When the strength of the American system becomes a weakness

In the US the confrontation between the President Barack Obama and the Republicans, who blocked the adoption of the budget for the current financial year which started on October 1, is getting worse. As a result, last Tuesday a range of federal institutions suspended or limited their work. Over 700 employees of state institutions were forced to go on an unpaid holiday. In the country national parks and tourist attractions have been closed for visitors, governmental websites, some offices, and other institutions do not work. By the way, the US Embassy in Ukraine had to limit its work as well.

The US government is scaling down its work for the first time over the past 17 years. The Republicans and the Democrats are blaming each other for having driven the negotiations into a dead-end. One should know that another much more dangerous crisis is likely to arise in the nearest weeks. On October 17 the American government will run out of money to pay its bills unless the upper bound of the government debt is raised.

Last Wednesday after fruitless talks with the leading congressmen Obama claimed that Wall Street should beware that the conservative wing of the Republican Party is ready to make the country default in its government debt. Barack Obama declared that he refused to continue the talks concerning the budget with the Republicans until they allow the government to resume its work and vote for raising the upper bound of the government debt.

Meanwhile, speaker of the House of Representatives republican John Boehner said in his conversation with the journalists that the meeting was great but there was no any significant progress. According to Boehner, the president refused to pursue the negotiations. The Democrats’ leader in Senate Harry Reid informed that the President Obama had told the Republicans that he would not support their tactic.

It should be reminded that the Republicans controlling the House of Representatives are trying to force Obama and the Democrats to make concessions in exchange for resuming the funding of public expenditures and raising the upper bound of the government debt.

First of all, the Republicans are trying to cancel, postpone or reduce the large reform of the health system, started by Barack Obama. His proposal, obliging all the Americans to have a medical insurance under penalty of fine, was the object of fierce discussion during the then presidential campaign.

Meanwhile Head of the European Central Bank Mario Draghi claimed, that if the American governmental institutions are paralyzed for a longer period of time, it will cause risks not only for the US, but for the global economy as well.

Is the threat of default really serious in the US, what consequences does it have for the world and why does a developed country have problems with the budget adoption?

COMMENTARIES

Oleh SHAMSHUR, former Ukrainian ambassador to the US:

“Actually, it is quite serious, taking into account that in a week the US have to decide on raising their upper bound of the government debt. Now everything is blocked, so how are they going to sort out the question of the federal government functioning? It is also the evidence that the confrontation in the question concerning the raise of the upper bound of the government debt will be equally harsh. And there are no possible compromises so far. Obama rejected the Republicans’ proposal to finance certain institutions. Now the question is who will go soft.

“On the other hand, it is not the first time that the threat of default emerged. Both parties realize the risks for the country it involves. On the one hand, it raises rates, but on the other hand, it makes find a compromise. I am watching the developments in the US very intently but now nobody can say whether the compromise will be found. This possibility should not be eliminated.”

It is not the first time that the US, a developed country, has problems with the budget adoption. What it is the reason for this?

“It is a good question. I think such problems are not unique for the US. On the one hand, the process is extremely politicized, but on the other hand it is clear what should be done even for us and we are not specialists in this sphere.

“However, I think that first of all the weight of the US in the global economy is drawing such a big attention to this issue and, secondly, the enormously big debt of the US exceeding 13 trillion dollars. Still if we take into consideration the ratio of the debt to GDP, the US is not in the worst conditions.”

What is the reason why the US has constantly had problems with the budget adoption over the past years? Professor of bioethics of Princeton University and Laureate Professor of Melbourne University Peter Singer in his article for Project Syndicate remarked that he sees the reason why the founders introduced the division between branches of government into the Constitution…

“In principle, the system existing in the US can be blamed. However, the process there is quite clear and structured. In other words, it is clear how the decisions are made. Certainly, I think it is absolutely unacceptable that the range of decisions, important for the country, cannot be made because of the harsh confrontation between different parties. However, the distribution of powers between different branches of the government prevents one branch from usurping the process of decision making that might have negative consequences for the country. It means that the system itself forces to find compromises. Another thing is that finding this compromise is very difficult with the existing political realia in the US.

“I do not think that it is a flow of the American system, it is rather its strength. Another thing is with the current political situation this system works very badly or does not work at all.”

