TAUBE: European bailout is a cop-out

OPINION:

Recent economic turmoil in Greece and Italy has frustrated investors and creditors, caused political upheaval and created increasingly unstable European markets. While that’s all unfortunate, the massive bailout pledge simply isn’t the answer to solve the region’s financial woes.

With respect to Greece, the government’s debt crisis has played out like a Greek tragedy. The local economy once was a model of efficiency, growing at an annual rate of 4.2 percent between 2000-2007. Unfortunately, the global recession wrecked Greece’s two major industries, shipping and tourism, and the government’s long-standing strategy of maintaining structural deficits dragged down the economy. Various austerity packages were introduced during 2010-11, but all failed to stop the bleeding.

The eurozone countries and the International Monetary Fund then stepped in. They proposed a 130-billion-euro bailout plan, including a provision with banks writing off 50 percent of Greece’s debt, or roughly 100 billion euros. Yet Greece’s then-prime minister, George Papandreou, had the audacity to reject this gift and called for a national referendum on the bailout. Faced with intense domestic and international pressure, Mr. Papandreou quickly dropped his plan and resigned in favor of a coalition government led by former European Central Bank Vice President Lucas Papademos.

Meanwhile, Italy’s economic situation was enough to make a great tenor cry. Although it’s the eurozone’s third-largest economy, it has a horrendous debt-to-gross-domestic-product ratio of 120 percent. Italy also has trailed average economic growth for European Union countries for more than a decade. In addition, the country’s government bonds were regarded as a huge financial risk, and the economy began to sink. This led to huge austerity measures during the summer and early fall to save Italy close to 124 billion euros, but further measures had to be passed when 10-year borrowing costs plummeted. Prime Minister Silvio Berlusconi was forced to resign in favor of an interim government to be led by former EU Competition Commissioner Mario Monti.

So, the bad guys are out, the good guys are in, and Greece and Italy are on the road to financial recovery. Problem solved, right?

Wrong.

Even though Mr. Papandreou’s government was socialist and Mr. Berlusconi’s government was conservative, both of them were cut from the same economic cloth. Sadly, the vast majority of European administrations support big government and a significant role for the public sector. Social services such as health, education and welfare are an understood part of the government machine. Individual and corporate tax rates are exceedingly high. While the private sector plays a role, it is viewed in a cautious and rather distrustful manner.

At the same time, many of the same political actors, with the same dogmatic views about state control, likely will find their way into these new governments. It already has happened in Greece: Evangelos Venizelos retained his position as finance minister in the new coalition. If Greek politicians can’t even bring themselves to remove the person who oversaw the biggest financial collapse in their country’s history, they’ve learned absolutely nothing from this episode.

The massive bailout plan may help in the very short term. But forgiving significant levels of debt with the wave of a magic wand won’t motivate this region to adjust its viewpoint. Unless Europe makes massive changes to its political and economic conditions, Greece and Italy - and other nations - surely will face greater economic hardship in the months and years ahead.

In other words, this bailout is nothing more than a cop-out. The real financial prescription for long-term European economic success is a healthy dose of fiscal conservatism.

This can be accomplished with a two-pronged strategy. First, there needs to be less state involvement and a decreased reliance on the public sector and government-run services. Reducing state control would mean more financial incentives in place to motivate Europeans to work harder and allow them to keep more money in their pockets each year.

Second, there needs to be an increased push toward capitalism and private enterprise. In other words, European countries should reduce the size of government; support broad-based tax relief; stop the push to nationalize banks and other industries; create tax incentives for small businesses and international companies; remove restrictive trade barriers to non-EU countries; and promote more individual rights and freedoms. This would help improve social conditions for all Europeans, create more understanding and recognition about fiscal responsibility and keep the economy out of government’s hands altogether.

It remains to be seen when Europeans would be willing to forgo their historical roots and truly embrace capitalism. If they don’t, the word “bailout” will become a regular - and feared - word in the European lexicon.

Michael Taube is a columnist and former speechwriter for Canadian Prime Minister Stephen Harper.