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A Further Perspective
Can’t Face Economic Reality
Europe refuses to address the root causes of its unending crisis.
Most of us have now lost count of how many times Europe’s political leaders have announced they’ve arrived at a “fundamental” agreement which “decisively” resolves the eurozone’s almost three-year old financial crisis. As recently as late October, we were told the EU had forged an agreement that would contain Greece’s debt problems — only to see the deal suddenly thrown into question by internal Greek political turmoil, which was itself quickly overshadowed by Italy’s sudden descent into high financial farce.
No doubt many of these dramas reflect commonplace problems such as governments having difficulty reconciling promises made in international settings with domestic political demands. The apparently unending character of Europe’s crisis, however, is also being driven by another element: the unwillingness of most of Europe’s political establishment to acknowledge the root causes of Europe’s present mess.
One such mega-reality is the unsustainability of the pattern of low-growth, big public sectors, heavy regulation, large welfare states, aging populations, and below-replacement birthrates that characterizes much of the eurozone. Even now, it’s difficult to find mainstream EU politicians who openly concede the high economic price of these arrangements.
Nor have they acknowledged how the costs of this state of affairs necessitated the heavy public-sector borrowing used to fill the fiscal gap that not even the eurozone’s notoriously high-tax rates could cover. Today we know such borrowing helped facilitate many European nations’ catastrophic sovereign-debt levels which now translate into dismal growth-prospects, not least because of mounting debt-servicing requirements.
Rare, however, is the European politician willing to explain how this fiscal train-wreck occurred. Instead they often indulge in the intellectually lazy practice of blaming many Europeans’ favorite all-purpose bogeyman — “néolibéralisme,” aka “Anglo-Saxon capitalism” — for the EU’s woes.
This issue of debt and its deeper causes brings us neatly to a second major reality-denial by Europe’s political elites: the fact that the various bailout mechanisms created by the EU are built on sand.
A good example of this is the European Stability Mechanism (ESM). Due to start operating in mid-2013, the ESM will serve as a permanent institution for assisting financially challenged eurozone nations. Every eurozone member is obliged to contribute different amounts to the funds at the ESM’s disposal.
There are, however, serious questions about various countries’ capacity to meet their obligations. Italy agreed, for example, to guarantee 18 percent of the ESM’s funds. But as the Financial Times journalist Wolfgang Münchau wrote in March: “do we really believe that Italy… is in a position to find tens of billions for the bailout of another member-state?”
A third reality underlining Europe’s current predicaments often ignored by many European politicians is the European model’s increasing obsolescence in a global economy.
After World War II, many European countries sought to combine elements of the market with strong top-down coordination by the state, generous social programs, and neo-corporatist policies. The latter typically involved governments hardwiring protocols for extensive consultations between management and employees into entire economies in order to settle disputes about wage-levels, working conditions, and production-targets.
As the economist Barry Eichengreen observes, neo-corporatist structures may have helped many Western European countries shattered by war and characterized by sharp ideological and social divisions to side-step these fractures to address pressing reconstruction and development problems.
In a globalizing age, however, the utility of this approach is far less obvious. Employer associations, trade unions, and governments can negotiate wages in Spain as much as they want. But if labor is less-expensive in Korea, many companies may decide it’s much simpler, less time-consuming, and more cost-effective to cut out the middleman of neo-corporatist officialdom and build new factories outside Seoul rather than Madrid and employ Koreans instead of Spaniards.
To be sure, countries such as Germany and Sweden have made significant internal changes that have helped them capitalize upon the opening of world markets. But other EU nations have not. Instead they persist in futile dirigiste exercises such as France’s quixotic efforts to promote “national champions” that apparently aren’t great enough to do without government subsidies.
There is, however, a fourth factor at work that might well be the most intractable economic truth that many Europeans are reluctant to face: the corrosive effects of the never-ending West European quest for perpetual economic security and ever-deeper economic equality.
