Thursday, May 24, 2012

Games of Chicken.

Ezra Klein has a smart piece today on the four policy makers whose decisions may well determine the outcome of the 2012 US presidential election. The basic premise of the piece is that the outcome of the Eurozone crisis will tip the balance between President Obama’s re-election or defeat.

Walter Mead has a smart piece today about the two simultaneous games of chicken being played out in the Eurozone as we speak. Game #1 is the mutual assured destruction stare-down between Germany (pay or die) and Greece (we die, everyone pays). Game #2 is the German-French face-off on the under-writing of Club Med (southern European) debt.

By now, the mere mention of the subject – Eurozone crisis -- has become one of the great room-emptiers of our time. We’ve been through the drill repeatedly: cans are kicked, differences are fudged, pretend and extend goes on. And a few weeks or months later, the Euros go right back to square one and do it all over again.

Yet it really is enormously important. And Klein is right, it probably will have a determinative impact on the 2012 US presidential election.

The solution to the Eurozone crisis is, of course, a massive bailout. Everyone knows this. Part two of the solution is a series of gigantic loans to jump start growth across the Continent. There’s considerable argument about how this should be done (to say the least), but without economic growth the aging demographics of the Eurozone point to an almost endless economic stagnation – at best. Growth has to be on the agenda.

The question is: where does this bailout/loan money come from? The answer from all the Europeans (except the Germans, of course) is Germany. The answer from the Germans is: we know that eventually we will have to underwrite some of the bailout, but we will do it on our terms and we will not do it alone.

This is the third game of chicken that is being played out as we speak. German Chancellor Angela Merkel is facing off against President Obama in an advanced game of mutual assured destruction.

Basically, her message to the US president is this: “I will not lose a single vote if I force Greece out of the Eurozone. If the Grexit is messy and leads to contagion, which it almost certainly will, then the crisis will escalate to a much more menacing level. At that point, the US will have to demand that the IMF under-write a massive Eurozone bailout or we’re looking at 1930s Europe on steroids.”

“So, Barry, step up now if you hope to have any chance of re-election. We’ll help finance the bailout, but only if the IMF under-writes it. We can talk about percentage splits when you’re ready. But get ready and fast. Events may soon be in the saddle.”

“And one last thing: don’t send little Timmy Geithner over here to lecture us anymore, okay? Deals like this get done at the presidential level, Barry. So man up, get off the golf course and come to the table.”

Chancellor Merkel has no intention of letting President Obama off the hook on this. This puts the president in a difficult spot. Proposing a bailout of Club Med countries with US taxpayer dollars (washed through the IMF) is a one-way ticket to a 40-state loss in the electoral college. Not doing it risks the riptide of European economic and political implosion.

Sometimes the choices a president has to make are between the really bad and the truly dreadful. President Obama, courtesy of Chancellor Merkel, now confronts just such a choice.