At the risk of taking contrarianism to extremes, let me offer this suggestion: The global economy needs a "Tea Party" movement in Europe to lobby for fiscal conservatism there.
Many "mainstream" analysts deride the Tea Party agitators as a right-wing fringe group, and in many respects, that label is deserved. I wouldn't want them running the Treasury Department or the Federal Reserve.
But these conservative populists do perform the useful function of focusing American political attention on the need for fiscal responsibility. They make a good point, for example, in arguing that we shouldn't add a major new entitlement program for health care until we've figured out how to pay for the entitlement programs we've already got.
Europe, by contrast, lacks this sort of potent conservative movement to constrain government spending. Given Europe's experience last century with virulent right-wing populism, its wariness of extremism is understandable. But it means that Europe lacks a strong voice for reducing public-sector spending and debt.
Europe is in many respects an economic never-never land. It has a central bank to run a coordinated monetary policy, and a single currency, but it has several dozen finance ministries pursuing separate fiscal policies, many of which can be summed up as: spend, spend, spend. In fiscal terms, "Europe" is often a riderless horse.
Investors accept such shaky situations right up to the moment that, for whatever mysterious reason, they panic and decide the situation is unsustainable. And that's what has been happening over the past several weeks as the financial markets have been voicing a collective "eeek!" about the European debt and fiscal mess.
The focus of concern has been the debt of the so-called PIGS countries -- Portugal, Ireland, Greece and Spain, with some economists adding another "I" for Italy. But debt is only part of the problem. Debt levels as a percentage of gross domestic product were higher last year in booming India (85 percent) than in Portugal (76 percent), Ireland (61 percent) or Spain (57 percent). The larger problem is the lack of political will in the slower-growing European countries to challenge public spending and put fiscal policy on a sustainable path.
The best analysis I've seen of the problem of global fiscal imbalances comes from Mervyn King, the governor of the Bank of England. I may be biased (he taught me economics in graduate school) but I think King is the wisest central banker around. I would especially commend a speech he gave Jan. 19, which is available on the Bank of England Web site.
King captured the basic problem in a little game he called "Sudoku for Economists." It's a simple, nine-box diagram summarizing the interaction between "high-saving countries" (read: China and many other Asian nations) and "low-saving countries" (read: America and Europe). In King's formulation, total demand (or GDP) is the sum of domestic demand and net trade. The sudoku numbers add up only if the high savers' big surpluses match the low savers' deficits -- but as we've seen, this isn't a sustainable mix. The imbalanced system came crashing down in 2008 and 2009.
Asian surpluses are "too high to last," says King, but he cautions: "Sudoku for economists shows that it is essentially a political and not a technical problem," in which the low-saving countries must "reduce their net borrowing from abroad" and stop playing "the role of consumer of last resort." So how will this political adjustment take place? This brings us back to the Tea Party movement. The success of fiscal conservatives in recent political races in Virginia, New Jersey and Massachusetts means that U.S. politicians must pay closer attention to debt and deficit issues to survive. President Obama seems to recognize the potency of this issue among mainstream voters, with his pledge for a commission to tackle the long-run problem of entitlement spending.
But I see no similar political pressure in Europe. European leaders, for the most part, are still trying desperately to avoid the political day of reckoning. Few Europeans, political or conservative, seem willing to give up their share of the entitlements package that is part of the modern social-democratic compact.
I wouldn't really wish the Tea Party movement on anyone, but the Europeans could use some of its passion about fiscal responsibility. And while we're thinking contrarian thoughts, how about a "conspicuous consumer" movement in high-saving Asia to push for greater domestic spending there?