No one craves economic insecurity. Nonetheless, if most of your policy settings prioritize economic security and reducing wealth disparities over basic economic liberties and incentives to create wealth, you should expect low levels of economic growth and declining international competiveness. While disagreeing about when it occurs, most economists acknowledge that once wealth-redistribution efforts reach a certain level, the incentives to be economically creative begin shrinking.
About the Author
Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty, his prize-winning The Commercial Society, Wilhelm Röpke’s Political Economy, and, most recently, Becoming Europe: Economic Decline, Culture, and America’s Future.
Letter to the Editor View all comments (35) | Leave a comment
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John786| 11.18.11 @ 6:33AM
For an American to criticise European deficits takes a lot of chutzpah. The problem is not about the deficits : its the political will to solve: especially from the Germans. It will take up to 2 Trillion dollars to stop the contagion. The total assets in Europe are worth 200 trillion dollars. So affordable. The German cost of boroughing is now well below 2% . To borough Trillion with German backing will cost peanuts. The Germans are export led (: by value the biggest in the world). They Have benefited massively from the low euro: time for payback. Lets not forget that the bailouts are for the banks not the countries. The European welfare state is one of the great social innovation of the 20 th century. For example very high quality care is provided free at the time of need at a fraction of the cost in GDP terms as compared to the US. Europe will get through this.
Kenny| 11.18.11 @ 7:24AM
"For an American to criticise European deficits takes a lot of chutzpah."
Not really, given that all of Europe has been a welfare-type client of the U.S. in terms of its national defense for over 60 years.
The welfare state is killing Europe and we'll see it die in our life time.
Jack in Wi| 11.20.11 @ 6:53AM
Kenny: The warfare state is killing this country. It also subsidizes the EuropeanSocialst welfare states.
Redstateboy| 11.18.11 @ 10:19AM
Are you a Liber-ul? Cause you write like one - dumb. Europe is broke precisely because of what you praise. It's the welfare state Fo! That and your precious Socialism and you can't even see it!
PhilTheCapitalistPig| 11.18.11 @ 11:05AM
I don't see how anyone can continue to advocate for this while debt is crushing so many countries. Debt that wouldn't exist if it weren't for social engineering.
Definitely an element of willful ignorance on the part of liberals to ignore these truths.
idalily| 11.18.11 @ 2:28PM
John, two questions:
1. Please explain how high quality care in Europe is "free." I'm curious. How do all those doctors and nurses get paid? In fairy dust? How is it free?
2. How and why is the European welfare state "a great achievement"? What makes it great?
John786| 11.18.11 @ 5:15PM
Idaily sir,
Free at the point of use. Its payed out of general taxes in for example the British Nhs. if you are unemployed access is completely free.
What makes it great . On any realistic measure it compares extremely well with for example the US system at a fraction of the cost. Yes, in the US if you can afford gold standard insurance some outcomes may be better, but most don't have that kind of cover or no coverage. So yeh if you want to save trillions and have a very good health system you can't go far wrong in following Europe. its a no brainer unless you are a global warming denying creationist.
Quartermaster| 11.18.11 @ 6:02PM
In Germany you can get 1st class care, but you also have insurance that is not too unlike what we have in the US. But, it isn't free at the point of access. Just because the an indigent patient is not charged, does not make it free in any way. Some one else is paying.
The British NHS is a shambles and is an example of how not to do things. Germany was headed that way, but they realized that bad things were on the horizon and acted to save the system.
Canada is not much better than Great Britain. It has been said that the best medical care in Canada is in the US. People who have the money come south as it is unlikely they will be seen in a timely fashion in Canada.
The US has its troubles and no one on this site will deny that. We also decry and condemn the spending in this country because we know that the result will be the same here as it is in Europe. Frankly, I seriously doubt that either Europe or the US has the political maturity to deal with the problem and the universe will force the solution down our collective throats.
idalily| 11.18.11 @ 6:30PM
One correction and a follow-up question.
