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.
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.
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.
The question at National Journal's Security Experts blog concerning NATO and the future of Europe has stimulated quite a spirited debate. I decided to take another bite at the apple.
Gordon Adams objects to the framing of the question, arguing that Europe is more important than ever because European governments have chosen to invest in civilians, not men and women at arms. In this context, Europe's military weakness is a feature, not a bug.
Dan Serwer agrees, saying that the "Europeans are on to something," that their civilian capabilities are vast, that they've been deployed in 22 different operations, and are involved in a dozen currently.
But even if they have such capabilities, all the soft power in the world isn't worth much without some military power to back it up. In many of the places where nation building might be called for, various thugs, murderers and warlords use weapons to steal food aid, intimidate local officials, and kidnap wealthy foreigners. Such situations cry out for hard power: people who pry the weapons from the cold dead hands of the warlords, and convince the warlords' followers to get onboard or else meet a similar fate. The aftermath of this dynamic, played out dozens of times in the past several decades, is what allows the guys in wingtips and the gals in sensible pumps to do development assistance, legal reform, institution building, etc.
In this respect, I agree with Messrs. Killebrew and Carafano. Hard power still matters. Unlike them, however, I would much prefer that locals be responsible for adjudicating these internal disputes, and, failing that, that others beside the U.S. military be capable and willing to deliver that hard power.
Paul Starobin at the National Journal's Security Experts Blog has kicked off a spirited debate surrounding Europe's military capabilities (or lack thereof). The jumping off point in the discussion is Robert Gates's speech to NATO officers last month, in which Gates lamented that:
"The demilitarization of Europe -- where large swaths of the general public and political class are averse to military force and the risks that go with it -- has gone from a blessing in the 20th century to an impediment to achieving real security and lasting peace in the 21st." [Justin Logan blogged about this here.]
Starobin asks: "Can America Count On Europe Anymore?"
Is Gates right? What exactly does "the demilitarization of Europe" mean for U.S. national security interests? Should Americans care if Europe has to live in the shadow of a militarily superior post-Soviet Russia? Is NATO, alas, a lost cause?
In short, should the U.S. be planning for a post-Europe world? Does Europe still matter? Can we count on Europe any more?
It would be unwise for Americans to write off Europeans as a lost cause, congenitally dependent upon U.S. military power, and unable to contribute either to their own defense or to policing the global commons. We can’t count on Europe -- right now -- but that doesn’t mean we can never count on Europe in the future.
Americans who complain about Europe’s unwillingness to play a larger role in policing the globe, and who would like them to do more, should start by exploring the many reasons why Europe is so weak militarily.
Consider, for example, Europe’s half-hearted and inconsistent steps to establish a security capacity independent of NATO -- and therefore independent of the United States -- since the end of the Cold War. Such proposals have failed for many reasons, but we shouldn't ignore the extent to which Uncle Sam has actively discouraged Europe from playing a more active role. Most recently, Hillary Clinton expressed the U.S. government’s position that political and economic integration would proceed under the EU, but security would continue to be provided by NATO. This echoes similar comments made by the first Bush and Clinton administrations with respect to European defense. (See, for example, Madeleine Albright’s comments regarding European Defence and Security Policy (EDSP) in 1998).
Since many of the politicians in Washington want America to be more like Europe (including complete government‐run health care instead of the partially government‐run health care system we have now), it’s worth contemplating what that would mean for the economy.
America today is richer than Western Europe. Indeed, per‐capita living standards are about 30 percent higher in the United States — and that’s according to the statists at the Paris‐based Organization for Economic Cooperation and Development (see page 6 of this report). And we have been growing faster, which presumably should not be the case according to convergence theory (see Annex Table No. 1 of this OECD database).
It also seems that Europe’s economy is more likely to endure a double‐dip recession. Bloomberg reports:
Europe’s economy may be coming unstuck from the global recovery as governments to the south of the region struggle to reverse budget deficits and consumers in the north pull back spending. After the 16‐nation euro economy almost stagnated in the fourth quarter, data this week showed the weakness reaching into 2010. …“Europe is where we see the biggest risk of a double dip at the global level,” said Julian Callow, chief European economist at Barclays Capital in London. “Europe has been lagging and we’ve continued to see better numbers in Asia and now the U.S.” …“There are tentative signs that the U.S. economy may be pulling ahead from Europe,” [UBS strategist Nick] Nelson said in a Feb. 23 report… “The sovereign debt crisis in Europe’s periphery reinforces drags on euro‐area growth,” said Michael Saunders, an economist at Citigroup in London.
