Tag: europe

Panetta’s Obligatory Warning to NATO on Military Spending Will Accomplish Nothing

On Wednesday, Defense Secretary Leon Panetta issued a warning to NATO allies that reducing military spending on both sides of the Atlantic will risk “hollowing out” the alliance’s capabilities. Panetta implied that Europeans cannot continue to rely on the United States for their security. Following former defense secretary Robert Gates’s comments in June, Panetta joins the long list of U.S. presidents, secretaries of defense and state, and innumerable lower-level officials who have pleaded with Europe to pick up the slack on military spending, provide for their own security, and close the gap in capabilities.

But Secretary Panetta’s speech also praised NATO for the mission in Libya and he extolled Europe’s leadership in the campaign: “The alliance achieved more burden-sharing between the U.S. and Europe than we have in the past…on a mission that was in the vital interest of our European allies.”

Relative to past NATO operations, it may be true that Europe contributed more in this instance. But this ignores the fact that the mission would not have been possible without the unique capabilities of the U.S. military. As Justin Logan pointed out, the Europeans quickly ran out of munitions and relied on the United States to conduct air strikes. “Thus, Washington essentially borrowed money from China to buy ordnance to give to Europe to drop on Libya.”

Panetta’s finger-wagging will do little to alter the incentive structure European states confront when determining what they should spend on defense. As I explain in an article recently published at Big Peace, until the United States takes concrete steps to force Europeans to spend more for their security, they will continue to free-ride on the U.S. taxpayers’ dime.

Cutting the Pentagon’s budget without imposing additional burdens on our troops requires getting our allies to do more. That is unlikely to happen unless U.S. officials, beginning with Secretary Panetta, force the issue. Unfortunately, he is merely one of many in Washington who seem to forget how incentives work:

Those who simply assume that others would not do more to defend themselves and their interests often ignore the extent to which U.S. actions have discouraged them from doing so. Just as some welfare recipients are often disinclined to look for work, foreign countries on the generous American security dole do not see a need to obtain military power. Our great power, and our willingness to use it, even when our own interests are not at stake, has allowed others to ignore possible threats, always confident that the United States will be there to rescue them.

The Obama administration’s rhetoric merely reinforces this message. The National Security Strategy, published in May 2010, declares “There should be no doubt: the United States of America will continue to underwrite global security.” Taking their cue, U.S. allies have proved understandably disinterested in military spending.

Despite Panetta’s pleas, U.S. strategy—and NATO’s very existence—allows this free-riding to continue. The Libya operation appears to have reinforced these destructive tendencies. If Washington really wants our allies to spend more to defend themselves and their vital interests, U.S. officials must jettison their reflexive attachment to the NATO alliance, an organization that has been irrelevant to U.S. vital security interests for at least two decades.

Secretary Panetta understands the United States is dealing with its own fiscal problems, but he has missed a perfect opportunity to offload a share of our burdens on to our rich allies.

Tim Geithner: The Forrest Gump of World Finance

One almost feels sorry for Treasury Secretary Tim Geithner.

He’s a punchline in his own country because he oversees the IRS even though he conveniently forgot to declare $80,000 of income (and managed to get away with punishment that wouldn’t even qualify as a slap on the wrist).

Now he’s becoming a a bit of a joke in Europe. Earlier this month, a wide range of European policy makers basically told the Treasury Secretary to take a long walk off a short pier when he tried to offer advice on Europe’s fiscal crisis.

And the latest development is that the German Finance Minister basically said Geithner was “stupid” for a new bailout scheme. Here’s an excerpt from the UK-based Daily Telegraph.

Germany and America were on a collision course on Tuesday night over the handling of Europe’s debt crisis after Berlin savaged plans to boost the EU rescue fund as a “stupid idea” and told the White House to sort out its own mess before giving gratuitous advice to others.German finance minister Wolfgang Schauble said it would be a folly to boost the EU’s bail-out machinery (EFSF) beyond its €440bn lending limit by deploying leverage to up to €2 trillion, perhaps by raising funds from the European Central Bank.”I don’t understand how anyone in the European Commission can have such a stupid idea. The result would be to endanger the AAA sovereign debt ratings of other member states. It makes no sense,” he said.

All that’s missing in the story is Geithner channeling his inner Forrest Gump and responding that “Stupid is as stupid does.”

