There is a perfect storm brewing on both sides of the Atlantic, in Rome and in Washington. When these two political frontal systems converge, the ensuing hurricane could wreak more economic destruction — not just in Europe and the U.S., but in Canada.

It’s a trans-Atlantic fiscal circus, complete with clowns 

By Fen Osler Hampson | Mar 4, 2013 8:59 pm | ipolitics,com

More from Fen Hampson, available here.

Italy’s election produced gridlock in Europe’s third-largest and most indebted economy. Unless its political class stops clowning around, the modest but still important gains that interim president Mario Monti secured to cut Italy’s spending and raise taxes will have been for nought. Investors and financial markets are already spooked. The euro has taken a sharp nosedive.

There is talk that Italy could take the euro down entirely if there is no resolution of the current crisis — either through the formation of an unlikely pact involving Silvio Berlusconi, whose right-wing coalition came in a surprisingly close second to Pier Luigi Bersani’s left-centre alliance, or through new elections which hand one of Italy’s parties a clear victory. The odds are stacked against both possibilities.

France and Britain are also in trouble. Francois Hollande’s government has foolishly taken a run at the very private investors he needs to boost France’s sagging economic fortunes by raising corporate and personal income taxes, especially on the richest. France is still far too reliant on the public sector for employment and growth. Government spending is more than half the size of France’s GDP.Britain has the opposite problem: excessive penury. Many economists argue that Prime Minister David Cameron’s spending cuts have been far too draconian, given the fragile state of Britain’s economic health. Britain is now caught in a downward spiral of deficit reduction and shrinking growth unless Cameron takes his foot off the brakes and pushes down hard on the fiscal accelerator — something that he and Chancellor of the Exchequer George Osborne are loath to do.

Even Germany, which has long been Europe’s economic motor, is stalled as demand for its goods in key export markets — 60 per cent of which are in the eurozone area — undergoes sharp decline.

German politics is also entering an area of turbulence, with federal elections set for September. Although Chancellor Angela Merkel is miles ahead of her Socialist opponent in terms of personal popularity, her coalition partner in the Bundestaat, the FDP, is in real trouble. Merkel could well lose the next federal election to the Socialists and the Greens unless her own party, the Christian Democrats, can make up the shortfall in voters’ affections.

There is talk that Italy could take the euro down entirely if there is no resolution of the current crisis.

Last week’s sequestration antics in Washington and the drastic fiscal cuts that went into effect on Saturday are proof that you don’t need to be Italian to be a clown.

America’s decline has long been the topic of discussion in the world’s capitals. If you needed any proof, it came in abundance last week with the stunning lack of leadership displayed over the sequestration debate. The damage was done this time not just by mean-spirited Republicans but by a less-than-magnanimous president who demonstrated once again that he is neither a Lincoln nor a Johnson when it comes to the art of political dealmaking.

Perhaps America’s political classes need time off to come to their senses. But with so much heated rhetoric and fingerpointing by all sides, don’t expect a budget deal soon.

Americans are about to enter the worst of all possible worlds: drastic cuts to defence and other discretionary items (like foreign aid and education) that keep America strong, and no real cuts to entitlement programs — the big-ticket items where cuts are needed most.

Continuing economic malaise across the Atlantic will be compounded by the looming crisis south of our border. It’s a double-whammy blow to the global economy, caused by European and American acts of political self-immolation — just when we thought we were getting out of the woods.

Canada is going to take a hit from these colliding storms. Not only will this country’s trade and investment suffer if Europe falters yet again — a receding tide lowers all boats — but unless we can clinch a free trade deal with the Europeans soon we may be forced to throw in the towel. The clock is running out and the deal’s biggest booster in Europe, Angela Merkel, is now entering a real fight for her own re-election.

The much-hyped Beyond the Border deal with Washington may also be a casualty of the sequestration war between the White House and Congress. In short order, we may see fewer U.S. customs and immigration officials at the border, longer lineups, more delays and ever-worsening congestion at key transit points.

Our pleas for special treatment as America’s largest trading partner will be drowned out by the noisy crescendo of Washington’s ugly partisan wars. Getting the White House’s support and undivided attention may well be an exercise in futility.

Fen Osler Hampson is a distinguished Fellow and director of Global Security at the Centre for International Governance Innovation. He is also Chancellor’s Professor at Carleton University. He is the author of nine books and editor/co-editor of more than 25 other volumes on international affairs and Canadian foreign policy.

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