These are rough days for the European Union (EU). What began as
a sovereign debt crisis has now metastasized into a political
debacle for the leaders left holding the bag. Nicolas Sarkozy’s
electoral defeat in France, the ouster of an austerity-minded
government in Greece; and last month’s collapse of the governing
coalition in the Netherlands are all symptoms of a deeper problem
for Europe: bloated governments are hard to tame, even when there
is no money left to pay for them.
This is bad news for Europe. But the political tumult on the
continent is also a stunning vindication of the post-War thinkers
who anticipated this outcome. These individuals, men like Friedrich
von Hayek and Wilhelm Röpke, would become founding intellectual
fathers behind the modern conservative movement in Europe and the
United States. Even today, their foresight provides a defining
roadmap for navigating away from Europe’s current crisis and offers
a chilling warning to the United States about repeating the same
mistakes.
Much like the debt crisis of our own time, the dimensions of
Europe’s post-War reconstruction were staggering. Only instead of
ruined factories and decimated cities, today’s contemporary
European leaders must contend with bombed out credit ratings and
the herculean task of reordering the continent’s dysfunctional
economies. Then, as now, the basic policy debate centered on the
state’s role as guarantor of public prosperity and welfare; and
perhaps more importantly, how to finance it.
Wading into this dispute, Hayek, Röpke and other post-War
conservatives did not deny the need for basic social insurance
schemes. But they foresaw that the promises of an ever-expanding
welfare state would be maintained at heavy costs: both in taxation
and freedom. With stunning prescience, they warned that unless
state services were limited to basic forms of social insurance, the
financial basis for Europe’s economic order would become
structurally unsound and dangerously unmanageable. Government
largesse would invariably grow and require increased revenue from
taxes or heavy borrowing against future economic growth. As
citizens relied on the state to protect them from the uncertainties
of life, they would become dependent on it; but woe to politicians
who would try to wean voters off of the state.
This is an uncannily close portrait of Europe as it exists
today. From angry street protests in Greece and Romania, to
plaintive calls for a return to government stimulus spending by
France’s president-elect François Holland and Italian Prime
Minister Mario Monti, resistance to budget austerity is as
predictable as it is strident. While this opposition does not alter
the EU’s underlying financial problems, it could affect the
political outcomes of the crisis. Going forward, the EU faces four
potential scenarios, some of which could occur in combination:
Voluntary Austerity: Europe’s over-burdened
governments could fully commit to the rationale and rigors of
sustainable budgets. Already, the EU’s Baltic economies (Estonia,
Latvia and Lithuania) have demonstrated that deep cuts to state
spending are possible. Such an approach, however, requires strong
leadership and an understanding of what’s at stake by the voting
public. In this case, Baltic memories of economic chaos during the
late 1980s and early 1990s helped to catalyze decisive action.
Imposed Austerity: External actors (e.g.,
Germany or the EU) could alter national spending habits by
leveraging treaty or market forces. As recently as January, trading
houses savaged Hungary’s currency and imposed crushing interest
rates on government debt until officials agreed to a credible
reform agenda. By enacting its new Fiscal Treaty, the EU hopes to
avoid a similar pummeling of Euro-zone economies. But in binding
its members to budgetary prudence, the EU has triggered virulent
push back in France, Greece, Spain, Italy, Ireland and the
Netherlands.
Repudiation: Individual states could repudiate
their treaty and debt obligations but incur economic isolation and
impoverishment. Significantly, this approach would accelerate the
emergence of a “two tiered” Europe as the gap between healthy and
unhealthy Euro-zone economies widens. EU decision-making would be
concentrated into the hands of solvent countries, while weaker
economies could invite aggressive speculative pressure against the
Euro. Faced with this scenario, the common currency is unlikely to
survive in its current form.
Repugnant Replacements: Paralyzed by inaction,
Europe’s current governments could be replaced by new leaders who
are antagonistic to trans-Atlantic norms and fiscal necessity. In
recent months, non-mainstream parties in Austria (Freedom Party),
France (National Front), Greece (Golden Dawn), Hungary (Jobbik),
and the Netherlands (Freedom Party) have reaped an alarming
windfall of voter support. And even if these parties are unable to
translate a burst of popularity into majority rule, their role as
political kingmakers in wobbly parliamentary coalitions could
inflict lasting damage on fundamental values like open borders,
free trade, free markets, and inclusive societies.
As the EU gropes for a way out of its financial malaise,
continental leaders would benefit by heeding the advice of thinkers
like Hayek and Röpke. Faced with Europe’s current economic
prospects, both men would be skeptical of centralized or
collectivist approaches to spurring growth, preferring instead to
stimulate entrepreneurialism through tax incentives and greater
economic freedom. While Hayek might argue against applying a
Keynesian balm for Europe’s ills, Röpke was more willing to
prescribe public sector spending during a crisis. Even so, he
warned that such a policy should be deployed only with great
caution and for brief periods.
Given the current levels of European indebtedness, it is
difficult to imagine either Hayek or Röpke endorsing the rising
counter-argument in France and Greece that public debt got us into
this and even more debt will get us out. This would reinforce the
rationale behind “voluntary austerity” and encourage national
governments to fearlessly prune decades of overgrowth in public
sector spending. For the United States, the insight of Hayek and
Röpke highlights the need for cutting our own runaway deficits.
Viewing Europe’s troubles, we can glimpse how our own story is
likely to end if Congress cannot bridle federal spending. In this
event, the cost of inaction would be counted not only in dollars
and cents but in the unwanted decline of America’s capacity for
global leadership.