…at birth?
Separated…

This little spat reminds me of the old saying that there is no honor among thieves. Geithner wants to do the wrong thing. The German government wants to do the wrong thing. And every other European government wants to do the wrong thing. They’re merely squabbling over the best way of picking German pockets to subsidize the collapsing welfare states of Southern Europe.

But that’s actually not accurate. German politicians don’t really want to give money to the Greeks and Portuguese.

The real story of the bailouts is that politicians from rich nations are trying to indirectly protect their banks, which - as shown in this chart - are in financial trouble because they foolishly thought lending money to reckless welfare states was a risk-free exercise.

Europe’s political class claims that bailouts are necessary to prevent a repeat of the 2008 financial crisis, but this is nonsense - much as American politicians were lying (or bamboozled) when they supported TARP.

It is a relatively simple matter for a government to put a bank in receivership, hold all depositors harmless, and then sell off the assets. Or to subsidize the takeover of an insolvent institution. This is what America did during the savings & loan bailouts 20 years ago. Heck, it’s also what happened with IndyMac and WaMu during the recent financial crisis. And it’s what the Swedish government basically did in the early 1990s when that nation had a financial crisis.

But politicians don’t like this “FDIC-resolution” approach because it means wiping out shareholders, bondholders, and senior management of institutions that made bad economic choices. And that would mean reducing moral hazard rather than increasing it. And it would mean stiff-arming campaign contributors and protecting the interests of taxpayers.

Heaven forbid those things happen. After all, as Bastiat told us, “Government is the great fiction, through which everybody endeavors to live at the expense of everybody else.”

Confusion over Confusion

On August 29th, I penned “Lagarde Confused, Again.” In it, I argued that Christine Lagarde, the new managing director of the International Monetary Fund, misdiagnosed Europe’s banking crisis.

Ms. Lagarde’s assertion that Europe’s banks “need urgent recapitalization” is based on faulty economics. While the higher capital-asset ratios that Ms. Lagarde extols are intended to strengthen banks (and economies), higher ratios destroy money and are “deflationary.” This is not what a struggling Europe needs. Indeed, higher capital-asset ratios imposed on Europe’s banks at this juncture would virtually ensure that Euroland would take another dive. In consequence, some of the banks that were made “safer” by Ms. Lagarde’s medicine would go to the wall.

Today, the Wall Street Journal’s lead editorial “A TARP for Europe?” adds to the confusion by enthusiastically endorsing Ms. Lagarde’s prescription.

You Should Support a Value-Added Tax…if You Want Bigger Government and More Debt

I testified before the House Ways & Means Committee yesterday. As always, my trip inside the belly of the beast was an interesting adventure.

The tax-writing committee was holding a hearing on the value-added tax. I was on a panel with five other witnesses, and all of the other people testifying were sympathetic to a VAT. But since I had truth on my side, that made it a fair fight (though it did cross my mind that it’s not a good sign when a Republican-controlled committee stacks the witnesses in favor of a European-style tax system).

I made two points. First, a VAT is less destructive than the current income tax. As such, if we somehow repealed the 16th Amendment and replaced it with something ironclad that would prevent the income tax from ever again haunting the land, I would gladly make a trade.

But that’s not going to happen, so my second point was to warn that the VAT would be a recipe for bigger government. And even though some of my fellow witnesses said the revenue could be used to reduce deficits, I pointed out that Europe adopted VATs beginning in the 1960s and that hasn’t stopped welfare states such as Greece and Portugal from spending themselves into a fiscal crisis.

This chart, which is similar to what I included in my testimony, compares spending and debt levels in EU-15 nations (Western Europe) and the United States. As you can see, the burden of spending and debt is onerous in America (red columns), but even worse in Europe (blue columns).

That doesn’t prove that a VAT causes bigger government and more debt, to be sure, but it certainly seems to suggest that the other side is smoking dope when they claim a VAT will lead to deficit reduction. Instead, it seems like Milton Friedman was right when he warned that, “In the long run government will spend whatever the tax system will raise, plus as much more as it can get away with.”

I made some of these points in my VAT video.

P.S. Here are three very good cartoons on the VAT (here, here, and here).

The New York Times on Anders Breivik

My Washington Examiner column this week looks at the rush to score partisan points over the horrific slaughter in Norway last Friday.

