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U.S. pols risk fate of Europe’s leaders in debt mess

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Legislators in Washington who are tempted to punt yet again this fall and not take the painful medicine needed to tame the government's spiraling debt might want to consider the fates of European political leaders who did the same thing in years past.

As a powerful financial virus spawned by debt overload has moved from country to country across the Atlantic, governments that dallied and failed to address their debt problems have been toppled, from Ireland to Greece and Portugal to Italy.

Some debt-plagued countries have gone through several changes of government amid the turmoil. Political leaders in Greece and Italy who were recently under the gun of extreme financial turmoil pushed through some of the painful budget cuts and economic reforms needed to cure the debt disease had to fall on their swords because the measures were so unpopular.

They have been replaced by unelected technocrats charged with steering their countries into solvency.

"It's either suspend politics or suspend the markets," said Gabriel Glockler, a deputy director at the European Central Bank, speaking of the dire choices facing European leaders once the debt tsunami engulfs their country.

Mr. Glockler noted that the magnitude of the U.S. debt problem is equal to or worse than those in many of Europe's most troubled countries, and suggested that U.S. legislators who continue to put politics ahead of economic reality may be living on borrowed time.

Just as U.S. politicians from President Obama on down are facing record-low approval ratings as a result of the unresolved debt and economic problems here, Mr. Glockler said, public disgust in Europe with the "abysmal state of the domestic political systems" was what ushered in the dramatic and sudden changes in political leadership there.

But at the same time, Mr. Glockler defended the sometimes messy democratic processes that led to the succession of government crises and downfalls in Europe this year.

"This is the way democracies work. Sometimes there's a snag along the way. You get pushed into doing things," he said, noting that U.S. legislators, like their European counterparts, in the past often acted only under the gun of financial crisis to make tough decisions.

"If you want a government that's run differently, go to China," he said.

Analysts say Washington could easily tame its debt problems today with less painful measures than those being rammed through legislatures in Europe - such as by gradually lifting the Social Security retirement age, paring cost-of-living adjustments for government employees, programs and beneficiaries, and phasing out various tax cuts.

But economists warn that further procrastination in Congress runs the danger of driving the U.S. into the kind of "do or die" debt crisis seen in Europe.

There, disruptive changes in social programs are being made abruptly and in a crisis atmosphere, causing real hardship for citizens, stoking social unrest and making matters worse for everyone by sinking the nations deeply into recession.

Perhaps most tellingly, the politicians there who hoped to survive by denying their debt problems and postponing unpopular changes lost their jobs anyway.

"There's an old saying that 'the higher you fly, the harder you fall,' " said John Browne, senior market strategist for Euro Pacific Capital, one of many Wall Street investment gurus and economists who think the woes in Europe will eventually visit Washington.

"The U.S. government is, by any measure, the luckiest government in centuries" because it has not yet been forced to pay for its profligacy, he said.

The U.S. Treasury, in fact, is benefiting from a "flight to safety" among investors taking their money out of Europe, a process that has driven its borrowing costs to record lows.

But eventually, the U.S. and its political leaders will pay a price for having repeatedly put off solving the debt problem while relying on the U.S. Federal Reserve to buy large portions of the Treasury's debt to keep interest rates from soaring as they have in Europe, he said.

"The U.S. has risen to unforeseen heights of monetary excess, and has been rewarded for doing so," he said. But a close look at Europe shows that "lower flying planes are starting to stall out, and one can only imagine - from this height - how fast and how far the U.S. may fall."

Many Europeans are bitter that, thanks in part to the largesse of the Fed and its money-printing presses, Washington has thus far escaped their harsh fate despite having debts that are potentially as crippling as any seen in Europe.

The U.S. budget deficit, at $1.3 trillion or nearly 10 percent of economic output, far exceeds the deficit shares in Italy and Spain. In the U.S., the gross debt of federal, state and local governments recently exceeded 100 percent of U.S. economic output, putting it in the same company as the most debt-strapped Old World nations.

U.S. political leaders seem to think that "things will miraculously improve on their own," said Harm Bandholz, chief U.S. economist at Unicredit Markets, perhaps because the U.S. has been able to finance its debts at ultralow 10-year interest rates of about 2 percent.

Italy, by contrast, is having to pay close to 7 percent, even though it "has shown the willingness to take the painful steps in the right direction," he said.

Spain, whose deficits and accumulated debt are much lower than the U.S., is paying 5 percent. Despite having bitten the bullet with stringent measures to address its debts, Spain's ruling Socialists are expected to get ousted in parliamentary elections scheduled for this weekend.

"Most European countries have already started to implement serious austerity measures, which hurt growth and are felt by the population," Mr. Bandholz said. "The U.S. is still spending its way out of crisis."

The U.S. may be in a grace period before it encounters the market storm that engulfed Europe, he said.

"Right now, the market does not fully appreciate the severity of the situation in the U.S.," he said, even though the deepening debt problem caused the federal government to lose its AAA credit rating from Standard & Poor's Corp. last summer as parties in Congress dawdled and bickered over what to do.

Mr. Bandholz estimates that at the current rate of deficit spending, the gross debt of the U.S. will exceed Italy's gross debt at 120 percent of economic output in a couple of years - putting the nation in a quandary that can be difficult to reverse and lead to insolvency.

Mr. Bandholz said the Fed's intervention thus far has protected the U.S. from the ravages of the markets.

The European Central Bank, by contrast, has made it harder for governments there by being unwilling to endlessly underwrite the debt of big-spending nations like Italy and Greece. The ECB has only sparingly bought the debt of such stricken governments, usually after they enacted major economic reforms.

"The European Central Bank can't start the printing presses and finance government" the way the Fed does in the U.S., because of a constitutional prohibition against the bank participating in government bond auctions, said the ECB's Mr. Glockler.

"Monetizing debt is out of the question" because of long memories in Europe, particularly in Germany, of debilitating bouts of "hyperinflation" brought on by such loose-money policies in the previous century, he said.

Rather than make it easier for wayward politicians, Mr. Glockler said, the ECB has acted as a sort of disciplinarian, providing financial aid only after hard political decisions are made. He suggested that the U.S. would benefit from the same arrangement between its central bank and Congress.

By allowing interest rates to rise to levels that pressure politicians to act, "we're inducing responsible behavior in societies that didn't have that before," he said.

"It isn't pretty," he said, but "such a disciplining device on politicians in this country would be desirable as well."

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