Wonkbook: Europe hits its debt ceiling

Imagine if, during the depths of the financial crisis, the Federal Reserve hadn't stepped in to save the economy. Imagine, instead, that Ben Bernanke had emerged every few days to offer delphic hints about the importance of a large stimulus package, a medium-term deficit reduction plan, and a financial-regulation bill. Maybe he even threw in some commentary about how states needed more fiscal discipline, too, and said he was particularly concerned about state pensions plans, and he would like to see some reforms there.

Activists of the Occupy Frankfurt movement have set up a fire near the Euro sculpture in front of the European Central Bank in Frankfurt, Germany, on Nov. 3. (Michael Probst - AP) Imagine, in other words, that rather than save the economy during the financial crisis, the Fed had used its sudden leverage and importance to push a policy agenda on the president, Congress, and state legislatures around the country.

Seems sort of awful, right? Almost like blackmail. Like firefighters coming to your house during the blaze and keeping the hose on the truck while they told you how much they liked your jacket. But that's pretty much what's happening in Europe right now.

If you talk to the Europeans and finance experts who believe the Eurozone will make it out of this intact, here's what they think will happen, pretty much: The Eurozone countries will agree to a fiscal union with tight, binding constraints on the deficits that individual countries can run. Then and only then, the European Central Bank will step in, turn on the hose, and end the run on Southern Europe.

Mario Draghi, head of the European Central Bank, came very close to saying outright that that's the deal in remarks before the European Parliament. He called for a fiscal compact that “would enshrine the essence of fiscal rules and the government commitments taken so far, and ensure that the latter become fully credible, individually and collectively."

He continued: “If there is an anchor in the long term, it is easier to maintain trust in the short term. After all, investors are themselves often taking decisions with a long time horizon, especially with regard to government bonds."

As the Financial Times remarked, Draghi's "comments were the clearest indication yet of the ECB leaving itself room for manoeuvre if eurozone leaders agree at a summit next week on clear steps towards a eurozone fiscal union."

The metaphor most Americans have been using to understand Europe's debt crisis is the 2008 financial crisis. But perhaps that's wrong. That was an almost purely economic crisis. While Europe's economic problems are real, what imperils the Eurozone is a mostly political crisis, in which Germany and the ECB are threatening to permit armageddon unless their policy agenda is implemented. This is, in other words, Europe's debt ceiling. The Eurozone is facing an unimaginable economic catastrophe, but the players with the power to avoid it will only do so if their demands are met.

Top stories

1) The head of the European Central Bank is hinting that it would intervene more aggressively if the Eurozone agreed on a fiscal union, reports Ralph Atkins: "A fiscal compact, binding governments to stronger public deficit and debt rules, would be 'definitely the most important element to start restoring credibility', Mr Draghi told the European parliament. 'Other elements might follow, but the sequencing matters,' he added. His comments were the clearest indication yet of the ECB leaving itself room for manoeuvre if eurozone leaders agree at a summit next week on clear steps towards a eurozone fiscal union."

Austan Goolsbee on why the euro zone won’t survive: http://wapo.st/u1Kixx

2) Central banks are teaming up on the Euro crisis, report Neil Irwin and Anthony Faiola: "The world’s major central banks unveiled a new strategy Wednesday to keep Europe’s debt crisis from choking off global lending, a dramatic step that comes as the availability of credit for businesses and consumers has shown signs of freezing up. In an action that recalls the depths of the U.S. financial crisis three years ago, when global central bankers took coordinated steps to stem a worldwide panic, the U.S. Federal Reserve and five of its sister institutions agreed to supply one another with unlimited amounts of each country’s money at a reduced cost. Most immediately, this initiative means the European Central Bank can pump dollars into banks in the troubled euro zone at low interest rates."

Five things to know about the central bank action: http://wapo.st/vAoNMR

3) Eric Cantor wants to scale back the trigger, report Jake Sherman and Manu Raju: "House Majority Leader Eric Cantor is quietly working both sides of the Capitol to build support for a plan to scale back automatic spending cuts and combine the proposal with a wide range of critical year-end tax and spending measures. What it amounts to is a major year-end pitch: Democrats and President Barack Obama would get their much sought-after payroll tax cut extension and jobless benefits, while Republicans would tweak the Pentagon cuts that defense hawks hate. The White House has already sent out a warning against messing with these so-called trigger spending cuts...That package could also include a reform and a yearlong extension of jobless benefits, a payroll tax break and the Medicare reimbursement rate for physicians."