1. So to clarify, it isn't free. It's entirely paid for by a certain segment of the population, a segment that has to pay all medical costs for the other segment, correct?
2. What if I need a knee replacement? What's the wait time in Britain? Oh, yeah, that's right. TWO YEARS. You call that great? Seriously? Huh.
John786| 11.18.11 @ 7:19PM
There is nothing free. Its how you organise society so that you have reasonble outcomes: there will never be perfect outcomes.The waiting times are generally based on need; which are assessed by a doctor. So yes a doctor may not prioritise you. The biggest problem faced by all health systems is the escalating cost of new drugs some of which appear to have only a marginal effect on outcomes. From my experience Doctors continue to administer treatment to patients at the end of life when it will not change the outcome. If nothing else it robs a patient of diginity. Doctors don't want to be sued; and there is no cure for death. With ageing populations all health systems are facing pressure. The truth is medical science is still in the bronze age. Medicines on the whole are still not gene specific. For example in many disease categories a 100 patients have to take the medicine and may be only one will benefit. The cost soon start to spiral.
idalily| 11.19.11 @ 7:00PM
Yes, there is nothing free. So I wish socialized medicine would stop calling it free. It's NOT. It's actually very expensive, it's in every tax at every level. And I respectfully disagree with you. The biggest problem is NOT the cost of drugs. It's simple demographics. The shrinking Europeand tax base cannot continue to pay for the ever- longer-living older folks. Europe is crashing and burning, and this "great" medical care, along with all the other "free" stuff is the reason why. It cannot be sustained.
In other news, water bottlers now can't say drinking water helps prevent dehydration. Brussels = idiots in charge. Sorry, don't want people like that in charge of my health care. Thanks, anyway.
John786| 11.20.11 @ 6:07AM
Ageing demographics pose challenges to all health systems. The challenges are Worse in the US: Already paying double Europe's rate. One probable effect will be that the old will not get any coverage from private health care provider; or severe rationing will happen.
markenoff| 11.19.11 @ 2:21PM
Europe is about to be overwhelmed by its Muslim immigrants. The birthrates of native populations of all the EU countries (and some non-EU countries in Europe) are below the replacement rate while the birthrates of followers of Mo, the pedophile bandit (MHRIH), are well above replacement rate. Soon followers of Mo will be the majority in many European countries and will decide that they are not going to pay taxes to sustain non-Mos in their old age and the native Europeans will learn that the ``cradle to grave`` welfare state is not the economic security they thought it was. Within the next 20 years we will see non-Mo refugees (primarily the elderly but any family with children {especially those with daughters} that has brains and the means will leave as well) streaming to the western hemisphere.
There will be a European civil war between Mos and non-Mos. And the Mos don´t need to wait unil they are an absolute majority, they onlyhave to wait until the majority of militaty age men are Mos.
markenoff| 11.19.11 @ 2:23PM
What is more accurate is the statement ``For Barak Obama or any member of the Democrat Party to criticise European deficits takes a lot of chutzpah."
John786| 11.20.11 @ 6:14AM
Me markenhof,
I do not recognise the Europe you describe. You should get out abit more. May be stop reading obscure right wing websites. Muslims in Europe are on the Whole ( :yes there are nutty exceptons and religios conservatism) well integrated and upright citizens.
Thom| 11.20.11 @ 10:06AM
John786,
“It will take up to 2 Trillion dollars to stop the contagion. The total assets in Europe are worth 200 trillion dollars.”
