If the run-up to the G-20 summit has achieved anything at all, it's proven that the world is not going to bow down in front of President Barack Obama merely because he's not George W. Bush. The resistance that President Obama's enthusiasm for “stimulus” spending is meeting in Europe is evidence that, while he's still tremendously popular among the European public, the leaders of Europe are not impressed by his accomplishments or his economic strategy thus far.
A successful G-20 summit would conclude with American recognition that more spending, and any concessions to protectionism, is unwise, in return for a European realization that their own economic situation is dire and that what is needed is reforms, not more rules imposed by a new global regulator. But the most dangerous thing about summits like the G-20 is that they have to justify their existence by producing impressive-sounding agreements. Instead of promoting a return to reality, the G-20 is instead likely to give something to everyone, and thereby allow all concerned to indulge their worst tendencies.
It's sad that France and Germany are on the right side of the stimulus spending divide, with Britain and America lined up in the wrong. But, for once, the continentals have a clearer grasp of the budgetary situation than the Anglo-Saxons. Right now, stimulus bills–in addition to being cover for permanently expanding the size of government–are all about preserving the unbalanced financial status quo of the past fifteen years.
The only difference is that, instead of American citizens doing the borrowing, the government has in effect nationalized their debts and then doubled down on them. The Obama administration is not breaking from the legacy it inherited from the Bush administration: it is reinforcing it. Instead of emphasizing saving, it is spending like no administration has spent before. The continentals, many of whom have made painful and somewhat successful efforts to bring their budget deficits under control in the past decade, are understandably appalled.
But the Europeans have their own illusions. Foremost among these is a simple one that, by itself, explains much of the vehemence of their criticism of the United States. The illusion is that the entire financial crisis is America's fault, a result of its profligacy and poor regulation. The cure, they therefore believe, is for the U.S. to follow the European path of fiscal discipline and tight regulation. The result, according to France and Germany, will be a restoration of normalcy in Europe, which was unfairly sideswiped by the American collapse.
This is a fantasy. Except for the charge against American profligacy, it contains no truth. Like 1929–a precedent that should worry any sane observer–the 2008 collapse did begin in the U.S. But in both 1931 and 2009 it spread to Europe because both the European and the global financial system were fundamentally out of whack. A single stone does not start an avalanche unless the entire mountain is unbalanced. The first step for the Europeans, therefore, is to stop preaching, stop praising the European model, and start looking in the mirror.
The problems begin with the assumptions of European integration, and with the Euro. The admission of the countries of Eastern Europe to the EU may have made geopolitical sense, but it has been an economic fiasco. By expanding the EU, Europe's leaders declared that Eastern Europe was like Western Europe: a stable and mature market. The market reacted accordingly. But the declaration was not, and is not, true. The vast sums that Central European banks have loaned Eastern Europe are unlikely to be repaid in full, if at all.
In just the same way, the Euro was a European seal of approval for Greece, Italy, Spain, and Portugal. With these countries now in economic collapse, and political meltdown on the way, it is clear that the European pursuit of political ends through economic means has been a disastrous failure. Europe's basic failure has been to accept its own argument that history came to an end with the fall of the U.S.S.R. and the rise of a united Europe, and that, with the ending of history, economic realities could simply be ignored for the sake of the political aim of an ever-closer Europe. Having been built on the assumption that the good times would never end, Europe is proving itself unwilling to accept that its assumptions, and the European institutions themselves, are now irrelevant.
That is the basic reason why France and Germany have been so assiduous in blaming the U.S. for the crisis: it is a way of denying that their own model was profoundly unstable. Of course, Europe's problems are not limited to the self-inflicted wounds of integration. Europe, like the U.S., had a property bubble. U.S. banks over-extended themselves: European banks are even more highly leveraged. Former economic leaders like Ireland and Britain used the boom to inflate public payrolls at a spectacular rate, with a resulting loss of economic competitiveness. And, like the U.S., Europe faces a tidal wave of entitlement spending that will make the costs of dealing with the financial crisis appear minuscule by comparison. Unless Europe confronts these realities, no American recovery plan, be it sensible or not, will ultimately be effective.
As of this moment, Europe is not confronting reality. In fact, much like the United States, it is doubling down on failure. While the U.S. tries to spend itself out of debt, Europe is trying to regulate its way back to growth. The basic problem Europe has faced over the past two decades is that its high-tax and high-regulation model is a low-growth one. Its solution now is not to change the model: it is to try to use the crisis to force everyone else in the world to adopt it. That would impose massive costs on its competitors, and so make Europe a more attractive destination for investments.
That is also why Europe is so eagerly pursuing attacks on so-called tax havens, and on hedge funds. Neither had much to do with the crisis, but both are conduits for money fleeing Europe. Closing off those conduits would make Europe's life easier, even if it did little to end the crisis and nothing to help growth.
Global financial crises, as in 1929, do not happen when the world economy is well-balanced. When they occur, there's no reason to assume that every past policy was in error. But it's curious, and depressing, that all the leading countries are simply returning to what has become their stock solution: the U.S. wants to borrow and spend, the Europeans want to regulate, and the Chinese want to sit back and criticize.
The G-20 summit must, it will be argued, be a success: the consequences of perceived failure are too high. But to make it a success, the world's leaders will have to give a little something to everyone: a nod to spending for Obama, a glance at IMF reform for China, and generalities about global governance for Europe. All of those priorities are misplaced and dangerous. If the world's leaders want a genuinely successful summit, they will have to start by confronting their own illusions about what made the summit necessary in the first place.
Ted R. Bromund is the Senior Research Fellow at the Margaret Thatcher Center for Freedom and a frequent contributor to Commentary.
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