4) Republicans want federal salary cuts and means-testing in Medicare and other programs to pay for extending the payroll tax cut, reports Scott Wong: "Having little taste for Democrats’ plan to hike taxes on the rich, Republicans on Wednesday offered a new way to pay for an extension to the payroll tax cut: Keep federal salaries -- even for lawmakers -- in their deep freeze. President Barack Obama instituted a two-year federal pay freeze that began Jan. 1. Republicans would like to extend the freeze for three more years and cut the federal workforce by 10 percent. They say this would save much of the $111 billion needed to keep the payroll tax cut in place through 2012. Republicans would then lump the pay freeze savings in with other offsets, including means testing that would require millionaires to pay higher Medicare premiums and make them ineligible for unemployment benefits and food stamps."

5) Americans think health-care reform includes public option, end-of-life panels, reports Sarah Kliff: "More than 18 months after passing health reform, Democrats are struggling to educate the country on what’s actually in it. A new Kaiser Family Foundation poll out this morning finds most Americans think it includes a government-run health plan (it doesn’t), that it won’t eliminate co-pays for preventive care (it will) and that, for many, the actual content of the law may not even matter: Americans don’t like health reform because they don’t like Washington."

Top op-eds

1) 'An ordinary middle-class consumer is far more of a job creator than I ever have been or ever will be,' writes Nick Hanauer: "I’m a very rich person. As an entrepreneur and venture capitalist, I’ve started or helped get off the ground dozens of companies in industries including manufacturing, retail, medical services, the Internet and software. I founded the Internet media company aQuantive Inc., which was acquired by Microsoft Corp. in 2007 for $6.4 billion. I was also the first non-family investor in Amazon.com Inc. Even so, I’ve never been a “job creator.” I can start a business based on a great idea, and initially hire dozens or hundreds of people. But if no one can afford to buy what I have to sell, my business will soon fail and all those jobs will evaporate. That’s why I can say with confidence that rich people don’t create jobs, nor do businesses, large or small. What does lead to more employment is the feedback loop between customers and businesses. And only consumers can set in motion a virtuous cycle that allows companies to survive and thrive and business owners to hire. An ordinary middle-class consumer is far more of a job creator than I ever have been or ever will be."

2) Foreign aid just works, writes Ezekiel Emanuel: "Many Americans feel that foreign assistance is like money poured down a rathole. The United States contributes more money every year -- spending nearly a third of all global health aid -- while tangible results in developing countries can be hard to see. But the 'rathole' argument is dead wrong...Child mortality has decreased to 7.6 million preventable deaths in 2010 from around 12 million in 1990. That’s nearly 12,000 lives saved every day largely because of improved sanitation and water systems and significant increases in vaccination levels for measles, mumps, rubella, tetanus and whooping cough. We have also made big strides on malaria, decreasing deaths to fewer than 1 million per year."

3) Italy can stay sovereign without leaving the Euro, writes Martin Feldstein: "Italy can save both its own economic sovereignty and the euro if it acts decisively to convince financial markets that it will balance its budget and increase its growth rate, reducing the ratio of its debt to output in a steady and predictable way. If markets have confidence in that, Italy’s interest rate could fall to its pre-crisis 4 per cent level. Italy is well-placed to do this. Starting with its 'primary budget surplus' (tax revenues exceeding total non-interest outlays), it can eliminate its overall budget deficit if it cuts spending by just three per cent of gross domestic product in a budget that equals half of GDP. If reforms raise its growth rate to two per cent, Italy’s debt could fall to about 65 per cent of GDP over the next 15 years."

4) Obama changed policy rather than politics, writes Ezra Klein: "The legislative process proved stronger than Obama’s campaign promises. His election didn’t usher in a new post- partisan era. If anything, partisanship grew stronger. Nor did his administration fulfill its promise to lock lobbyists out of the halls of power...Some of this isn’t Obama’s fault. Bipartisanship requires a willing partner, and Obama’s Republican partners are typified by Senate Minority Leader Mitch McConnell, who said his 'single most important goal' is to defeat Obama in 2012. But some of this is Obama’s fault. The White House calculated that changing policies was more important than changing Washington...Obama has accomplished vastly more in his first term than any of his recent predecessors."

