Tag: europe

Reaping What We’ve Sown in Europe

Josef Joffe famously referred to the U.S. presence in Western Europe as “Europe’s pacifier.” The idea was that you stick the American pacifier in there and the *cough* recurring problem emanating from Europe goes away. 

After the Cold War ended, and the official reason for the NATO alliance blew away as if in the wind, we never considered letting the alliance go with it.  That tells you something.  Instead of coming home, we pushed NATO “out of area” rather than allowing it to go “out of business.”  Christopher Layne argues that this was all by design.  U.S. policymakers never intended to allow Europe to establish its autonomy and worked diligently to ensure that efforts at autonomous European defense would fail.  They succeeded.

In February, Defense Secretary Robert Gates was whining about the “demilitarization of Europe” and how the Europeans have grown “averse to military force.”  I responded by pointing out that this was dumb.  Mancur Olson’s logic and the history of American policy on the European continent that Layne documents show that we were as much to blame for this state of affairs as the Euros themselves.

And now here’s the Wall Street Journal pointing out that the Euros are slashing their defense budgets further still.

There are two schools of thought on this.  The first says that European defense spending isn’t so low as it’s commonly made out to be.  This group argues (implicitly at times) that there is no pacifier.  War has been “burned out of the system” in Europe, to steal a phrase, so the Euros should just invest in capabilities that can help out with the sorts of overseas noodling-around missions we’re doing now in Afghanistan and that NATO/America is likely to create in the future.

But I don’t think you have to be John Mearsheimer [.pdf] to belong to the second group.  This group buys pacifier logic but worries about both the prudence and the sustainability of Washington playing the pacifier role indefinitely.  It worries about the larger role the United States appropriates for itself in the world as it promotes the infantilization of Europe.  And it worries, ultimately, about how this all ends.

The question for the first group, it seems to me, is how little European defense spending is too little, and why.  Further, if we approach or cross the “too little” line, what should we do to promote more European defense spending?  Would this include promoting a larger European role in the world, which has historically been the main reason America has opposed EU defense efforts?

Regardless, the perennial American lament about European defense spending is likely to wind up again, particularly in the shadow of the dubious Afghanistan campaign.

The G-20 Fiscal Fight: A Pox on Both Their Houses

Barack Obama and Angela Merkel are the two main characters in what is being portrayed as a fight between American “stimulus” and European “austerity” at the G-20 summit meeting in Canada. My immediate instinct is to cheer for the Europeans. After all, “austerity” presumably means cutting back on wasteful government spending. Obama’s definition of “stimulus,” by contrast, is borrowing money from China and distributing it to various Democratic-leaning special-interest groups.
 
But appearances can be deceiving. Austerity, in the European context, means budget balance rather than spending reduction. As such, David Cameron’s proposal to boost the U.K.’s value-added tax from 17.5 percent to 20 percent is supposedly a sign of austerity even though his Chancellor of the Exchequer said a higher tax burden would generate “13 billion pounds we don’t have to find from extra spending cuts.”
 
Raising taxes to finance a bloated government, to be sure, is not the same as Obama’s strategy of borrowing money to finance a bloated government. But proponents of limited government and economic freedom understandably are underwhelmed by the choice of two big-government approaches.
 
What matters most, from a fiscal policy perspective, is shrinking the burden of government spending relative to economic output. Europe needs smaller government, not budget balance. According to OECD data, government spending in eurozone nations consumes nearly 51 percent of gross domestic product, almost 10 percentage points higher than the burden of government spending in the United States.
 
Unfortunately, I suspect that the “austerity” plans of Merkel, Cameron, Sarkozy, et al, will leave the overall burden of government relatively unchanged. That may be good news if the alternative is for government budgets to consume even-larger shares of economic output, but it is far from what is needed.
 
Unfortunately, the United States no longer offers a competing vision to the European welfare state. Under the big-government policies of Bush and Obama, the share of GDP consumed by government spending has jumped by nearly 8-percentage points in the past 10 years. And with Obama proposing and/or implementing higher income taxes, higher death taxes, higher capital gains taxes, higher payroll taxes, higher dividend taxes, and higher business taxes, it appears that American-style big-government “stimulus” will soon be matched by European-style big-government “austerity.”
 
