The Australian

By Geoffrey Garrett

It is already a cliche that if the world descends into double dip recession, dysfunctional politics and an absence of leadership will be to blame. In fact, the situation is even bleaker in Europe and the US.

The problem is not just partisan warfare in the US and divergent national versus European interests on the continent. On both sides of the Atlantic, key political players believe their fortunes will improve the worse the economic situation becomes.

In the US, Republicans think another downturn in the US's already foundering economy will give them the keys to the White House next year while providing more grist for their mill that more government is the problem not the solution.

In Europe, Chancellor Angela Merkel hopes that holding out against a real fix to Greece's problems will revive her government's waning popularity by asserting German interests over European solidarity and by pushing down the euro and driving up German exports.

At some point, the sheer magnitude of the crisis might jolt politics in the US and Europe out of its cynical malaise. But for now market volatility and pessimism, slow global growth, high Western unemployment and rising debt and deficits will probably remain the staples of news headlines.

The roots of the US and Europe's post-GFC economic woes are well known. The US is locked in a vicious cycle in which anxious consumers won't spend, cautious businesses won't invest, and fiscal and monetary stimulus looks like throwing good money after bad - all on top of a decade of costly foreign wars and mounting health care and pension liabilities.

In Europe, the combination of economic stagnation and government austerity has exposed the disconnect between the eurozone's common monetary policy but national fiscal policies, with the markets testing daily the commitment of Germany and its northern European acolytes to keeping the euro whole while Greece and the other Mediterranean nations remain on life support.

For many, the way forward seems straightforward. In the US, more short-term stimulus underwritten by a credible long-term deal to manage down public debt. In Europe, moving some taxing and spending power from national capitals to Brussels and having the European Central Bank issue and guarantee bonds for its members.

US President Barack Obama has been proposing the short-term stimulus, long-term debt reduction for months. European Commission President Manuel Barroso has long supported beefed-up European Union budgetary powers and will soon propose a plan for creating eurobonds.

But these initiatives seem dead on arrival. The Republicans in the House of Representatives won't support anything that involves higher taxes. Europe's de facto pay master and strongest economy, Germany, seems very unlikely to support more underwriting of Greek debt or creating eurobonds.

Under Tea Party pressure, the Republicans were unwilling a few months ago to accept Obama's "grand bargain" for debt reduction because even though four-fifths would have come from spending cuts, the remaining one-fifth would have involved tax increases. Now the Republicans say they will oppose Obama's new job creation bill, about half of which is tax cuts, because it would also raise taxes on the wealthiest Americans.

The underlying Republican political strategy is clear - continue to say less government is always better, and use the steady diet of dire economic news as evidence you are right. No US president since FDR in the 1930s has been re-elected when the unemployment rate was over 7.2 per cent and even in his wildest dreams Obama can't expect that low a number by November 2012. The Republicans know they don't have a great candidate to take on Obama. So high unemployment is a political insurance policy.

With last week's vote to top up the bailout fund, the Merkel government has provided enough support to keep Greece in the eurozone for now, but not enough to guarantee that Greece will stay in for the long term. Germany could lead the charge to underwrite all of Greece's debt and to eurobonds for it and other countries that would have the full faith and credit of the European Central Bank.

But it is in neither Merkel's electoral or economic interests to do so. German voters are offended by the notion that their hard-earned money should be used to bail out Greeks they see as lazy and corrupt. German bankers blanch at the prospect of their cherished inflation-fighting credibility being undermined by weak and irresponsible Greek government.

Merkel also knows the German economy, today Europe's strongest, has benefited by the downward pressure on the euro caused by Greece's parlous state. At a time when most numbers on most economic screens are flashing red, German exports, especially high-quality machinery to feed China's continuing infrastructure boom, are going gangbusters.

As economic doom and gloom envelops the world, the common diagnosis is political dysfunction and the common call is for political leadership. The problem is that on both sides of the Atlantic, leaders needed to end the dysfunction quietly think behind closed doors that "the worse, the better".

Geoffrey Garrett is chief executive of the United States Studies Centre at the University of Sydney