- The Washington Times - Thursday, June 25, 2009

OPINION/ANALYSIS

As the debate intensifies over the details of health insurance, expanding the Federal Reserve Board’s authority to monitor systemic financial risk or the allocation of more than $1 trillion of CO2 allowances, it is easy to lose the forest for the trees by forgetting the recent admonition of the chairman of the Joint Chiefs of Staff that economic health has serious political stability implications.

As an example, the first question raised by European Council foreign policy officials with American diplomats just after the market meltdown last September was whether the U.S. could continue to afford its military.

Another way of looking at the issues is to observe that overall economic growth - domestic, trans-Atlantic and global - is too important to be left to stove-piped technocrats who may be experts in derivatives, but illiterate about energy security. Everything connects at some level. But there is no channel or forum for integrated policymaking with respect to economic issues the way NATO provides, for example, for trans-Atlantic military security. Three examples can illustrate the vacuum.

Energy Security: The issue of energy security means different things in Europe and the United States, and there is little discussion of the implications. For the United States, the problem is not power generation, but reliance on imported oil used in the transport sector and the constant need to provide military and diplomatic protection for shipping lanes. For Europe, the most pressing problem is not transport, but a power-generation system too dependent on Russian gas, and the consequent special need to manage the Russian-EU relationship.

In part because of these differences, the EU and U.S. are constantly sniping at each other over climate-change policy, which is the arena of the environment where trans-Atlantic energy policy has always been developed.

Because of the desire to protect its agricultural sector, for example, the EU devises circuitous policies to hamper the development of biofuels and genetically modified seeds that could solve the food-fuel problem and the shortage of water for agricultural development. The two continents also cannot come to closure on rain-forest protection, thus leaving that important issue to be addressed by the odd remedy of curbing biofuel use. And policies that have dramatically increased natural-gas reserves in the U.S. are slighted in Europe, perhaps because of fear of offending the Russians.

Economic Stimulus: In part because Europe has a more extensive social safety net than the U.S., it had less need for economic stimulus but more need for regulatory reform to support its banks, on whose financial health EU industry is more dependent than U.S. companies, which have alternative sources of capital.

But there has been inadequate coordination, with the U.S. calling for more deficit spending that the EU rightly has opposed and the EU calling for more detailed hedge- and venture-fund regulation, which many question because those funds contributed little to the current crisis.

There are also serious doubts about whether the Troubled Asset Relief Program (TARP) authorizes the government takeover of General Motors and whether it supplies any guidance for the government’s role. There is, for example, no effective judicial review (except for a claim of unconstitutionality). What this means is the essential collapse of the legislative branch into the executive that also eliminates judicial oversight - an obvious violation of the separation of powers.

Whatever its constitutionality, however, nothing in the legislation authorizes the use of bankruptcy to extinguish present and future liability claims with respect to Chrysler and GM cars now on the road. And nothing authorizes GM - effectively under Treasury Department control - to extract from its spun-off Opel subsidiary the commitment not to sell cars in North America or China. This is a clear per se criminal violation of the antitrust and trade laws, as well as a worrisome form of protectionism.

Financial Oversight: Both the EU and the U.S. are barreling down a road map to financial recovery without reaching any kind of consensus about the causes of the problem. Europe rightly questions U.S. deficit spending and intervention but wants more regulation of venture capital, which provides the engine of innovation for the entire global economy.

In the U.S., reform proposals ignore the great damage done by government supported entities such as (1) Fannie Mae and Freddie Mac in creating vast demand and subsidies for mortgages that could never be offered or resold in a normal market economy and (2) the rating agencies that approved them. As a result, there is proposed regulatory intensification for all entities except those of the government. This includes the Fed, which contributed to the bubble by too much money creation, and will now have the responsibility to oversee - but also thus to protect - those institutions that are too big to fail. The government should set the rules and get out, not ignore the rules and then burrow in.

The Obama administration’s intention to restore antitrust enforcement against “bigness” as a key to economic recovery unfortunately appears to apply only to the high-tech growth sectors, not to the government supported and protected institutions that contributed most to the current threats to economic stability.

C. Boyden Gray is a former U.S. ambassador to the European Union.

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