing the situation in the 1970s, we can accept that the world picture was bleak for the United States. It took a change in leadership in 1980 to reverse that situation. Maybe we can do it again.

The euro takes another hit
The European Central Bank (ECB) unwittingly took another step toward the demise of the euro. It has been the policy of the Euro Zone, the ECB and the European Union to do anything they can to save the euro – apparently even at the cost of the European economy. And so, last week they announced that they would lower interest rates to less than zero percent. Some say that this could precipitate a serious crisis.

Their action sounds crazy, no? But, it’s true. The ECB is fearful of deflation and has been trying to increase inflation for years. So having offered low, low interest rates and seeing no rise in inflation, they took the next step. And if this doesn’t work – and there’s no reason to believe it will since nothing they’ve done previously worked – the ECB may try the U.S. method of employing quantitative easing (printing money) although that accomplished nothing tangible for the U.S.

The problem is that European banks have money but no one wants to borrow it; borrowers need confidence in the economy before they borrow money to invest. While monetary policy can influence on the economy – especially bad monetary policy – it is not the sole determinant and, at this point dropping the interest rate from zero percent to -0.1 percent is likely to have little influence. Having an abundance of cash with few borrowing for business expansion can fuel real estate, stock market or commodities bubbles – likely outcomes.

Why did the ECB choose to act now? In 2013, prices have dropped in Greece, Ireland, and Latvia. In Germany, prices rose by 1.1 percent and inflation is expected to hit 1.9 percent in 2015. But the ECB is targeting 2.0 percent. It seems that with differing rates of inflation/deflation it would be hard to adopt a singular policy that would meet everyone’s objectives.

Meanwhile, over in Germany, the inveterate savers (average 10 percent of wages) are watching their interest on bank and insurance plummet. As low as the inflation rate is, interest is lower and some interpret these ECB policies as a form of expropriation. Der Spiegel told of a secretary who was informed in 2009 that her retirement account would reach “€40,000 when she retired. But by 2010, the sum had already declined to €38,000, and in 2012 the company was projecting a future benefit of €37,000. According to the latest notice, she can now expect no more than €34,000.”

In Der Spiegel, German stockbroker and author Dirk Müller last year warned that Europe is being “run into the ground in order to preserve the euro, which, according to Müller, is much too strong for the weak countries in the south but too weak for the strong German economy. … He warns against "lost generations" in Portugal and Spain. ‘The euro isn't bringing us peace,’ he says. ‘In fact, the euro is the spirit of discord.’"

Over in France, Marine LePen’s conservative and euro-skeptic Front National party captured the most votes in the European parliament elections as other European euro-skeptic parties also exceeded expectations. LePen hopes to form alliances with the Dutch Freedom Party, the Austrian Freedom Party, Belgian Vlaams Belang, Italian Lega Nord, Slovak National Party and Sweden Democrats and then break away from the euro.

If and when the euro does fail, there will be a period of readjustment, but then Europe will begin to climb out of its recession.

Quote without comment
Mario Draghi, President of the European Central Bank, July 2012: “The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

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