You learn common sense things in the study of Economics that they apparently don’t teach in Europe any longer. The “state” says my estate is worth twice what it was just 6 years ago. I’ve offered to cut off a piece of my imputed estate wealth and pay the 1.12% annual property taxes with it but they insist on real money for some unexplained reason. No one will generally pay me what the “state” says my estate is worth for the same reasons. You learn in the study of economic and life in general that “something is only worth what someone will pay you today for it” hence in a world economy with about an annual 60 trillion GDP your statement of the worth of Europe (200 Trillian) and that 2 Trillion is all that is needed to fix the problem has as much credibility as my “State’s” property assessment and their unwillingness to take a physical portion of what they value it at in payment for taxes……
Appleby| 11.18.11 @ 8:52AM
Stand back and let it crash. Thats the only way to solve the problem. There will be plenty of squalling and chanting until people realize life in a squat in the park is their permanent home now, and Global Warming isnt going to moderate the winter winds. Pull our troops out of Europe to guard our borders (especially with Canada, which is heading in the same direction) and let the Europeans slug it out until water reaches its own level. This time let them rebuild on their own.
There is no solution beyond this splintering crash.
Lev Tolstoy| 11.18.11 @ 9:29AM
I agree. This turn of events will hopefully bring the end to the Social Democratic social and economic model.
Ken in Tyler| 11.18.11 @ 9:18AM
Interesting article. Next you might expose the depth of interconnectivity between the EU banking system and ours with a follow-up on the inevitability of the collapse of our banks when the EU experiences its "splintering crash". And end the series with a piece explaining how the US taxpayer will once again be left holding the tab for the bailout. We will long for the good 'ol days of the '30's depression.
Redstateboy| 11.18.11 @ 9:28AM
"One such mega-reality is the unsustainability of the pattern of low-growth, big public sectors, heavy regulation, large welfare states, aging populations, and below-replacement birthrates that characterizes much of the eurozone. Even now, it's difficult to find mainstream EU politicians who openly concede the high economic price of these arrangements."
I'd double-dare an American Liber-ul to argue that this is Not what Hussein and his Slave (Democrat) Party are actually trying to impose on the United States - because that's precisely what they're attempting to do - Which again! confirms; Liber-ulism is a Mental Disorder because only a lunatic would try and institute policies that demonstrably fail everywhere and anytime they're tried.
Petronius| 11.18.11 @ 10:16AM
Europe will crash and burn and so will we. Our populations' levels of competence have been declining since the early 70's and with subsequent generations also refusing to grow up we now stare in the face the existence Liberal Government wants us to have; permanent dependency in a perpetual kindergarten. Can you say OWS? Those fools believe their birthright to be material and social equality without disappointment or pains of any kind. Success is anathema to them as they were taught altruism, selflessness, and hatred of competition. Too bad boys and girls. Life IS Competition. And voting for politicians who offer to take over from your mommies by picking My pockets to maintain your thieving asses will lead to the anarchy the blackblocs claim they want. Should that occur; have a nice life. It won't last long.
JimH| 11.18.11 @ 10:51AM
Remember to, that our presence in NATO is subsidizing their defense allowing them to spend more on welfare programs.
Thom| 11.19.11 @ 8:33PM
JimH,
I know this goes against conventional wisdom but if we pull out of "our" bases in their countries they will not spend on defense to replace our contribution "there". What we have left in Europe in combat terms is a very small fraction of Western Europe's total force level even given how diminished it is. They really believe they are “safe” with or without us “ there” and it isn't really what we have there that they depend on, it’s the capability we have they don't have as demonstrated by the Libya thing.
NitmA| 11.19.11 @ 11:34PM
Thom, please let me add something vital to this disucssion:
We also need to keep what we have remaining (Just a fraction of what was in place in 1989/1990) in Europe as all those military bases serve as strategic (world-wide mission) platforms for better/faster reaching to the Middle East/Afghanistan/N. Africa.
Many a US boy/Soldier has had his life saved at the now famous hospital in Germany. Ditto for many of our allies who just (still) don't have that kind of capability.
Don't ever make the mistake of shortchanging the value of our (now minimal) presence in W. Europe.
Life saving for our very critically wounded would not happen without the airstrip right there and the hospital a short ride up the hill. We need this medical care "closer," to the hot spot front lines as it is very dicey if some of our guys could be stabilized and make it on 9, 10 or 11 hour flights back to the continental US.
