Here it is: everything you want to know about the Euro crisis.
In the beginning, Germans feared being shackled currencywise to spendthrift countries like Italy that would undermine the Euro. So they insisted on a treaty to financially penalize any Euro nation whose deficit exceeded 3% of GDP. Guess who first sailed past 3%? Germany and France. Were the penalties applied? Of course not. First big mistake. (A new deficit limit is part of Europe’s current crisis plan. Will it work any better?)
Second big mistake: letting in a dodgy country like Greece. It was the epitome of progressive thinking (or should I say “thinking”?) – liberality, nondiscrimination, inclusiveness – doing what feels good, not what makes sober sense.
I recently wrote of the French economic ideal: everyone working for government (or should I say “working”?) with short hours, long vacations, early retirement, and fat pensions; paid for by taxing, well, someone else. But Greeks make the French look almost like Spartans. Emblematic of Greconomics is their national railway, with 80 million Euros in annual ticket sales, 500 million in wage costs, and losses around a billion. Average salaries are $78,000. And the trains run almost empty because they run like snails. It’s been calculated that transporting all the passengers by taxi would be cheaper. (Faster, too.)
Greece does have taxes, or should I say “taxes,” because many people don’t pay up. (Or train fares either.) And like the French, Greeks hate the idea that prosperity must come from productiveness, creating saleable goods or services (i.e., capitalism, or real work). However, whereas such la-la attitudes in France are belied by a nevertheless reasonably strong business sector, that’s not true of Greece.
Instead of actually earning income, and seriously taxing anyone, Greece has long financed its profligacy by heavy borrowing, mainly from other countries, which it couldn’t possibly ever repay. Awakening to this reality, the recent bail-out deals allowed Greece to welch on a sizable part of its debt; but conditional on cleaning up its act (somewhat).
The Greeks hate it. They seem to imagine life should go on as before: cushy government jobs and pensions and benefits for all, paid for (presumably) by yet more debt — which needn’t be repaid.
The rest of Europe mirrors Greece, if only less outrageously. Italy, Spain, and Portugal too are close to being unable to pay their debts. And the riskier that looks, the higher the interest rates bond buyers naturally demand, squeezing these nations even further. It’s recognized that they, and others, must reduce borrowings to manageable levels. That means budget cuts: austerity. Though the word misleads: we’re really talking “slightly less profligacy.”
However, Europe now has record 11% unemployment (with Depression-level 24% in Spain, whose banks are tottering). Such economic weakness is poison vis-à-vis these countries’ debt crunch, threatening a downward spiral. Hence some, like France’s new President Hollande, argue that spending cuts make things worse, and call for the opposite tack, promoting economic growth instead.
But that’s a false choice. Europe’s growth problem is not insufficient government spending. Such spending may be stimulative in the short term, but adds to debt, dragging them down. And (as Greece shows) a prosperity that depends on government spending, financed by borrowing, is unsustainable. Europe’s real problem is lagging business vitality and competitiveness, and a host of government policies that impede business flexibility and, especially, employment. Reflecting the old “social welfare” approach, many European countries try to protect workers by making it very hard and costly to fire them. That makes companies reluctant to hire in the first place.
So there are plenty of things Europe can do to open up its inflexible markets to spur hiring and growth, without spending a Euro-cent. Of course, such reforms face resistance from vested interests (like labor unions), and misguided ones. When France proposed more flexible contracts for young workers, students rioted; they wanted no one ever fired. Never mind that the new scheme would help their being hired.
Now Hollande has reversed Sarkozy’s hard-won reform of raising the retirement age from 60 to 62. Absolutely the wrong direction to go. Surely anti-growth! Madness.
I’m reading Landes’s The Wealth and Poverty of Nations. It shows how Europe originally flourished because of an environment conducive to its people’s creative energies, enterprise and industriousness. Today’s Europe is conducive to living off the industriousness of others.
The European social model is meantime also being undermined by demography. Populations are falling and aging, with ever fewer earners supporting ever more benefit recipients – another reason why over-generous welfare and pension provisions cannot continue. It would help if Europeans had more children. That’s where the sex comes in. They should do it more.
For Greeks to reject the austerity and bail-out deal would be suicidal: no more borrowing. Leaving the Euro, which might inexorably follow, would impoverish them even more. Maybe they’ll come to their senses in the June 17 election re-run.
Breaking up the Euro would also be economically catastrophic for the rest of Europe; so would letting any country beyond Greece go broke. But for all its problems, Europe as a whole is not in such bad shape, mainly because German strength counterbalances weakness elsewhere. Thus the answer seems clear: as Franklin said in 1776, all hang together, or hang separately. In other words, Europe has to go further toward becoming a single economic unit, by issuing Euro-bonds, for example, backed jointly by all members. The Economist recently published a concrete plan along such lines. (German Chancellor Angela Too-Little-Too-Late Merkel remains dead-set against it.)
Such a plan would mean giving up some national sovereignty and becoming more of a “United States of Europe.” Maybe a bitter pill to swallow, but necessary to avoid worse. This eventual outcome may have been inevitable from the Euro’s adoption.
Which brings us to another problem, a boulder in this path: the European Union’s democratic deficit. The EU really operates, to too great an extent, without voter consent or accountability. Brussels is seen as a remote bureaucratic ruler, imposing its edicts by fiat. The European Parliament is impotent. The proposed European constitution was derailed a few years ago by rebellious negative votes in French and Dutch referenda. So the political elites rammed through most of the constitution’s provisions by way of a treaty. Voters resent this kind of thing, and it aggravates their rebellious mood.
The Euro itself was similarly a project of the political elites, with voters never really consulted. Now there is a (justified) widespread feeling of, “What a mess you got us in.” And if the elites’ answer to the mess is “more Europe,” will voters (especially Germans, who’d pay the bill) agree?