Left‐wing populists genuinely seem to believe that the economy is a fixed pie, so even though they are fundamentally wrong, their fixation on redistribution is understandable. After all, given their inaccurate view of the world, robbing Peter is the only way to lift Paul. What is more mystifying is why the (presumably) thoughtful left wants America to be more like Western Europe, where living standards lag America and the gap grows wider with each passing year. The only logical conclusion is that they are so fixated on differences in income (or, less charitably, are so resentful of success) that they are willing to make poor people worse off if they can impose even greater damage on rich people. As Winston Churchill noted, “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”
America may have dodged the bullet of Obamacare thanks to voters in Massachusetts, but even if the left ultimately succeeds in expanding government’s control of health care, the United States will still have more freedom than Europe. It seems that the European Union’s governing entities, the European Commission and the semi‐ceremonial European Parliament, combine the worst features of statism and collectivism from the entire continent. The Euro‐crats make lots of noises about subsidiarity and other policies to leave decision making in the hands of national and local governments, but virtually every policy coming from Brussels is a new power grab for unelected and unaccountable bureaucrats. The latest example is possible EU‐wide driving laws for the purposes of imposing absurdly low speed limits and to requiring foolish rules against more comfortable and safer large cars. Here’s what the UK‐based Express wrote about the topic:
Brussels bureaucrats want to slap draconian European Union driving laws on Britain’s roads in a new “green” campaign on motorists, it emerged last night. Measures being considered include a barrage of new maximum speed limits in town and city areas. British motorists could also be forced to undertake exams in “environmentally‐friendly” road skills as part of an EU‐wide overhaul of driving tests. And many large cars and other so‐called gas‐guzzling vehicles face being banned from newly‐declared “green zones” in urban centres. The latest threat of meddling from Brussels comes in an Action Plan on Urban Mobility drawn up by European Commission transport chiefs. …Mats Persson, of the Euro‐sceptic think tank Open Europe, commented: “This illustrates that the EU simply can’t stop interfering in every aspect of people’s lives.”
Meanwhile, a different tentacle of the European octopus is proposing that the European Union be given the power to audit budget numbers from member nations. Given the fiscal fiasco in Greece, this seems like it might be a reasonable step — until one remembers that the EU’s auditors every year give a failing grade to the EU’s own budget practices. The EU Observer reports on the issue, but the phrase “blind leading the blind” somehow did not get included:
…the European Commission has indicated it will seek audit powers for the EU’s statistics office, Eurostat, in order to verify elements of national government accounts. …Speaking to journalists after a meeting of EU finance ministers on Tuesday (19 January), outgoing EU economy commissioner Joaquin Almunia said greater Eurostat auditing powers could have avoided the mistakes that led to the Greek revision. He said the commission will propose “a new regulation in order to obtain powers, which we’ve already requested, to give Eurostat the possibility of carrying out audits.”
Last but not least, that same EU Observer story has a tiny bit of good news, or at least a dark cloud with a silver lining. Some of Europe’s governments want to impose an EU‐wide tax on banks. This certainly fits the theme of ever‐growing levels of bureaucracy and interference from Brussels, but the good news is that there is still (even under the statist Lisbon Treaty) a national veto on tax matters. So even though some of the big nations in Europe want to demagogue against the financial sector, the EU’s taxation commissioner (and former communist apparatchik from Hungary) indicated with sadness that such a tax probably would not make it through the process:
While discussion on Greece took up considerable time, EU finance ministers did have an opportunity to discuss a Swedish proposal for an EU‐wide bank levy to mitigate the effects of future financial crises. …British, Belgian and German ministers were amongst those who showed moderate support for the idea. However, outgoing EU taxation commissioner Laszlo Kovacs said it was unlikely to fly because of EU unanimity voting in the area of taxation.