For­get Trump’s trade war; the real eco­nomic threat is in Europe, espe

The East African - - OUTLOOK - By SE­BAS­TIAN MALLABY The Wash­ing­ton Post

AL­MOST ANY­WHERE you look th­ese days, the eco­nomic news is heart­en­ing. The United States has rock-bot­tom un­em­ploy­ment and above-nor­mal growth. China has tamed its crazy trade sur­plus and is start­ing to tackle its ex­ces­sive debt. Europe and Ja­pan are out of the dol­drums. Across the world, 120 coun­tries, ac­count­ing for three-quar­ters of global gross do­mes­tic prod­uct, saw growth ac­cel­er­ate in 2017. The IMF ex­pects this year and next year to be even bet­ter.

The po­lit­i­cal pic­ture could hardly be more dif­fer­ent. The Trump ad­min­is­tra­tion has purged rea­son­able of­fi­cials and el­e­vated ide­o­logues. China’s leader seems in­tent on gov­ern­ing for life and en­forc­ing mind con­trol via In­ter­net sur­veil­lance. His Rus­sian coun­ter­part goes one bet­ter, ex­port­ing psy­cho­log­i­cal ma­nip­u­la­tion.

Mean­while, in the Euro­pean Union, a Trumpian has just won re-elec­tion in Hun­gary. Bri­tain is bent on a wit­less pol­icy of de-glob­al­i­sa­tion. Even in France, one of the world’s few po­lit­i­cal bright spots, a re­formist pres­i­dent faces an­gry street protests and his poll num­bers are slip­ping. Free­dom House judges that in 2017 democ­racy faced its most se­ri­ous cri­sis in decades.

This eco­nomic/po­lit­i­cal con­trast begs a ques­tion: How might po­lit­i­cal dys­func­tion de­rail eco­nomic ex­pan­sion?

To many in the US, the es­ca­lat­ing trade fight with China looks like the ob­vi­ous an­swer. But for now, that fight is mostly just rhetor­i­cal — nearly all the tar­iffs that both sides have laid out don’t take ef­fect un­til some un­spec­i­fied fu­ture. With luck, the pan­icky sell­ing on Wall Street will per­suade Pres­i­dent Don­ald Trump that a deal is bet­ter than a mar­ket col­lapse ahead of the midterm elec­tions. On Sun­day, the pres­i­dent reaf­firmed that “Pres­i­dent Xi and I will al­ways be friends” and that “a deal will be made.”

In Europe, on the other hand, the ob­vi­ous dan­ger lies else­where. The spring of 2018 was meant to be the time when the con­ti­nent fixed its rick­ety mon­e­tary union. Ma­jor na­tional elec­tions — in France, Ger­many and Italy — are now done, sup­pos­edly open­ing a win­dow for re­form be­fore next year’s Euro­pean elec­tions. But be­cause of that toxic tide in pol­i­tics, eco­nomic re­form ap­pears un­likely to hap­pen. Bar­ring a ma­jor po­lit­i­cal sur­prise, an even­tual re­peat of the euro zone cri­sis is be­gin­ning to seem in­evitable.

An un­easy his­tory

Europe’s predica­ment re­flects an ear­lier time in which pol­i­tics and economics be­came un­hinged from one an­other. In the eupho­ria fol­low­ing the Cold War, pro-glob­al­i­sa­tion, anti-na­tion­al­ist, utopian states­men cooked up the idea of a sin­gle cur­rency for Europe. They ig­nored the eco­nomic ob­sta­cles, in­clud­ing the re­al­ity that a sin­gle cur­rency and a sin­gle in­ter­est rate are un­likely to serve a ter­ri­tory as large and var­ied as Europe. The mon­e­tary pol­icy that suits Ger­many at any given time prob­a­bly won’t be the one that hap­pens also to suit Italy or Ire­land. To man­age this prob­lem, you need large bud­getary trans­fers from boom­ing ar­eas to de­pressed ones. You also need bank­ing crises

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