And this, according to some observers, impacts the image of the US and even is the reason for making jokes about the American system. The Washington Post remarked that the South Africans are making fun of the situation: the US, IMF, and the World Bank used to give lectures to South Africa “and now we can see that they are governing their country to some extent as “a banana republic.”

“Let’s compare the American system with ours in which the role of the parliament in the budget adoption is just a formality. Everything is decided in the President’s Administration and the government. I think it is wrong. The image of the US is affected not by the structure of the process but the current development of this process. Now it looks like they are not taking prisoners.

“As for the reaction of the world, it is important to see the reaction of the global markets which is quite calm. If there was a real threat of default they would react in a different way.

“As for the countries, some of them, that consider the American model unacceptable, are gloating. However, all serious countries, serious politicians and economists are waiting for the result of all these events.”

How can be Russia’s silent pause interpreted? It is well known that Putin has always used any pretext to criticize the US.

“Even if Putin says something, will it influence the final result? What matters is China’s behavior. And Beijing is not interested in the default, but in settling the crisis. I think this silence is quite tense.

“On the other hand, if we concede why Russia is keeping silent… Let’s imagine the worst scenario, the default. It will increase the instability in the global economy that might lead to political instability as a consequence. And what happens if instability arises? The prices for energy carriers increase as well. It is not that bad for Russia. Many events such as handling the Iranian crisis and other can be explained by the fact that high instability is beneficial for Russia as it can hope for raising prices for energy carriers. It is not a surprise.”

How should Ukraine react to the possible default of the US?

“Since our hryvnia is de facto bound to the dollar any instability of the American currency will certainly affect our country. However, these consequences won’t be catastrophic.”

Who do you think will go soft in this budget confrontation in the US: Obama or the Republicans?

“Nobody can foresee it. Now the republican part of the Congress who is looking for a compromise is more active. Obama is holding on his own and counts on the necessity for the federal government to work as it meets the interests of the country. He also hopes that the opposition is not very popular with the consistent reform of the health system. A large part of the questioned Americans do not support the Republicans’ actions aimed at torpedoing the health system reform. It seems to me that Obama has more chances. However, so far he has not won any serious battle against the acting Congress concerning financial issues. So, the stakes are high for the president and the Republicans.”

Andrii NOVAK, Ukrainian economist, public figure, author of the book How to Improve the Ukrainian Economy:

“The talks about the possible default in the US are, in all probability, just speculations and an element of the information wars led by the main political and economic competitors of the US. The default of the US state budget is impossible for one simple reason: the US is the country producing the main world currency, the dollar that it can use to saturate not only its domestic economy, but the global economy as well. I do not see any threat that the US might lack dollars to supply wants of the state budget including its business liabilities. There was a similar situation after the crisis of 2008-09 and it was resolved by making a decision about raising the upper bound of the US debt. As a result, the global economy received another trillion and 300 billion dollars. It means that the US economy made the global economy yet more dependent on the American currency. I think now the situation will be very similar. The only thing is that there might be a discussion within the country about the sum of the bound. Thus yet more dollars will appear in the global money turnover. The other factor that will save the US budget from the default is the fact that the American economy has already overcome the recession and has resumed its development. The GDP is growing, as compared to the Ukrainian economy which, regarding the results of the first six and even eight months of the current year is going through a GDP fall. Speaking about the threat of default, it is much more likely to happen in the Ukrainian economy than in the American.

“What is happening there is an economic and political bartering between two political forces. However, when it is time to make governmental decisions these two American parties come to an agreement and always make profit making decisions for the US. This is what the Ukrainian policymakers should learn to do.”

How might the emission of this sum into the global economy influence the Ukrainian economy?

“The situation with the American state budget will not significantly affect the Ukrainian economy. The direct Commodity turnover between Ukraine and the US is not significant in the structure of the Ukraine’s foreign economic relations and makes a few percent. I can see the only direct connection how it can influence the Ukrainian economy. In case Ukraine signs the Association Agreement with the EU it is very likely that we will continue cooperating with the IMF. Then the first tranches for Ukraine by the IMF might be slightly smaller. Probably, the total sum of the contract will not change but the first tranches Ukraine will receive might be not as large as the Ukrainian government counts.

“As a rule, in case of any relative problems in the American budget the US cuts down on grant programs. This is the only real tight connection between the US state budget and Ukraine.”