Here’s a blurb from the Christian Science Monitor about the Potemkin Village fiscal fight in Canada:

This weekend’s G-20 summit is shaping up as an economic clash of civilizations – or at least a clash of EU and US economic views. EU officials led by German chancellor Angela Merkel are on a national “austerity” budget cutting offensive as the wisest policy for economic health, ahead of the Toronto summit of 20 large-economy nations. Ms. Merkel Thursday said Germany will continue with $100 billion in cuts that will join similar giant ax strokes in the UK, Italy, France, Spain, and Greece. EU officials say budget austerity promotes the stability and market confidence that are prerequisites for their role in overall recovery. Yet EU pro-austerity statements in the past 48 hours are also defensive – a reaction to public statements from US President Barack Obama and G-20 chairman Lee Myung-bak, South Korea’s president, that the overall effect of national austerity in the EU will harm recovery. They are joined by US Treasury Secretary Tim Geithner, investor George Soros, and Nobel laureate and columnist Paul Krugman, among others, arguing that austerity works against growth, and may lead to a recessionary spiral.

The Good Side of Bad News in Europe

What does the Greco-Euro currency/debt crisis mean for the U.S. economy?

Nearly everyone except the uniquely wise economist John Cochrane assumes very bad “contagion” effects –on U.S. banks, exports and particularly U.S. manufacturing.

This echoes identical anxieties while the world went through a far more dramatic Asian currency crisis after  July 1997,  and a Russian debt crisis the following May.

The most widely ignored effect of that crisis, however, was to depress foreign demand for oil, and thus slash oil prices to U.S. buyers from $25 a barrel in early 1997 to $11 by the end of 1998.

Oil is a major input into the manufacturing process (e.g., chemicals and plastics), and a major cost of distribution (trucks, trains and airplanes).  It is also a major determinant of the cost of all energy sources used in making other goods such as aluminum and paper.   When marginal costs go down, it becomes profitable to expand production.

At the height of the Asian/Russian crises, the table below shows that U.S. manufacturing output  rose by more than 10 percent. It’s an ill wind that doesn’t blow somebody some good.

Looking at the same phenomenon from the other side, every recession but one (1960) was preceded by a big increase in the price of oil. For oil importers like the U.S., cheaper oil is definitely better.

During the last big foreign currency/debt crisis, the real growth of U.S. Gross Domestic Purchases (the home-grown portion of GDP) jumped by 4.7% in 1997 and 5.5% in 1998.  Yet the Fed cut interest rates three times in October and November of 1998 because of what was happening in other countries.

The table  show what happened to the price of oil and to U.S. manufacturing from June 1997 to December 1998. The middle column is the price of a barrel of West Texas crude, and the column to the right is the U.S. industrial production index for the manufacturing sector.

1997-06    19.17    87.80
1997-07    19.63    88.12
1997-08    19.93    89.69
1997-09    19.79    90.45
1997-10    21.26    90.98
1997-11    20.17    92.05
1997-12    18.32    92.52
1998-01    16.71    93.36
1998-02    16.06    93.31
1998-03    15.02    93.13
1998-04    15.44    93.68
1998-05    14.86    94.25
1998-06    13.66    93.53
1998-07    14.08    92.96
1998-08    13.36    95.40
1998-09    14.95    95.11
1998-10    14.39    95.96
1998-11    12.85    96.08
1998-12    11.28    96.63

In recent weeks, as the debt and currency problems in Euroland hit the front page, the price of crude oil fell by about 20 percent.

Once again, as in 1997-98, everyone may be watching the wrong ball in the wrong court.

Europe’s Über Bailout

I’m semi-impressed with the Europeans for choosing the hog-wild approach to bailouts. Not because it is good policy, but rather because it will be a useful demonstration of the old rule that bad policy begets more bad policy (which begets God knows what, but it won’t be pretty). The background is that many European nations have been over-spending, over-taxing, and over-regulating. This has created a poisonous combination of weak economies, pervasive dependency, and political corruption, with Greece being the nation farthest down the path to Krugman-topia. Europe’s political elite at first thought they could paper over the problems with a $140 billion Greek bailout. The ostensible motives were to stop contagion and to demonstrate “solidarity,” but behind-the-scenes lobbying by big European banks (which foolishly own a lot of government debt from profligate nations such as Greece, Portugal, Spain, and Italy) may have been the most important factor. Regardless of the real motive, the original bailout was a flop, so the political class has decided to go with the in-for-a-dime-in-for-a-dollar approach and commit nearly $1 trillion of other people’s money to prop up the continent’s welfare states. The Wall Street Journal reports on the issue, noting that American taxpayers will be involuntary participants thanks to the financial world’s keystone cops at the International Monetary Fund:

