Three years ago, the global economy was brought to the brink by a near meltdown of the international banking system. Now we're in trouble again, but this time our economic woes stem largely from the actions of governments. Escaping from this crisis is more of a political challenge than a financial one.
That doesn't necessarily mean it will be any easier.
The decision by Standard & Poor's to downgrade U.S. credit last week had less to do with the size of the U.S. budget deficit than with the inability of Democrats and Republicans to work together to reduce it. In explaining its move, the ratings agency cited concerns about the "effectiveness, stability, and predictability of American policymaking and political institutions."
Similar critiques apply in virtually all the countries affected by the current crisis. Take Spain, another country that has had its credit downgraded.
"One lesson from both the U.S. and Spain is that internal politics can greatly complicate economic progress," says Fernando Fernandez, a former economist with the International Monetary Fund who is now teaching at the IE Business School in Madrid.
Politically polarizing debates over how best to reduce a budget deficit, Fernandez points out, have played out in Spain as well as the United States, and with similar results.
"That [fight] has paralyzed policymaking here for two years and has made the Spanish crisis longer and more costly," he says.
Spanish Politics Polarized
There is wide agreement among Spanish economists, for example, that their country can promote economic growth and reduce unemployment (currently at 20 percent) only after it enacts painful and unpopular reforms in the labor and banking sectors.
But for such a program to succeed and overcome opposition, some cooperation between left- and right-wing parties would probably be necessary, and the prospects are not good.
"[Achieving] consensus between the parties here has become a mission impossible," says Vicente Jimenez, managing editor of El Pais, Madrid's leading newspaper.
Italy faces similar political challenges. European leaders made it clear to Prime Minister Silvio Berlusconi last week that his government could expect financial support from his neighbors only if he promised to support a balanced budget amendment. Berlusconi agreed, but securing that amendment will be a major task for him and the rest of the Italian government.
The 2008 financial crisis required banking experts to unravel complex financial instruments like credit default swaps and collateralized debt obligations. The negotiation of the 2011 eurozone crisis, by contrast, has featured tough political rhetoric.
Calls For Tough Political Decisions
One of the most outspoken public figures has been Jose Manuel Barroso, president of the European Commission. Barroso opened a summit of European heads of state last month with a call to the richer countries in the euro monetary zone to show solidarity with the poorer ones, for the sake of European unity.
"They [European leaders] have said they will do what it takes to ensure the stability of the euro area," Barroso said. "Well, now is the time to make good on that promise. ... Leaders need to come to the table saying what they can do, and what they want to do, and what they will do, not what they cannot do or will not do."
The basic problem in the eurozone is the indebtedness of countries on the periphery and their heightened difficulty getting banks to finance that debt on terms that will not prove too burdensome. It is difficult, but it is not complicated.
"If there is a solution, it will be a political one," says John Authers, managing director of the Lex column in the Financial Times.
"If politicians can work out a way of convincing the world that the full eurozone stands behind all the countries at the periphery," Authers said in a recent video commentary, "then there need not be a crisis in those sovereign credits. But obviously that is a huge political task."
And getting bigger by the day. Politicians in Berlin are making clear they oppose the use of Germany's good credit to shore up their weaker neighbors. That could present an obstacle to the resolution of the euro difficulties. The German parliament will need to approve a eurozone rescue effort, just as the Italian and Spanish parliaments will need to approve the reforms on which their aid is conditioned.
Before this is over, policymakers and government leaders may be yearning for another crisis that can be solved by technocrats huddling in conference rooms. A crisis whose resolution depends on political courage and a willingness to compromise could just be too much to bear.
MELISSA BLOCK, host: From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.
MICHELE NORRIS, host: And I'm Michele Norris. The recent market crashes have investors worried about a relapse, or maybe a replay of the crisis that shook the global economy three years ago. Like in 2008, world markets have collapsed together, and quickly. But the crisis of 2008 was centered in the banking system. It involved subprime mortgages and other financial products.
This time, the crisis has more to do with politics and not just in the U.S., as NPR's Tom Gjelten explains from Madrid.
TOM GJELTEN: It wasn't the size of the budget deficit that prompted S&P to downgrade U.S. credit last week. It was the inability of the parties in Congress to get a better agreement to reduce the deficit. The ratings agency cited political paralysis in explaining its downgrade decision. That same issue could also explain why credit agencies have a problem with Spain.
VICENTE JIMENEZ: (Spanish language spoken)
GJELTEN: Vicente Jimenez, the managing editor of El Pais, Madrid's leading newspaper, says getting a consensus between the political parties in Spain has become mission impossible. That's not good. Like in the U.S., economic progress in Spain will depend on building a political consensus behind a reform program.
But Jose Ignacio Wert, one of Spain's leading public opinion experts, says recent polls suggest the Spanish people are down on all their political leaders.
JOSE IGNACIO WERT: The government has the lowest confidence rate in the modern history of Spain. But it's also about the political establishment as a whole.
GJELTEN: It's a similar situation in Italy. European leaders last week made Prime Minister Silvio Berlusconi promise a balanced budget, in exchange for help financing Italy's huge debt. That will be a tall order for him and the rest of the Italian government.
All over Europe, this new debt crisis is totally wrapped up in politics. Jose Manuel Barroso, the president of the European Commission, opened a summit of European heads of state last month with a challenge: If the euro monetary zone is to be saved, the richer countries will have to show solidarity with the poorer ones.
JOSE MANUEL BARROSO: They have said they will do what it takes to ensure the stability of the euro area. Well, now is the time to make good on that promise.
GJELTEN: Again, a political challenge to Europe's leaders.
Three years ago, it was the world's banks whose credit standing was damaged. Governments in Europe and the U.S. came to banks' rescue, backing them up with their own good credit. This time, it's the European governments themselves - particularly those on the periphery of the continent - whose credit is in jeopardy.
JOHN AUTHER: If there is a solution to this, it will be a political one.
GJELTEN: This is an online video commentary by John Auther, who directs the Lex column in the Financial Times newspaper.
AUTHER: If politicians can work out a way of convincing the world that the full eurozone stands behind all the countries at the periphery, then there need not be a crisis in those sovereign credits but obviously that is a huge political task.
GJELTEN: And getting huger by the day. Politicians in Berlin say they oppose this idea of putting Germany's credit behind the weak governments in the south - that's critical. The German Parliament will need to approve a eurozone rescue effort, just as the Italian and Spanish Parliaments need to approve reform packages in order to be rescued.
Whether in Washington or Europe, there could hardly be a worse time for political systems to turn dysfunctional - but that's exactly what's happening. And it worries El Pais editor Vicente Jimenez in Madrid.
JIMENEZ: (Spanish language spoken)
GJELTEN: We can someday escape our economic problems, Jimenez says, but when your democratic institutions deteriorate, it's very hard to rebuild them. In fact, if your democracy deteriorates, you may not escape your economic problems any time soon.
Tom Gjelten, NPR News, Madrid. Transcript provided by NPR, Copyright NPR.