5) We need much higher taxes on the rich, writes Brad DeLong: "I got a copy of an article written by Emmanuel Saez, whose office is 50 feet from mine, on the same corridor, and the Nobel laureate economist Peter Diamond. Saez and Diamond argue that the right marginal tax rate for North Atlantic societies to impose on their richest citizens is 70%. It is an arresting assertion, given the tax-cut mania that has prevailed in these societies for the past 30 years, but Diamond and Saez’s logic is clear. The superrich command and control so many resources that they are effectively satiated: increasing or decreasing how much wealth they have has no effect on their happiness. So, no matter how large a weight we place on their happiness relative to the happiness of others...we simply cannot do anything to affect it by raising or lowering their tax rates."

Chan Marshall interlude: Cat Power plays "Metal Heart" live.

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Still to come: The Republican leadership is closing ranks around the payroll tax cut; nonprofit health plans get better results; Republicans want to revamp the whole rule-making process; Republicans want to pare back the Clean Air Act; and one selfish porcupine.

Economy

It looks like the Eurozone is down to either dissolution or political integration, reports Howard Schneider: "Europe’s politicians face an increasingly sharp divide in combating their financial crisis: either take the sort of politically difficult steps that would tie their economies more closely together, or prepare for the breakup of the euro currency zone,..Political resistance to even the most aggressive ideas appears to be waning as European leaders enter a critical week of negotiations. What’s being debated is nothing short of a reordering of the European political and financial system. Governments would transfer some of their sovereign power over spending and taxes to a central authority, responsibility for individual government debt would be collectivized across the 17 euro nations, and -- potentially -- the European Central Bank would take a more aggressive role in shoring up the regional economy."

The Fed has named a new head regulator, reports Luca di Leo: "The Federal Reserve said Wednesday that Michael Gibson would take over as director of its regulatory division, a key role as the U.S. central bank implements the Dodd-Frank financial overhaul law. Mr. Gibson, 45 years old, a deputy chief at the Fed's economic research department with expertise in risk management and financial markets, will take on his new role at the start of next year. He succeeds Patrick Parkinson, 59, who is retiring after more than 30 years at the central bank...In his new role, Mr. Gibson will oversee the ramping up of the Fed's oversight of the nation's largest financial institutions, including the latest round of so-called stress tests of banks with $50 billion or more in assets."

China shows the failure of free market orthodoxy, writes Andy Stern: "The conservative-preferred, free-market fundamentalist, shareholder-only model--so successful in the 20th century--is being thrown onto the trash heap of history in the 21st century. In an era when countries need to become economic teams, Team USA's results--a jobless decade, 30 years of flat median wages, a trade deficit, a shrinking middle class and phenomenal gains in wealth but only for the top 1%--are pathetic. This should motivate leaders to rethink, rather than double down on an empirically failing free-market extremism. As painful and humbling as it may be, America needs to do what a once-dominant business or sports team would do when the tide turns: study the ingredients of its competitors' success. While we debate, Team China rolls on."

Adorable animals being selfish interlude: A porcupine doesn't want to share his corn.

Health Care

Nonprofit health plans are better quality, reports Julian Pecquet: "For the seventh straight year, most top-quality health plans are nonprofit, according to the latest rankings by the National Committee for Quality Assurance. The rankings are rekindling calls for federal regulators to require that plans sold on the healthcare reform law's state-based insurance exchanges make transparent to consumers whether they're for-profit or nonprofit. The Alliance for Advancing Nonprofit Health Care spearheaded that request in recent comments to the Department of Health and Human Services. According to the alliance's analysis of the new rankings, 100 percent of the Top 10 private, Medicare and Medicaid plans were nonprofit. In addition, nonprofit plans made up 68 percent of the top 25th percentile among the 390 private plans ranked."

