For over a year now, the biggest short-term risk to the global economy has the been the ongoing European debt crisis. For political reasons as well as substantive ones, the Obama Administration for some time has been jawboning the ECB (which has been more conservative than either the Fed or the Japanese central bank during the crisis) into being more stimulative. So when the world’s central bankers descended on Washington last week, Treasury Secretary Timothy Geithner tried again:

“The success of the next phase of the crisis response will hinge on Europe’s willingness and ability, together with the European Central Bank, to apply its tools and processes creatively, flexibly and aggressively to support countries as they implement reforms and stay ahead of markets,” Geithner told the IMF.

To which Europe’s central bankers replied:

“None of the advice that the IMF is offering has been discussed by the Governing Council, in recent times at least,” [Mario] Draghi [President of the ECB] said on April 20 while attending IMF meetings in Washington. [Jens] Weidmann [President of the Bundesbank] said in an interview that “the problems in Europe can’t be solved by monetary policy measures.”

More evidence that you don’t bring an elf to a gunfight. But why can’t Europe’s problems be solved by monetary measures?

“The ECB is drawing a line to keep pressure on governments to make the necessary adjustments,” said Megan Greene, head of European economics at Roubini Global Economics LLC, who was in Washington. “If push came to shove the ECB would step in, but they’ll hold the line for now.”

Those “necessary adjustments” aren’t exclusively or even primarily related to this year’s budgets; they are structural adjustments related to pensions, labor rights, etc. As I argued from early on in the crisis, the ECB is playing hardball because of the enormous risk of moral hazard if the ECB were to bail out the southern European countries without getting structural reform in return. The ECB wants the pain to continue in southern Europe until countries like Italy, Spain and France enact the kinds of reforms that the Schroeder government enacted in Germany a decade ago – and to get binding commitments that those reforms will continue in the face of political opposition from entrenched interests (commitments that may amount to handing over a certain amount of sovereignty to European institutions effectively controlled by creditor nations like Germany). They are not willing to let the Euro itself collapse – that’s their red line – but they are willing to let lots of people suffer in the short term to get what they think are important reforms for the long term. They are certainly willing to see Obama lose the next election as collateral damage.

The usual thing to say about why the ECB can get away with this is that they are unelected bureaucrats, so they can push an unpopular agenda with impunity. But why would they want to do so? Well, although they are unelected, they are not completely unaccountable. More than to any single other center of power, they are accountable to the government of Germany. They are not being particularly responsive to the center of gravity in Italy or Spain – but they are being responsive to the center of gravity in Europe as currently constituted. And it’s not at all clear to me they have the Italian or Spanish politics wrong either. Do the Spanish really want to be the ones who broke up the Euro? Do they really think they’d be better off outside? If so, what has changed about their view since they originally joined the Euro? The benefits of Euro membership are very substantial. The political leadership in the Southern European countries knows that to leave the Euro rather than take on, for example, pension reform would be economically catastrophic. If the ECB wants to keep playing hardball politics, I predict they’ll win.

What’s interesting to speculate on is the degree to which this situation has parallels in the United States. The Obama Administration’s initial response to the economic crisis centered on a $1 trillion stimulus plan. That plan primarily consisted of tax cuts and direct aid to the states to forestall layoffs, plus a grab-bag of longstanding Democratic spending priorities. There wasn’t really an effort to use the aid to the states as a lever to force structural reforms.

I continue to believe that this is the major reason why the stimulus has proved at best tepidly popular: because it looked like a giveaway to AFSCME. Preventing layoffs was a good idea – pro-cyclical austerity wasn’t going to help the economy, and legitimate functions of government didn’t suddenly become less important to society because of the deep recession. But there was an issue of fairness: some people got direct government assistance to preserve their jobs, while others did not. And the issue of fairness has economic consequences: if the government behaves as if its own efficiency isn’t important, that will affect people’s assumptions about the economic drag associated with government spending, which will affect their expectations for growth.

Since then, the Obama Administration has pivoted twice. First, to a focus on long-term deficit reduction, which required a focus on entitlements. President Obama ran a problem here: he required the cooperation of the opposition to make any headway, but they had no political incentive to help because the reforms were bound to prove unpopular, as they would involve cuts to programs that benefit a broad swathe of Americans. When this strategy failed, the President pivoted to a greater emphasis on fairness – particularly Republican solicitude for wealthy taxpayers. But the fairness argument – while stronger than his previous strategy – runs into the problem that it presumes on the people’s trust in President Obama as the steward of their tax dollars.

That trust needed to be earned by action that clearly took on prominent clients of the government, even as deficits were deliberately expanded. It’s not an accident, I think, that among the most popular governors during the ongoing economic crisis have been those – like Democrat Andrew Cuomo and Republican Chris Christie – who are perceived as having been tough with public sector interests (without going too far by trying to annihilate those interests). The center of political gravity in the United States, in other words, may not be so far away from where the center of political gravity in Europe is.

In the general election, the Democrats are going to try a variety of different attacks on Mitt Romney. One prominent one is going to be the Bain Capital connection. They will portray the Republican nominee as a Wall Street fat cat out of touch with ordinary Americans, but more than that, as somebody who happily destroyed businesses in order to make money for himself, as the embodiment of the rigged rules of contemporary capitalism whereby financial manipulators prosper whether or not they build profitable businesses. The GOP is going to respond (among other things) by arguing that precisely because Romney has private sector experience, he’s in a better position to “fix” the American economy. But I wonder whether a better way to turn the Bain history to Romney’s advantage isn’t to say: yeah, I restructured companies to make them more efficient, and yeah, that often involved layoffs. Sometimes it involved killing off the business altogether. And that’s exactly what I’m going to do with the government. I’m not ideologically averse to government. I don’t want government to wither on the vine. I just want Americans to get their hard-earned money’s worth.

If the general election is “I want the rich to pay their fair share” versus “I want people to keep more of their money,” the President has the winning argument. If the general election is “I want the rich to pay their fair share” versus “I want taxpayers to get their money’s worth,” I think the challenger has the upper hand.