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.
As several EU studies
demonstrate, steady majorities in most West
European countries express a decided preference for security (be it
through attaining a public-sector job, voting for munificent social
security systems, or supporting massive wealth transfers within and
between EU countries) over allowing more scope for economic
freedom. The same analyses illustrate that West Europeans are more
willing than Americans and Chinese to trade off economic dynamism
in order to have lower wealth disparities.
If that’s what most contemporary Europeans want, then so
be it. But if leadership occasionally involves telling people hard
truths, Europe’s politicians should inform their constituencies
that the economic policies flowing from such preferences have
contributed mightily to the eurozone’s contemporary disarray. Once
again, their silence on this matter is deafening.
Europe’s leaders are hardly alone in avoiding meaningful
discussion of their countries’ deeper economic troubles. Even now,
some American politicians simply won’t admit the need for major
entitlement reform. It’s near-impossible to find Chinese officials
prepared to confess that China’s one-child policy is turning out to
be an economic and moral-cultural disaster.
Nevertheless, it’s striking how a crisis that’s presently
leading to ruinously high youth-unemployment, the disintegration of
governments, and threatening the euro’s implosion hasn’t produced
any profound rethinking of economic policy by most European
politicians. It’s as if they’re convinced Europe can somehow hang
on through a combination of financial chimeras, minor adjustments
to retirement ages, temporary spending cuts, and, above all,
centralizing more power in Brussels in the name of “European
economic governance.”
Such wishful thinking may turn out to be the greatest
European delusion of them all.
