How a Leadership Deficit Is Deepening the Debt Crisis

Obama, Merkel, Sarkozy overmatched, and the despair in Europe and the U.S. grows.

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During the financial turmoil of the past month, U.S. President Barack Obama, German Chancellor Angela Merkel, and French President Nicolas Sarkozy have all taken to the podium in an attempt to calm the public and investors. Obama reassured any who would listen that the United States would always have a triple-A credit rating, despite the fact that Standard & Poor's had just downgraded U.S. debt. Merkel and Sarkozy announced plans for a new economic government in Paris as the rest of the continent panicked over Europe's ability to contain its festering debt crisis.

Both attempts failed miserably: The Dow dropped nearly 1,500 points by mid-August, alternating gains and losses since then, while there is no end in sight to the European debt crisis. In the face of financial realities, Obama, Merkel, and Sarkozy were helpless.

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But according to experts, the negative reactions to these reassurances are not only based on pessimism about economic fundamentals: They also show a leadership deficit, both in Europe and the United States. These experts said that Merkel, Sarkozy, and Obama all have failed to show adequate foresight and have appeared flat-footed in the face of dire economic news.

"Merkel and Sarkozy were making concessions to each other to look good on TV and to improve their chances of re-election," says Charles Wyplosz, a professor of International Economics at the Graduate Institute of International Studies in Geneva. "The market is asking for these euro bonds and they tried to slam the door on them."

A cycle of leadership failures. Wyplosz says the steps announced by Merkel and Sarkozy, largely a rehash of failed policies, will only prolong the inevitable spread of the crisis to Spain and Italy. This continues a pattern started last January: Investors express concern about a country's ability to pay its debt. Europeans leaders then take action to placate the market in the short term without addressing the EU's larger problems.

"What we've seen now for a year and a half is the crisis develops in fits and starts," Wyplosz continued. "Anytime we have the next generation of the crisis, these [French and German] governments step in and provide the wrong answer, which makes things worse. Because of this we're not even close to the endgame of this crisis."

[See Why Europe's Debt Crisis Will Keep Coming Back.]

Ansgar Belke, research director for international economics at the German Institute for Economic Research in Berlin, says officials there were equally frustrated with Obama's actions as well as the actions of the Republican's Tea Party caucus during the recent debt ceiling debate.

"We feared that a weak dollar could send the euro skyrocketing at a time when the currency was weak," Belke said. "The other aspect is that if the United States increases the debt ceiling, you're only buying time. You do not solve the problem and leave it for another day."

"A lot of people in the outside world were surprised by American willingness to take the debt debate to the brink," adds Erik Jones, professor of European studies at the SAIS Bologna Center of Johns Hopkins University in Italy. "The United States showed a real lack of responsibility."

Jones attributed this to a perceived lack of leadership. Obama was seen as ineffectual during the debate and in the face of the S&P downgrade of U.S. credit. Congress failed to take action to prevent default until the last minute. The market's underwhelming response to the debt deal and its negative reaction to the credit downgrade show how much U.S. stock has fallen on the world stage.

"The reality is that power is leaking out of the system because no one wants to step and take collective action," Jones says. "There's an enormous amount of problems that will continue to fester and persist."

Jones adds that in past instances of national crisis, both in Europe and in the United States, strong leaders emerged to right the path. Former President Ronald Reagan, whose policies were very unpopular with many Democrats, still managed to unite the country, change its mood, and improve the economy in the 1980s. Around the same time, former German Chancellor Helmut Kohl managed to unite Germany after four decades of division while setting the foundation for Germany's economic success today.


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