10/7/13 – The Europeanization of American Politics

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Oct 7, 2013 7:36:38 AM

and tagged Europe, Politics and the Economy

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I hate writing about politics, I really do. But, as we’ve seen repeatedly over the past couple of years, politics is now economics, and, therefore, it behooves us to get to grips with what that means for our country—and our investments.

One of the driving memes about Obamacare has been that it socializes a large section of the economy. The Republicans use this as an argument against, while the Democrats by and large see it as a feature, not a bug. The destination on the horizon, for both, is a more European polity. That means slower growth and stagnation for the Republicans and more social justice for the Democrats—in any event, a more European-style economy.

We’re a long way from that yet, but both sides are correct that it will be an outcome of Obamacare’s implementation. In the here and now, though, what we’re seeing is not the Europeanization of our economy but the Europeanization of our politics.

Let’s look at some examples: In Italy, one small party run by a business tycoon had the ability to potentially shut down the government. Italy is famous for political instability, with multiple small parties that combine and dissolve, and more than 50 governments since World War II. We’re actually seeing some progress there, as the government survived the most recent turbulence, but the outsize influence of small parties and wealthy individuals is a limit case of European politics.

Germany, Europe’s most successful economy, is another good example. In the recent election, Angela Merkel’s party won a great victory, but now it can’t form a government. Its usual coalition partner failed to win 5 percent of the votes and didn’t get into the legislature. Merkel is now engaged in negotiations with other, smaller parties in an attempt to form a government. It is very likely she will succeed, but there’s no doubt she will have to make concessions to her partners along the way.

Historically, what we’ve had in the U.S. were two relatively well-disciplined, broad-based parties that widely reflected the left and right sides of the political spectrum. While each had its own factions, at the national level, there was a broad consensus on each side that allowed meaningful compromise and deal-making. Everyone was in broad agreement on the rules of the game, so it was possible to play together.

In Europe, that hasn’t usually been the case. The prosperity of the 2000s masked many of the political rifts, but we’re now seeing populist and extremist parties from both right and left come back to life. The parliamentary structure of most European governments gives the small parties real power, as noted above.

In this country, the rise of the Tea Party faction of the Republicans may represent the first wave of that type of political fragmentation. For the first time here in the U.S., a minority of one party is trying to steer the ship by threatening to sink it. This isn’t a sudden trend; we’ve been down this road several times in the past couple of years, and the Democrats were every bit as divided in the 1960s. Still, this is as close as we’ve ever gotten to a European-style government collapse driven by one small group. The fact that it’s a faction of one party rather than a separate small party is, in this case, a distinction without a difference.

It is also a signifier of the future. If the Tea Party Republicans succeed in getting their way by holding hostage the federal budget and debt, other factions, of both parties, will be tempted to do the same. Nothing succeeds like success, after all. And when it comes to two factions, both with the power to bring down the government and both demanding opposite things—that’s when we become Italy.

Think it can’t happen? Consider the current Tea Party group, holding out for the abolition of Obamacare, against an equivalent group on the left, demanding higher taxes on the rich and prepared to vote down any budget or debt ceiling deal that doesn’t include them. How will that situation get resolved? Make no mistake: based on current trends, it will likely be coming.

This isn’t a policy question. I take no position here on whether the Tea Party is right or wrong about Obamacare, although I have my own opinions. What I’m discussing are the tactics being used, which are new here in the U.S.

This, I think, is the real long-term issue we should keep an eye on. The current confrontation will be settled, one way or another, but the underlying trends suggest we will be back again—probably sooner rather than later.

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