By the end of the 5th century BC Athens was bankrupt as a result of Pericles’ overspending on public works (such as the Acropolis) and it quickly succumbed to Sparta. In the early 21st century AD Greece is bankrupt as a result of public sector employees; to what it will succumb still is being written. At least with Pericles we got some great classical art and buildings. Hello George Santayana! Greece is the canary in the European and, for that matter, American coal mine.
History and Causes of the Present Crisis
War-ravaged Europe recovered remarkably fast as a result of hard money, abolishment of price controls, defeating inflation and creation of a common market. What resulted was termed Wirtschaftswunder, Les Trente Glorieuses and Il Miracolo Economico in Germany, France and Italy respectively. GDP grew over 5% per year; government spending was 28% of GDP; the fertility rate was 2.5; debt was low; and Europeans worked more hours than Americans.
“The cause: decades of gargantuan government spending, financed by high taxes and debt, destroyed economic growth, in 3 words – the welfare state.”
Good times continued until circa 1990. In the next 20 years government spending skyrocketed to 50%; debt exceeded GDP; the fertility rate plummeted to 1.35%; Europeans worked 20% fewer hours than Americans; and GDP rarely grew more than 2%. Nobel laureates Prescott and Lucas explained it thusly: “The burden of government (at 50% of GDP) to pay for all the largesse falls on workers in the form of high marginal tax rates. The welfare state is so expensive it breaks the link between work effort and what you get out of it.”
Europe’s Response to the Crisis
The response has been denial, delay and prestidigitation; did I mention bailouts? Following are the main actions taken and/or proposed thus far by European leaders.
1. Bailing out Greece without requiring austerity measures. Greece has not fired one public sector worker. Hellenic Railways has €100 million revenue and €400 million payroll.
2. Bailing out European banks via measures including higher government bank guarantees.
3. Increasing the EFSF (European Financial Stabilization Facility) and having it “insure” bonds. The messy details are left to be worked out later.
4. Recapitalizing banks to achieve a 9% capital ratio of risk-weighted assets. Banks are complying with legerdemain and maskirovka such as redefining risk and reducing new lending. Instead of raising additional capital they will reduce lending €1 trillion.
5. Shooting the messenger (EU regulators) by silencing rating agencies during a crisis.
6. Printing (ECB) hundreds of billions of euros to buy defaulted bonds.
7. Raising taxes even higher as in Greece. This strangles growth and creates a vicious circle.
Not one of the measures implemented or proposed addresses the underlying problem; they are intended only to palliate until the politicians are safely past the next election. Europeans want to spend yet more money, have the Germans bail out everyone else and even beg from the Chinese. France proposes to raise the sales, corporate and capital gains taxes. Some want to abandon the euro so they can devalue and beggar their neighbors.
What is the Real Solution?
As everyone, even alcoholics and drug addicts, knows, the first step is to acknowledge the problem. There are no signs that is happening. But hard choices no longer can be temporized. Real solutions begin with understanding the root causes which are government spending, debt, taxes and regulation, in three words – the welfare state. The solution therefore must begin with dismantling the welfare state, i.e. downsizing government via reducing taxes, debt and regulation. Pro growth policies must be implemented as done by Thatcher in the 1980s and Germany a decade ago.
“The first step must be to acknowledge the root cause of the problem; that is not happening. The real solution begins with dismantling the welfare state.”
Europe literally rose from the ashes following WWII by following pro growth policies as described infra. Britain achieved modest growth again in the 1980s and 1990s by following Thatcherite policies; most recently Germany experienced a moderate economic revival beginning a decade ago with a major overhaul of its labor and welfare paradigm.
What Will Happen to Europe?
It may already be too late for olde Europe to save itself; the answer to that question is blowing in the wind. The real question is whether or not Europe even will make a serious attempt to save itself from a meltdown of biblical scale. On this score, as well as the likely outcome of such an effort, it is difficult to be sanguine. Following are the reasons I conclude the worst is likely to happen.
1. Neither the governments nor the people are willing to accept the root causes of the problem and hence understand the nature and scale of the solutions required.
2. The wounds have been permitted to fester for so long, gangrene has set in. For Europe to save itself requires so much pain for so long that it is unlikely to happen voluntarily.
3. Most of Europe is entering a recession which will severely exacerbate the problem.
4. Europe is sclerotic to a degree hard for Americans to grasp. Of the top 100 companies in Europe in 1960, 94 were still there in 2000; the comparable figure for the US is 7. Innovation is non-existent; they even import pop culture from the USA.
5. Europeans are feckless and delusional. Europe won’t defend itself; it ran out of bombs in 10 days in the Lilliputian Libyan campaign. The population is imploding; not having children is the ultimate vote of no confidence in the future. Their fixation on green issues is an opiate to beguile them into accepting the unacceptable and to misdirect them from the real issues.
6. The social cost to truly solve the problem is so dear as to be unthinkable. The riots of Athens will be dwarfed by the mayhem in Marseilles, Madrid, Milan and Mainz.
7. Ultimately, ballooning debt reaches a tipping point; debt reduction becomes impossible as tax revenues plunge amidst recession. The mayhem begins.
8. In the end stage, an economic death spiral grips Europe and transmogrifies into social disintegration pitting immigrant against native, pensioner against worker, young against old and rich against poor.
“Ballooning debt amidst recession reaches a tipping point. An economic death spiral grips olde Europe and transmogrifies into social disintegration with mayhem in Marseilles, Madrid, Milan and Mainz.”
I’ll close with a story from my month in Europe last year. My wife and I took a shuttle from an airport hotel in Paris to the airport. Our trilingual 30 year old Italian driver (now a French citizen) had been in that same job for 10 years. It was the bottom level job with that company and he expected to be mired there the rest of his working life. Nevertheless, his calculus was that he was better off forsaking his own country to take this dead end job in another in which he never truly would be at home. He had a girlfriend but was unmarried. He expected neither marriage nor children and already was thinking about his pension.
I recognized something in his face and demeanor I had noted elsewhere during our trip, a countenance of quiet desperation. Thoreau was right, at least about this time and place. I had observed this same countenance throughout our travels in Europe in the vacuous expressions of many of our guides, drivers and hotel-restaurant service personnel and yes, the man in the street.
Perhaps they have a preternatural grasp of what is about to happen and their complete powerlessness to prevent it.
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