We fight to have "clean" operating capabilities within Iraq and Afghanistan, but the truth is the better "clean" medical facility is a "hard" one in a stable, safe environment like Germany.
No more pulling out of Europe. Our presence there is nearly postage-stamp sized now anyway.
JimH| 11.20.11 @ 11:51AM
Thom, NitmA, you both make valid points. I don't think Europe would necessarily increase it's defense spending in our absence but I'm not sure we should still be subsidizing them even if as you point out that the subsidy is less than before. Is our presence there of use to us militarily? Yes if you believe that we have need of forward positioned airbases, equipment and medical facilities. Is it cost effective? Possibly only if you think that we will still have extensive long term deployments in the middle east and it's environs for the foreseeable future. The merits of which I will not argue here.
glenn d| 11.18.11 @ 1:12PM
There are no easy solutions to this problem. Years of economic turmoil are the best Europe can hope for. Any recommendation to “just do that”, or “just do this: will be chock full of unintended consequences. Without addressing serious productivity issues and a population addicted to easy living on the backs of others, any measure is bound to fail eventually if not immediately. Time is short for the USA to heed the warnings.
Ron| 11.18.11 @ 1:35PM
One of the big problems is that the US markets (do not get me going on those) continue to react to any little shiver in Europe...We need to really get out of the whole "global economy" need. not to mention NerObama loves the idea of expending our FRNs to help Europe out.
shipley130| 11.18.11 @ 6:08PM
I disagree that socialism isn't a vehicle for creative thinking. The welfare and SSI recipients are very creative about getting their check. In turn, that gives lawyers and congress a career.
POST American| 11.18.11 @ 11:11PM
"It was decided way back in the 40's
to integrate Europe and destroy ALL
soverignty, ALLL culture. In fact, it's
on record, that Churchill himself, during
the blitz, at night woud attend parties
and positively glow about the post war
prospects for 'social engineering'.
This was all done secretly. The publicwas NEVER asked to vote on it ---EVER."
"Understand, Globalism, 'Free Trade'
and EUGENICS are always intertwined.
---ALWAYS---"
---------------------ALWAYS
--------------HUAC/ NUREMBERG 2012-------------
--We ain't seen nothin' yet. . .
martin j smith| 11.19.11 @ 8:02AM
Socialism is a recipe for disaster because the premises are a lie outright. The rhetoric of our Socialists includes "fairness" well la di da. Who is to determine what is fair. ? Let me tell those people who are Socialists that that politicians who engage in Crony Capitalist policies are not interested in fairness. And as in the case of other such countries and I will include the USSR there is the real danger of a class with special privilege.
Where is your fairness then ? T^he American People will have choice and I think any Republican who is the candidate needs to make the choice clear: Either your are for Free Market Capitalism and our Constitutional form of Government or you get Socialism which means single Party government , ending your rights enumerated in the Bill of Rights and a degrading of our nations economic position as well as severe military weakness--you chose.
Peter Yankov| 11.19.11 @ 5:57PM
Soialism exists on the premise of a free market economy that it can tax to support it. Nonetheless by taxing and redistributing wealth it strangles that which it needs to survive. Tyranny takes hold in the vacuum and freedom and free markets die.
Eurocrat woes| 11.19.11 @ 11:25PM
This new story coming from the Netherlands:
Topic: Technology and National Budget
"Dutch fall out of love with windmills"
Nov. 19 - EGMOND AAN ZEE, Netherlands - Faced with budget cuts, the Dutch government says offshore wind power is too expensive and it will be transferring the financial burden to consumers instead of granting subsidies starting in 2013.
The full article: http://www.reuters.com/article.....JM20111116
Yet one more example of subsidies BUSTING a nation.
POST American| 11.20.11 @ 10:20PM
-----Globalism
--------'Free Trade'
----------'EUGENICS
---------------------and TREASON. . .
-----------------------REALLY----------------------------