Domestic Policy

Republicans are aiming to reform the whole rulemaking process, reports Jia Lynn Yang: "For months Republican lawmakers have targeted specific regulations they want to repeal or block, all in the name of saving jobs. Next up: remaking the entire process for government rulemaking. A handful of bills on Capitol Hill would add new layers of congressional involvement to the rulemaking process, in addition to dozens more criteria for agencies when they analyze a rule’s impact on the economy. The net effect, say consumer groups, is that the already slow process for implementing regulations would get even slower. Supporters of the bills argue that government regulations are impeding businesses and that agencies need further checks on their work. Several Republican presidential candidates have framed their economic policy plans around rolling back regulations."

A bill to ban Congressional insider trading is gaining steam, reports Kimberly Kindy: "For six years, Rep. Louise M. Slaughter pressed her colleagues to co-sponsor legislation that would ban them from using information they gleaned on Capitol Hill to guide their trades in the stock market. Most lawmakers bristled, offended by the mere suggestion that they would ever engage in such behavior...But now, as the Senate Homeland Security and Governmental Affairs Committee prepares to hold the first of two congressional hearings on the topic, Slaughter’s Stop Trading on Congressional Knowledge (STOCK) Act has become an overnight sensation. Slaughter has 127 co-sponsors, up from the nine she had on Nov. 12, the day before '60 Minutes' aired a piece highlighting investments that congressional leaders made in companies while legislative efforts were underway that may have affected stock values."

The NLRB is moving forward with its funding boost, reports Tim Mak: "The National Labor Relations Board voted Wednesday to move forward with a contentious new labor rule that Republicans and business groups charge would restrict the ability of employers to bring concerns about union elections to the regulatory agency. A 2-1 vote was along party lines, with the two Democratic members backing it and the lone Republican voting no. The rule will now be drafted into final language for a subsequent NLRB vote before it goes into effect. Democrats says the new rule will eliminate delays between when employees file for a vote on whether to start a union and the day the ballots are cast...Though the NLRB should be made up of five members, it currently only has three - 2 Democrats, board chairman Pearce and member Craig Becker, as well as 1 Republican, member Brian Hayes."

The FDA's getting an unexpected funding boost, reports Dina ElBoghdady: "An unusual alliance of consumer advocates and industry groups won a victory this month when they helped persuade Congress to boost funding for the Food and Drug Administration, while most other programs paid for by a newly passed agriculture spending bill had their money slashed. That alliance engaged in an old-style shoe leather campaign to prevent spending cuts for the FDA as the agency prepares to carry out a landmark food safety bill that was adopted by the previous Congress. The effort included at least four dozen visits to congressional offices and grass-roots events in the districts of key lawmakers involved in spending decisions, as well as advertisements in Capitol Hill newspapers. This month, after weeks of haggling, Congress increased the agency’s funding by nearly 3 percent from last year’s level to $3.8 billion."

Super PACs aren't just for presidential contenders anymore, reports Dan Eggen: "Several new super PACs have sprung up in recent months with the explicit aim of helping a particular lawmaker, including Sen. Orrin G. Hatch (R-Utah) and Rep. Howard L. Berman (D-Calif.). There are also super PACs that have formed to oppose the reelections of Sens. Scott Brown (R-Mass.) and Thomas R. Carper (D-Del.). But the boldest proposal comes from Sen. Mike Lee (Utah), a freshman Republican who wants to add a super PAC component to his leadership PAC, the Constitutional Conservatives Fund. The Federal Election Commission is set to consider the request during a meeting Thursday. The idea would allow Lee to raise unlimited funds from corporations and wealthy individuals as head of the super PAC, then spend the funds to help other Republicans."

Adorable babies looking cool interlude: A baby cries, gets sunglasses, stops crying.

Energy

Republicans are pushing to pare back the Clean Air Act, reports Erica Martinson: "The House Energy and Commerce Committee operated on the Clean Air Act on Wednesday, passing legislation that would cut into the Environmental Protection Agency’s ability to regulate particulate matter in numerous situations. 'We don’t trust EPA. We know they’ll come back. We know they’ll go after dust. ... That’s why we have this bill,' Rep. John Shimkus (R-Ill.) said. The committee passed its 'farm dust' bill, HR 1633, by a vote of 33-16. Republicans also beat back several amendments by Democrats to limit the bill’s scope...Democrats on the panel have repeatedly charged that the bill would go beyond its stated mission, exempting mining operations, lead smelters and chemical and industrial facilities’ emissions from regulation under the Clean Air Act."

Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams.