Tag Archives: liquidity crisis

Welfare States in Europe can not keep their promises of goodies (Part 2)

I have been saying over and over that the USA is heading to Greece. I will post this story in two different posts. It should show us why the destination of European Welfare State is not a good one even though we are heading there fast under President Obama.

Flashing Red: European Debt Crisis Signals Collapse of Social Welfare State

By James Roberts and J.D. Foster, Ph.D.
August 16, 2011

Social Results of the Welfare State

For decades now, one of the most tragic costs of the European welfare state has been Europe’s structural unemployment, especially among the young, combined with welfare payments that turned unemployment into an acceptable—even desirable—status, while stripping those affected of their dignity and sense of responsibility. The recent riots in the U.K. are an ominous reflection of this failure.

One of the key questions now is: How much longer will workers and taxpayers in Germany and other relatively more fiscally prudent countries in northern Europe be willing to work into their late 60s to subsidize (via eurozone bailouts and managed defaults) their neighbors in southern Europe so that the latter can retire early in their 50s on generous state-funded pensions and go to the beach?[3]

The Next Monetary Policy  

The euro elites’ response to date has been to try to address the solvency crisis through fiscal policy, and the liquidity crisis through additional debt—ignoring the EU’s monetary policy failure because they have no politically acceptable solution. It is obvious where this will lead, as Heritage Foundation analysis has noted in the past.[4]

Maybe, instead, some of the PIIGS will decide to exit the euro. Or perhaps the northerners will leave the euro (and the euro-denominated sovereign debts of the PIIGS) behind and resuscitate the Deutschmark? One path or the other appears inevitable.

The European social welfare state has contributed mightily to this situation by making all of Europe less competitive relative to the rest of the world, which is why the U.K., though not subject to the monetary policy failure, cannot escape the growth consequences entirely. Meanwhile, Germany’s inherent strengths have allowed it to take advantage of its Euro-linked trading partners.

Lest there be any doubt, the underlying monetary policy failure is the euro. It is now quite clear that this policy was doomed, not solely because Europe failed to harmonize it with other policies, but because monetary union between fast-growth states and slow-growth states can only end in tragic monetary disintegration. The hope that it would cause slow-growth states to catch up was a pipe dream.

Will Europe’s elites succeed in making one more try to save the eurozone, perhaps by creating a central EU treasury that alone has the power to issue new debt for EU countries? This would guarantee that the PIIGS pay lower interest rates than their credit histories would mandate, while the north pays more.

French President Nicolas Sarkozy reportedly aims “to seize the Greek crisis to make a quantum leap in eurozone governance.”[5] The recent assertion by Berlin and Paris that a new eurobond is dead on arrival,[6] however, suggests Germany’s patience has just about run out—apparently, that quantum leap will have to be in a different direction.

For the U.S., Europe is the ultimate object lesson—a warning of what happens when government is allowed to run wild, with the resulting loss of liberty and fiscal deficits. Fortunately, though the United States has a single currency, it largely achieved the necessary conditions for such an arrangement to be successful long ago.

Rescuing Europe and Protecting the U.S.

It is almost certain that this crisis will produce something new out of Europe. The emergence, whether collectively or individually, of stronger European societies with durable financial and monetary regimes would certainly be in the best interest of the U.S. and the rest of the world.

As Ambrose Evans-Pritchard reports in The Telegraph (U.K.),[7] the likely short-term outcome is described by Daniel Gross from the Centre for European Policy Studies: “Germany and the other AAA states must agree to some sort of Eurobond regime. Otherwise the euro will implode.” However, as noted above, France, and especially Germany, have been stoutly opposed to a eurobond, and for very good reasons. Assuming Gross is correct in his assessment, and he most likely is, the future of the euro is bleak indeed.

Meanwhile, spending by the U.S. government—presently on track to consume one-third of the economy by the time today’s newborns graduate from college—must be reduced. Entitlements must be reined in and reformed; non-defense discretionary spending must be rolled back to 2008 levels.

To reduce federal spending and prevent economic collapse, U.S. policymakers should follow The Heritage Foundation’s plan in “Saving the American Dream.[8]

James M. Roberts is Research Fellow for Economic Freedom and Growth in the Center for International Trade and Economics, and J. D. Foster, Ph.D., is Norman B. Ture Senior Fellow in the Economics of Fiscal Policy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.