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Why Only Obama Can Save Europe, Now

Monday, 1 Apr 2013 | 1:32 AM ET
Photo: Getty Images

When U.S. President Barack Obama looks at the dangerous euro wasteland that once was a prosperous region driving nearly one-fifth of the world economy, he probably has flashbacks of repeated rebuffs he got from German Chancellor Angela Merkel when, in late 2011, he asked for more economic growth and less austerity.

Schadenfreude (German word for delight in misfortunes of others) and "I told you so" are probably not even crossing his mind because he suspects that he might soon have to move to save Europe from the resurgence of its old demons.

I hope he does feel that way, because a real sense of urgency should prevail at the time when America's perhaps only and truly reliable ally is sinking deeper into an intractable recession and politically flammable problems of joblessness and poverty.

(Read More: Remember Euro Breakup Fears? They Are Back)

Indeed, just four days before the Holy Week came this heartbreaking report from Caritas (one of the world's largest humanitarian organizations): more than 3 million people in Spain currently live in extreme poverty (families with an income of less than $390 per month), and more than one million are barely surviving on charitable donations – an increase of 150 percent from the pre-crisis levels.

Saving Europe From Itself

And there seems to be no end to this, Chancellor Merkel says that at least five more years are needed to put this horrible human suffering behind. But five years sounds like a short time to produce a German euro area. And a more important question is whether that objective can be achieved without tearing apart the social fabric already stretched to the breaking point in France, Italy and Spain – to say nothing of smaller countries like Greece, Portugal, Ireland, Cyprus, Slovenia, etc.

For the U.S., the euro area chaos is not just an issue of bleak outlook for one-fifth of American exports going to Europe. It is a question of political stability of its key ally and a pillar of the largest and, arguably, the most successful military alliance in history.

(Read More: Cyprus Bailout Won't Be Euro Zone's Last: Poll)

It is also a question of the viability of America's new security doctrine, founded on the concept of sharing with allies the political and military responsibilities for world peace, and freedom of global commerce and finance. Yes, for reasons of its own budgetary problems, Washington wants its allies to do some heavy lifting, too.

But how can Washington square euro area's deep and continuing budget cuts for basic public services with the requirements of their military and political burden sharing?

Mission impossible, no doubt. America's new security doctrine is, therefore, just a pipe dream at a time when the world is confronted with serious challenges to peace and stability in the Middle East, Central and East Asia and parts of Africa.

(Read More: Euro Zone Overrates Ability to Curb Contagion: Moody's)

What can the U.S. do? To begin with, President Obama might wish to forget and forgive the uncooperative attitude of the German Chancellor. He would probably get the same answer again in the run-up to German elections next September. But only President Obama can free Europe from being hostage to German politics. As a leader of the Euro-Atlantic community, he should ask for the euro area fiscal consolidation in the context of growing economies and declining unemployment.

Regulate and Supervise, Don't Confiscate

Such a gesture from President Obama would get an enthusiastic support from French and Spanish leaders, and from whoever will be in charge of the Italian government in the months to come. That would be a formidable coalition.

(Read More: Italian President at Center of Storm as Deadlock Continues)

Probably kicking and screaming, the German, Dutch and Finnish advocates of austerity would have no choice but to go along. Especially since their push for brutal spending cuts, tax hikes and confiscation of bank deposits has hit a dead end and seriously damaged the credibility of the euro area financial system.

The inability of Spain and France to drastically cut budget deficits in a recessionary economy is a clear proof – if one was needed – that the German austerity mantra is nonsense and has always been. These two countries are the "declared" cases of budgetary slippages, but others will follow.

Confiscations of bank deposits are a much more dangerous nonsense. A failure of financial authorities to supervise the banking system is a failure of public policy, a failure of people whose salaries are paid by depositors as taxpayers to provide an essential public good: a sound and a reliable financial system. By reaching into depositors' – taxpayers' – pockets to pay for errors of public policy, the German-Dutch-Finnish disciplinarians are not only violating the rules of public service, but they are also running afoul of basic principles of social equity and justice.

(Read More: Bank of Cyprus Big Savers to Lose Up to 60 Percent)

In fact, the whole euro area crisis is a comedy of public policy errors paid for by taxpayers and wasted lives of millions of unemployed. Cyprus is the latest example. The German idea that there could be a water-tight cordon sanitaire around the destruction of a small island economy of one million people is a grave error of judgment in a monetary union whose weak financial system continues to be damaged by a worsening recession and soaring unemployment.

Just like in cases of Greece, Ireland, Portugal, Spain and Italy, Germany failed to lead – or simply could not lead - in a timely and effective manner, allowing again relatively simple and minor problems in the Greek Cypriot state to develop into a crisis of major proportions.

The Euro Crisis Is a Threat to Peace

I hope Washington will take all this very seriously. Surely, some Beltway pundits will probably gloat about German incompetence. And they might also like the fact that the U.S. is benefiting from the flight of capital to its safe, deep and broad financial markets – as shown by the dollar's 5.3 percent gain against the euro since the Cyprus crisis entered its acute phase in early February.

But that would be wrong and short-sighted. This large capital outflow from euro assets is a sign of major distress that can easily spill over into other markets and damage institutions of systemic importance.

More ominously, recessions, rising unemployment and the difficulty of seeing an early end to all that are leading us back to security problems. The euro area economic fault lines have now become serious political fissures. Resentment of Germany, recent Italian elections run on anti-German themes, vicious invectives, pervasive hate talk and ghosts of the Nazi past are now flying around a continent that was supposed to swim in solidarity and brotherly love of an ever closer European Union.

Here is what the Luxembourg's Prime Minister Jean-Claude Juncker – the man who accused Germany of playing domestic politics on the back of the euro - told the German magazine Der Spiegel on March 11, 2013: "Anyone who believes that the eternal issue of war and peace in Europe has been permanently laid to rest could be making a monumental error. The demons haven't been banished; they are merely sleeping … I am chilled by the realization of how similar the circumstances in Europe in 2013 are to those of 100 years ago … In 1913, many people believed that there would never again be a war in Europe. The great European powers were economically so strongly inter-twined that there was a widespread opinion that they could no longer afford to engage in military conflicts. Primarily in Western and Northern Europe, there was a complete sense of complacency based on the assumption that peace had been secured forever."

(Read More: Hands Off Our Banking Sector, Luxembourg Tells Euro Zone)

The late French President Francois Mitterrand said the same thing more bluntly, and more directly, in his speech to the European Parliament on January 17, 1995: "…we have to vanquish our history…nationalisms lead to war! The war is not just part of our past; it could also be part of our future."

Clearly, a wake-up call for Washington. Or as the astronauts were saying when calling their base: "Houston, we have a problem."

Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.

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