Americans gape with fascination at the slow-motion implosion of the Eurozone. But it’s a fabulous opportunity to learn from others, if we will, and avoid at least some of the misery enveloping Europe.
Europe’s problem is that they have grown governments too large for their private sectors to support. Their much-vaunted Eurosocialism gave them a sense of superiority over the mean-spirited capitalists across the Atlantic. But the result over time was chronic overspending, an existential debt crisis and a popular mind-set that makes the resolution all but impossible.
We’ve seen rioters fill the streets in Greece (and elsewhere). The French (and others) elect leaders who assure them that they have a secret sauce that will allow the funds to keep flowing. The rioters and voters can’t comprehend that the money for their beloved government benefits simply isn’t there and there’s no way to get more.
It’s even worse than they realize. You know those austerity measures that have sent moochers all across Europe over the edge? They never happened.
The numbers don’t lie. Even though the average EU country spends over 50 percent of its GDP on government, not one has come close to enacting spending cuts that would produce a balanced budget.
In the UK, for example, where the government has suffered election losses because of unwelcome “austerity” measures, total spending actually rose by 59.2 billion pounds from 2009 to 2011. They did hike the personal income tax rate to 50 percent for those earning more than 150 thousand pounds per year, to the delight of the “soak the rich” crowd. Unfortunately, the result was a drop of 509 million pounds in income tax revenues.
France, too, has pursued policies familiar to Americans: raise taxes now and promise spending reductions in the future. They imposed a surtax on the wealthy, raised the top income tax rates, raised corporate income taxes, capital gains tax, the VAT and excise taxes on tobacco and alcohol.
Surprise, surprise! Economic growth has stalled out. But the French also agreed to raise the retirement age from 60 to 62 — in 2017 — while a cap on health-care spending was also agreed upon but deferred to the future.
Politically incapable of cutting spending, Europeans are thrashing around for other solutions to their dilemma. Raising taxes is not only unpopular but tends to stall economic growth. Reforming labor markets could theoretically help. But even marginal changes to the 30-hour work week or lavish unemployment and retirement benefits are met with outraged resistance. Politicians are booted from office for insulting workers with such shabby treatment.
EU countries now have an average debt load of 96 percent of GDP. Creditors are understandably starting to shy away. It has been obvious for some time that Greece, almost certainly Spain and Portugal, and possibly others are in a death spiral. Their debt load is too large to ever be paid off, especially with rising interest rates and costs of debt service.
Greece would have been better off if it had been allowed to go into default. Government spending falling to the level of revenue would have been painful but necessary. At least healing and recovery could have proceeded and the collateral damage to other countries limited.
Instead, a series of well-intentioned bailouts have prolonged the agony. The bailouts never result in a turnaround. Instead, debt levels continue to climb (now up to 160 percent of GDP in Greece) while dissolute governments use the time to defer the spending reductions that are ultimately the only path to solvency.
There is a semi-humorous side note to this. President Obama recently announced that the EU is in “a difficult state, partly because they didn’t take some of the decisive steps that we took early on in this recession.” Are you kidding me? This guy is clueless.
The truth is that we’re in a “difficult state” too because in the first three years on his watch, Keynesian spending schemes “stimulated” our debt load by $4.9 trillion to $15 trillion, about 100 percent of our GDP. Like the Euros, we tried spending our way out of trouble with the same disastrous results. Our leader is in deep denial.