A Further Perspective

Can’t Face Economic Reality

Europe refuses to address the root causes of its unending crisis.

By 11.18.11

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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.

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About the Author
Samuel Gregg is Research Director at the Acton Institute. He has authored several books including Becoming Europe and most recently Tea Party Catholic.