In it, I argue that blaming Al Gore for the Unabomber, Sarah Palin for Jared Loughner, or Bruce Bawer for Anders Breivik makes about as much sense as blaming Martin Scorcese and Jodie Foster for the actions of John Hinckley. In general, “invoking the ideological meanderings of psychopaths is a stalking horse for narrowing permissible dissent.”

And right on cue, here’s today’s New York Times editorial on Breivik, decrying “inflammatory political rhetoric” about Muslim immigration in Europe:

Individuals are responsible for their actions. But they are influenced by public debate and the extent to which that debate makes ideas acceptable — or not. Even mainstream politicians in Europe, including Prime Minister David Cameron of Britain, Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France have sown doubts about the ability or willingness of Europe to absorb newcomers. Multiculturalism “has failed, utterly failed,” Mrs. Merkel said last October.

Oh, Grey Lady: you had me at “individuals are responsible for their actions,” but you lost me after “but.”

Because, maybe there are, in fact, limits to the ability or willingness of Europe to absorb newcomers. And perhaps multiculturalism has failed. I don’t know—I don’t live in Europe, and I don’t follow its immigration debates closely. But contra the Times’ editorialists, it seems to me that these ideas are “acceptable,” in the sense that they might actually be true, and that you ought to be able to debate them without thereby becoming morally responsible for the actions of lone psychotics.

Virtually every European immigration skeptic manages to participate in that debate without resort to violence, just as vanishingly few hard-core environmentalists try to promote their ideas by means of armed assault. The actions of the deranged few don’t tell us much about what’s wrong with those political stances.

As others have pointed out, the notion that you should “watch what you say” in political debates amounts to giving a sort of “heckler’s veto” to the biggest nutjobs within earshot.

As a means of avoiding horrifying—but thankfully rare—events like mass shooting sprees, it doesn’t seem terribly promising. But it might help you temporarily intimidate your ideological opponents—which is why it’s a perennially popular tactic.

Bacon, Duct Tape, and the Free Market

It’s hard to imagine how we would get through life without necessities like bacon and duct tape. But have you ever thought about how the free market gives you so much for so little?

Here’s a video that should be mandatory viewing in Washington. Too bad politicians didn’t watch it before imposing government-run health care.

And since we’re contemplating the big-picture issue of whether markets are better than statism, here’s some very sobering polling data from EurActiv:

A recent survey has found deep pessimism among European Commission staff on a wide range of issues, including the course of European integration over the past decade and the likelihood of success of the EU’s strategy for economic growth. Some 63% partially or totally agreed that “the European model has entered into a lasting crisis.”

This is remarkable. Even the statist über-bureaucrats of the European Commission realize the big-government house of cards is collapsing, yet politicians in Washington still want to make America more like Europe.

European Political Elite React to Deteriorating Fiscal Outlook with Decisive Moves to…Kill the Messenger

I’m not a big fan of the rating agencies. I’ve warned in TV interviews that they generally wait too long before downgrading profligate governments.

So when the rating agencies finally catch up to everyone else and lower their outlook for failing welfare states such as Greece and Portugal, one would think that this would be seen as a useful – albeit late – warning sign. But European politicians are not very happy about this development. At the risk of mixing metaphors, they want everyone to keep their heads buried in the sand and to continue complimenting the emperor on his new clothes.

Here are some excerpts from a BBC report.

The European Commission has strongly criticised international credit ratings agencies following the downgrade of Portugal by Moody’s. The Commission said the timing of the downgrade was “questionable” and raised the issue of the “appropriateness of behaviour” of the agencies in general. Earlier, Greek Foreign Minister Stavros Lambridinis said the agencies’ actions in the debt crisis had been “madness”. Ratings agencies have downgraded Greece and Portugal many times recently. …German Finance Minister Wolfgang Schaeuble told a news conference that he wanted to “break the oligopoly of the ratings agencies” and limit their influence. …”The timing of Moody’s decision is not only questionable, but also based on absolutely hypothetical scenarios which are not in line at all with implementation,” said Commission spokesman Amadeu Altafaj. “This is an unfortunate episode and it raises once more the issue of the appropriateness of behaviour of credit rating agencies.” Commission President Manuel Barroso added that the move by Moody’s “added another speculative element to the situation”.

This is not the first time this has happened, by the way. Back in January, I mocked the President of the European Council for whining that “bond vigilantes” had the nerve and gall to demand higher interest rates to compensate for the risk of lending money to incontinent governments.