The European Union agreed on an audacious €750 billion ($955 billion) bailout plan in an effort to stanch a burgeoning sovereign debt crisis that began in Greece but now threatens the stability of financial markets world-wide. The money would be available to rescue euro-zone economies that get into financial troubles. The plan would consist of €440 billion of loans from euro-zone governments, €60 billion from an EU emergency fund and €250 billion from the International Monetary Fund. Immediately after the announcement, the European Central Bank said it is ready to buy euro-zone government and private bonds “to ensure depth and liquidity” in markets, and the U.S. Federal Reserve announced it would reopen swap lines with other central banks to make sure they had ample access to dollars.

Back when Greece first began to collapse, I argued that bankruptcy was the best option. And I noted more recently that my colleague Jeff Miron reached the same conclusion. Everything that has since happened reinforces this viewpoint. Here are a few additional observations on this latest chapter in the collapse of the welfare state.

1. A bailout does not solve the problem. It just means that taxpayers bear the cost rather than the banks that foolishly lent money to corrupt and incompetent governments.

2. A bailout rewards profligate politicians and creates a moral hazard problem by letting other politicians think that it is possible to dodge consequences for reckless choices.

3. A bailout undermines growth by misallocating capital, both directly via bailouts and indirectly by signaling to financial markets and investors that governments are a “safe” investment.

4. A bailout will cause a short-term rise in the market by directly or indirectly replenishing the balance sheets of financial institutions, but this will be completely offset by the long-run damage caused by moral hazard and capital misallocation.

The last point deserves a bit of elaboration. Assuming markets continue to rise, the politicians will interpret this to mean their policies are effective. But that is akin to me robbing my neighbor and then boasting about how my net wealth has increased. In the long run (which is probably not too long from now), though, this system will not work. At best, Europe’s political elite have postponed the day of reckoning and almost certainly created the conditions for an even more severe set of consequences. No wonder, when I was in Europe a couple of weeks ago, I kept running in to people who were planning on how to protect their families and their money when the welfare state scam unravels. Their biggest challenge, though, is finding someplace to go. People use to think the United States was a safe option, but the Bush-Obama policies of bigger government have pushed America much closer to European levels of fiscal instability.

Greetings from Spain

I arrived in Madrid yesterday for a speech to the annual Convention of Independent Financial Advisors, and it is somehow fitting that Spain was downgraded by Standard and Poor’s as I entered the country. I’m not a fan of the bond-rating agencies, and the fact that it has taken so long for Spain to be downgraded simply reinforces my skepticism about their value. So let’s focus instead on identifying the sources of Spain’s fiscal crisis. If you look at the OECD’s fiscal database, you will see that Spain’s short-run problem is solely the result of a growth in the burden of government spending. Over the past seven years, the budget in Spain has skyrocketed from 38.4 percent of GDP to 47.2 percent of GDP. And since tax revenues have stayed the same as a share of national economic output, it is difficult to see how anyone can conclude that the fiscal crisis is the result of inadequate revenue. In the long run, the problem also is excessive government spending, largely because demographic factors such as an aging population will push up outlays for pensions and health care.

In other words, Spain is in trouble for the same reason that Greece is in trouble. Government is too big and politicians are unwilling to take the modest steps that are needed to rein in dependency. This, of course, is exactly why there should not be a bailout. Subsidizing Greek politicians and Spanish politicians – regardless of whether the bailout comes from German taxpayers and/or the IMF – will send a signal to other European nations that there is an easy way out. But the “easy way out” simply postpones the day of reckoning and makes the eventual adjustment much more challenging. Here’s an excerpt from the Washington Post report:

European and International Monetary Fund officials on Wednesday were considering a dramatically increased $158 billion bailout package for Greece as the country’s debt crisis continued to ripple across Europe, with Standard & Poor’s downgrading the credit rating on Spain, the continent’s fourth-largest economy. …In Europe, the most intense focus remains on Greece, but fears were intensifying elsewhere, especially in Portugal and Spain. Though analysts noted that both countries are in better shape than Greece – with lower ratios of debt – they both shared large fiscal deficits and poor long-term economic prospects. On Wednesday, the government in Portugal announced that it would move up a program of painful spending cuts to shrink its budget deficit and shore up confidence amid signs that fearful depositors were moving capital out of Lisbon banks. After lowering Greek debt to junk bond status on Tuesday, Standard & Poor’s kept Spain at investment grade status, but lowered its rating one notch, to AA.

