Despite the possible breakup of the EU, there's a certain degree of complacency and denial over the political gridlock and lack of leadership on both sides of the ocean. The respite in the euro-crisis lasted only a few months and Europe sits on the edge of collapse after almost two years of political rhetoric and last minute summits. The threat of a Greek exit and escalating borrowing costs in Spain has revived fears of a financial contagion threatening the credibility and viability of the European banking system.
Most of the eurozone's banks remain on life support and are overexposed to their respective markets and sovereign entities. The IMF itself has had to top up its balance sheet. European policymakers are calling for more austerity, amid signs that its banking system has gone through the last bailout and is in need of more funds. Simply, the fundamental problems were not resolved by the bailouts. The rescue packages merely transferred enormous private liabilities unto the sovereign entities, and their debt load is far too high. Debt on debt does not work.
The Americans too spent more than $3 trillion to bailout Wall Street and debt today is a staggering 100 percent of their gross domestic product. The US consumer already saddled with almost $3 trillion of debt, is a no show in this growth scenario. The federal deficit this year will exceed $1 trillion for the fourth consecutive year in a row. Yet still, money comes into the United States. The threat of the EU unraveling has caused a "dash for cash", with funds once again piling into US government debt, an even weaker sovereign credit whose debt load is greater than combined debt of the entire eurozone and United Kingdom. Left unsaid is the United States is not too big to fail.
The United States has avoided the European budget cuts because the upcoming presidential election is yet another opportunity for policymakers to forestall making decisions. Mr. Obama's budget was defeated by both Houses, in a rare show of bipartisan unity making it more than a year without budgetary approval. Then there is the federal debt heading for what Chairman Ben Bernanke calls "a massive fiscal cliff", when the Bush tax cuts expire and $1.2 of trillion automatic spending cuts hit in January. One party wants tax increases and the other cuts in spending but neither side is looking for compromises or solutions. Instead Mr. Obama tried to impose the "Buffett Rule" which would do very little to erase his budgetary deficit but instead focused attention on the rich. The problem is that leadership is lacking, and while politicians on both sides of the pond are fiddling, the confidence and basic integrity of the world's financial system is at risk.