As the world financial crisis deepens, it is unlikely that it can be alleviated without carefully reviewing the infelicitous confluence of mistakes in Europe and the United States that has brought it to its present extreme state. The European Monetary Union, involving 17 countries, was based on a number of generally admirable premises, but also on a couple of false assumptions. All civilized people were grateful at the extension of European cooperation to this new level of intimacy, as ancient foes led by France and Germany reached an ever-closer community of national interest. For German chancellor Helmut Kohl, who did not trust Germany’s political instincts to cause his country to act responsibly when alone and not in the company of allies of less erratic recent history, an ever-closer union was an insurance policy of constructive peer-group thinking. He was sincere in espousing “a European Germany and not a German Europe.”
Greece, in particular, joined the euro, scrapping the ancient drachma, on a false prospectus prepared with the help of the ubiquitous, not to say adaptable, Goldman Sachs. Greece fluffed up its assets, finessed its liabilities, and leapt into the eurozone like a circus acrobat moving forcefully to a higher but stronger trapeze. In practice, the real backing of the euro was about three fifths a Deutschmark, one quarter a French franc, 5 percent a Dutch guilder, and the rest a potpourri of everyone else. (Britain has abstained and Switzerland is not a member.) Kohl and his officials presumably suspected that Greece and some of the others were over-egging the pudding a little, but were prepared to stand for it in the higher interests of a popular Germany girt about with grateful allies. Kohl had committed even greater resources to the same cause when he had paid a Deutschmark for every (essentially worthless) Ostmark issued by East Germany, at reunification. It brought inflation, resentment, and ingratitude, and contributed to the end of Kohl’s 14-year reign as chancellor (longer than Adenauer’s and surpassed only by the tenure of Bismarck). But it ended the ugly and dangerous division of Germany (and of Europe).
It is a truism to say that Germany was too late unified, ambivalent about whether it was an east- or west-facing country; and that whenever it sought to assure its own security, it undermined the security of its neighbors. With reunification, NATO expansion, and monetary union, all was resolved. Germany is an honored member of the Western alliance, solidly embedded in the West; and its eastern border is with the gallant ally of the West, Poland. It seemed a price worth paying for such security in so comfortable and secure a cocoon.
All of Western Europe has been suffering from a collapsed birthrate, and has been paying fiscal and political Danegeld to organized labor and the small farmers for notoriously obvious historic reasons. Only about 40 percent of eurozone residents work, and demographics assure that an ever-increasing percentage of people are on benefit, piggybacking on the productive minority within each country and in the EU as a whole.
And for over ten years, Greece, Portugal, Italy, and Spain have been issuing prodigious quantities of debt (Italian sovereign debt is 120 percent of GDP, compared with about 90 percent in the U.S.), in euros, and the European Central Bank laboriously conserved the fiction that all Euro-debt was of equivalent quality. The European private-sector banks, pretending that the riskier issues had the same debt standing as the German government’s, hold nearly $2 trillion of these unreliable sovereign obligations, which obviously imperils the European banking system, and backs into questions of the solvency of a number of European countries.
As one palliative after another has been put forward, and been shattered by deteriorating events, and as each solution, accompanied by a fanfare on the theme of “Mission Accomplished,” has failed, confidence has eroded. As historian Niall Ferguson remarked, the West failed to “beware Greeks bearing debts.” The European Central Bank imposed on Greece a regime of spending cuts and tax increases that was bound, in the short term, to increase the deficit; instead of a package such as Ireland adopted (with considerable success so far), of expense reductions but also incentives to investment, that has reduced its deficit. The fate of Greece has been that of a sovereign Lehman Brothers that has rewarded the short sellers.
Whatever happens to Greece — and the sojourn with the referendum was a bolt of insanity — Europe must prescribe measures for other laggards that encourage economic growth. Herbert Hoover proved that you can’t shrink your way out of bad economic news, just as Barack Obama has proved that you can’t spend your way out of it either.
Europe will have to put everything behind its banking system, pare back the welfare cocoon, and promote economic and natural-population growth. (It was a little gratuitous for a major American newspaper recently to refer to the birth of a child to French president Nicolas Sarkozy and his glamorous wife as “a gesture to family values.”)
There is a further wrinkle for Germany. It doesn’t enjoy subsidizing the Mediterranean welfare societies, but so effective a manufacturer is it that 49 percent of its GDP is exports (a figure exceeded among advanced countries only by Canada and Australia, but those are mainly natural resources). An enfeebled euro is useful to German exports, even though most of its exports are in Europe. Germany seems likely to retain this edge for some time, and is, with Canada, Australia, and the atypical Norway (a Kuwait of the North), the most successful Western country, especially as Brazil starts to droop.
These are very serious problems, but they have at least banished Europhoria, and they can be met by determined leadership. Germany’s Angela Merkel and the incoming conservative Spanish regime are probably up to it. Sarkozy is questionable, and it should finally be time for a change from the Berlusconi carnival in Rome. There has been some talk of a Euro-bailout by China. If any arrangement were made with the People’s Republic, it would be so usurious that the European commissioners would soon be personally conveying their Chinese creditors through the streets of Europe’s capitals in rickshaws. It’s up to the Europeans; the Americans can’t help them this time.
I have dilated on the American economic and budgetary condition at such length and so often, here and elsewhere, that strict economy of words and metaphors is appropriate. It is a bit rich for Barack Obama and Timothy Geithner (though it is a relief to hear Mr. Geithner speak in public again after a lengthy simulation of a cigar-store Indian) to urge stimulative spending in Europe. Europe is not prepared, to its great credit, to resort to the fraud of simply “electronically” buying its own bonds, as the U.S. has been doing with the last $3 trillion of new debt; and the policy has failed in the United States. The $800 billion stimulus package of 2009 accompanied an addition of 2.5 million unemployed, despite the creation of over 400,000 new federal-government jobs.
The collapse of anticipated U.S. economic growth from an expected 3.5 percent to 0.7 percent in the first half of this year (though the latest figures are better) amplifies the failure of public-sector pump-priming. The two-part debt-ceiling fiasco — the original impasse, followed by the failure to agree on the required deficit reduction — emphasizes the ineffectuality of the country’s leadership.
As American conditions deteriorated, a great deal of capital moved out of equities and other places to low-yield but liquid money-market funds, until it came to light that these funds were engaged in large-scale loans to European banks imperiled by the sovereign-debt crisis. This drove Americans out of Europe and back to U.S. debt held by the same money-market funds, ironically (and briefly) facilitating continued fiscal profligacy in the U.S.
The whole stimulus concept is a fraud, because as much productive resources are immobilized in borrowing the stimulus as are created in spending it. And the spectacle of the administration claiming to seek deficit reduction in the debt-ceiling process, while asking for $477 billion of new borrowed stimulus in what is called a “jobs bill,” is contemptible, and is universally seen as such. The idea that temporary tax cuts will permanently invigorate the economy even after they have been cancelled after a year is nonsense.
One more time, the country needs entitlement reform, consumption and some transaction taxes (though not the taxes the Wall Street Journal has been frightening its readers with), personal- and corporate-income-tax reductions, tax simplification, promotion of alternative energy sources, real health-care reform, and the bundling together of most of the monstrous public-sector debt bomb in a sinking fund with a believable plan for reducing it without just monetizing the Obama debt hemorrhage, which most observers suspect is now in the cards.
Not all hope for progress after the 2012 election has been extinguished. The principal Western countries are great nations and they will survive, but not the way they have been pursuing that objective in recent years.