Political structures and crisis

The most immediate threats facing the world economy are two events with the clever nicknames 'fiscal cliff' and 'Grexit'. One involves the combined scheduled spending cuts and tax increases in America and the other the effects of a Greek default on Europe. In both cases these pose such a threat because of the dysfunctional political systems of the European Union and the United States. In America the politicians could stop this scheduled disaster by compromising and simply acting in a responsible manner. On the other side of the Atlantic the European leaders could similarly set up adequate defenses to deal with the Greek exit. With their insistence to wait until the last minute to act they are creating massive uncertainty in markets around the globe.

I would argue that it is partly the result of the political structures of these two political unions and that a centralized all powerful parliament as found in Britain or Sweden would likely not have placed the world economy in such an hazardous situation. In order to protect the conditional independence of the American states and European nations, great restraint has been placed on all centralized authority. By requiring the consent of both chambers of the legislature and the support of an independent executive as well as voting procedures requiring qualified majority approval, not to mention federal and EU actions being effectively constrained by an American constitution and European treaties. Making it very hard to take controversial decisions. When it comes to protecting the individual from intrusive new rules decided on in a far away capital this structure might serve a purpose. But when painful decisions are needed to prevent an expected economic disaster such a political structure is evidentially unable to cope, at least not in till disaster appears inevitable at which point some barely satisfactory half-measure is passed.

It is almost paradoxical how countries who group together in order to increase their economic wellbeing will, in order to persevere their political sovereignty tend to adopt a political system which will be ill-suited for adapting the policies necessary economic prosperity.

The limits of monetary magic

The power which comes from control over the money supply is immense. If the European Central Bank wanted to put an end to the Europe's economic turmoil they could simply announce the interest rates they feel are appropriate for government debt and make it clear that they will if necessary go on a shopping spree to ensure bond yields match their targets.

Putting the whole concept of moral hazard aside for a moment, there is a more fundamental reason why this is not done. While the central banker has near limitless control over demand in the economy he is incapable of generating any wealth on his own. His printing press allows him to print as many euros as is needed, but any one of those bills has no inherent value, following the inescapable laws of economics the value of every individual unit will decrease as supply increases. So the tranquility brought about by central bank action will have to be payed for in inflation.

That said, a rise in inflation might be preferable to the pain of recession. But such action will bring benefits primarily to the profligate while the discomforts of inflation will be showered on all in the monetary union. This will set a precedent that rewards those unwilling to balance their budgets and punishes those who pursue a sound economic policy. A recipe for future disaster.