Regardless of the Problem, the European Political Elite Thinks More Centralization and Bigger Government Is the Answer

Greece is in trouble for a combination of reasons. Government spending is far too excessive, diverting resources from more efficient uses. The bureaucracy is too large and paid too much, resulting in a misallocation of labor. And tax rates are too high, further hindering the productive sector of the economy. Europe’s political class wants to bail out Greece’s profligate government. The official reason for a bailout, to protect the euro currency, makes no sense. After all, if Illinois or California default, that would not affect the strength (or lack thereof) of the dollar.

To understand what is really happening in Europe, it is always wise to look at what politicians are doing and ignore what they are saying. Political union is the religion of Europe’s political class, and they relentlessly use any excuse to centralize power in Brussels and strip away national sovereignty. Greece’s fiscal crisis is simply the latest excuse to move the goalposts.

The Daily Telegraph reports that Germany and France are now conspiring to create an “economic government” for the European Union. Supposedly this entity would only have supervisory powers, but it is a virtual certainty that a European-wide tax will be the next step for the euro-centralizers.

Germany and France have [proposed] controversial plans to create an “economic government of the European Union” to police financial policy across the continent. They have put Herman Van Rompuy, the EU President, in charge of a special task force to examine “all options possible” to prevent another crisis like the one caused by the Greek meltdown.

…The options he will consider include the creation of an “economic government” by the end of the year. “We commit to promote a strong co-ordination of economic policies in Europe,” said a draft text expected to be agreed by EU leaders last night. “We consider that the European Council should become the economic government of the EU and we propose to increase its role in economic surveillance and the definition of the EU’s growth strategy.”

…Mr Van Rompuy, the former Prime Minister of Belgium, is an enthusiastic supporter of “la gouvernement économique” and last month upset many national capitals by trying to impose “top down” economic targets. Angela Merkel, the German Chancellor, has called for the Lisbon Treaty to be amended in order to prevent any repetition of the current Greek crisis, which has threatened to tear apart the euro.

Great Moments in International Bureaucracy

Greece’s fiscal disarray is a visible manifestation of Europe’s future, but the most appropriate symbol of what’s wrong with the continent comes from Brussels, where there are three “presidents” fighting over the right to represent Europe at international gatherings. The contestants include the President of the European Commission, the President of the European Council, and the European Union President (which rotates every six months among different national leaders).

While these three personalities fight over who gets to sit where and shake hands first, the real problem is that they all agree that government should be bigger, taxes should be higher, and power should be more centralized as part of the effort to create a superstate in Brussels. Inside this gilded cage, insulated from actual voters, Europe’s technocratic elite is content to enjoy a parasitical existence while the welfare states of member nations slowly but surely collapse and lead to social chaos. Here’s an excerpt from the UK-based Express about the fight between the the philosophical descendants of Louis XVI. Or would Nero be a better analogy? How about the Three Stooges? Well, you get the idea:

Promises by EU leaders that the Lisbon Treaty would herald a new era of clarity have been shattered after attempts to settle a major internal power feud resulted in a typical Brussels fudge. Bureaucrats have decided to send not just one president and his entourage to global summits but a tax-draining three. Only four months after the fanfare of Herman Van Rompuy’s appointment as European Council president, his most jealous and powerful rival in Brussels has persuaded allies to allow him to muscle in too. José Manuel Barroso, president of the European Commission, has succeeded in his demands that he should also go to diplomatic summits, such as the G20, after insisting only he has the expertise to deal with specific policy matters. At certain summits there will even be a third representative – the leader of the country holding the EU’s rotating presidency. This seems to justify criticism that the Lisbon Treaty would add to the EU’s murky waters and not be a move towards transparency. …Since the Lisbon Treaty came into force at the end of last year, arguments have raged in Brussels over which department does what. Mr Van Rompuy, the former Belgian prime minister dismissed last month by Ukip MEP Nigel Farage as a “damp rag” and a “low-grade bank clerk”, is the permanent president of the European Council.