While a resolution of the European sovereign debt crisis awaits, the situation today is considerably more promising than four months ago when expulsion of Greece from the European Monetary System and a return to the drachma seemed just a matter of time to many. A Greek rescue package has been agreed to, albeit with steep losses to bondholders, and a permanent financing facility, the European Stability Mechanism, is being launched. Behind this facility lies the promise of additional funding from the IMF backed up by its members, including the deep-pocketed Chinese.
While all eyes have been focused on EU summits featuring Germany's Angela Merkel and Nicolas Sarkozy of France, the real turning point in the crisis occurred in November, 2011 when Lucas Papademos became Prime Minister of Greece and Mario Monti became Primer Minister of Italy. If a Greek collapse could not be contained, Italy was in jeopardy. If Italy collapsed, all European and U.S. financial markets would not be far behind. The installation of Papademos and Monti were key supports in the firewall that Europe was erecting.
What is striking about Papademos and Monti is that they are as similar to each other as they are different from their political peers. Both have degrees in economics and both studied in the U.S. - Papademos at MIT and Monti at Yale. Both have long experience as technocrats - Papademos was Governor of the Bank of Greece and Monti was a European Commissioner. Both were academics - Papademos at Harvard and Monti at several Italian universities.
What Papademos and Monti represent is the triumph of expertise over politics as usual. Both Greece and Italy had reached a point of political dysfunction prior to November. To save the two flailing economies, government expenditures had to be cut, tax collections had to be improved and regulation needed to be simplified. Inflated public sector wages and unrealistic pension promises needed to be restructured. Greece needed to make these changes to receive aid. Italy needed to make these changes to restore confidence. The path was clear.
Nevertheless, the political processes in Greece and Italy were incapable of doing what needed to be done. In Greece, three bitterly opposed parties - the socialist PASOK, center-right New Democracy and the far right Popular Orthodox Rally had proved incapable of compromise on any of the key requirements of economic stability. In Italy, an even wider array of parties and interests had reached the same paralyzed state. What Papademos offered Greece and what Monti offered Italy was a chance for all parties, left, right and center, to come together under technocratic and non-political leadership to solve economic problems that threatened to spin out of control and damage democracy itself.
These arrangements are transitory and the traditional party systems will reassert themselves soon enough. Yet, for now the parties seem relieved to have an economic adult swim where rational problem solving trumps ideology, special interests and pandering for votes.
The parallels between the Greece and Italian fiscal situations and that confronting the United States are obvious. While the U.S. does not have a parliamentary system, our two-party system has proved quite capable of producing gridlock and dysfunction. Democrat and Republican politicians belabor social issues while a fiscal freight train comes barreling down the tracks ready to destroy an economic recovery barely breathing on its own.
The Bush tax cuts are set to expire in January 2013. If Obama wins reelection, he can try to force a tax increase on entrepreneurs and job creators by threatening a veto of a blanket extension. An actual veto would result in a tax increase on everyone. If Obama loses, he can simply run out the clock and let the tax increases kick in. At best, Republicans will be scrambling to undo the damage retroactively. U.S. executives and investors can hardly be blamed for sitting on the sidelines until this mud-wrestling match is resolved. The losers are the armies of unemployed who rely on new investment to create new jobs.
Those who say that the U.S. is not Greece or Italy should become better acquainted with the facts. The former Comptroller General of the U.S., David Walker, in collaboration with Stamford University has compiled an objective Sovereign Fiscal Responsibility Index of thirty-four leading economies. The U.S. ranks twenty-eighth, slightly behind Italy and not far ahead of Greece. Walker also shows that if the U.S. enacted fiscal reforms along the lines of the Simpson-Bowles Commission it would leap ahead to eighth place and insure its fiscal stability for the next forty years.
An organization called Americans Elect has created an open bi-partisan facility for an American-style Mario Monti to come forward and be placed on the presidential ballot in all fifty states this year. Their online electronic nominating process in now open for nominations and their first online primary is scheduled for April 17th. If James Madison were alive today, he would certainly approve of the steps Americans Elect has taken to avoid the curse of "faction" which Madison rightly condemned in Federalist Number 10.
Today America needs a prominent CEO, academic or military commander to come forward to push the frivolous political noise to one side and address the looming fiscal catastrophe. Paul Simon once lamented, "Where have you gone Joe DiMaggio / A nation turns its lonely eyes to you …" Today that might be rephrased as "Where are you, Mario Monti …"
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.