GHEI: No hope for Europe

OPINION:

The victory of socialist Francois Hollande in France on Sunday and the resounding defeat of the parties trying to push through bailouts in Greece amount to a clear rejection of austerity in Europe. That’s particularly troubling because the Continent has never actually tried to reduce its spending.

Europe is the epicenter of the debt crisis because it has built a lavish welfare state that feeds off the private sector’s productivity. Lightening the burden on private enterprise would free up some growth potential, but European politicians refuse to cede control. The result has been predictable: shrinking economies and higher unemployment.

Greece has been the only country where significant (by European standards) spending cuts have been implemented. Unfortunately, this minor budgetary trimming came with significant tax increases. None of the other countries in crisis have shrunk the size of their government or reduced the regulatory burden on the private businesses that create jobs. What they refer to as “austerity measures” are really just tax hikes and increased public debt.

The fundamental problem in Europe, and particularly in Portugal, Italy, Ireland, Greece and Spain, is that it is not possible to borrow one’s way out of a debt crisis. A 2010 study by the Bank of International Settlements (BIS) details the explosion in public debt as the economic turmoil began to grow in 2008. As the authors point out, the Organization for Economic Cooperation and Development’s estimates showed the public debt for all industrialized countries was expected to exceed the 100 percent mark last year.

So it’s not surprising that the overall fiscal situation has worsened considerably for almost all of the European Union countries - only Germany and the Netherlands have recently shown any sign of recovery. Unfortunately, even if the rest of the nations pull out of their economic tailspin, they will still be stuck with massive structural deficits - these are the deficits that are not caused by the economy being in the downswing of a business cycle. France has a structural deficit of 6.3 percent of gross domestic product, whereas Italy’s is a staggering 9 percent, and Portugal is not far behind at 6.8 percent. These gaps cannot be closed by “taxing the superrich” because they simply don’t have enough money to close a gap that wide.

There’s no getting around the math. The current system is unsustainable, and at some point, Europe will have to try real austerity that actually cuts spending. A few Baltic nations - Estonia, Latvia and Lithuania - have done so. Painful as the process was in the short term, they are back on the path toward growth.

We need to learn from this. The BIS study found the United States had a structural imbalance - that is, a mismatch between government income and expenditures - of 9.9 percent, the highest of any industrialized nation. We’re not paying the full price for our profligacy yet because, unlike Spain and Italy, we can finance our public debt at near-zero rates. That advantage won’t last forever. High debt acts as a drag on growth, making it that much more difficult to finance.

Public debt and interest on this debt are projected to explode in virtually all industrialized countries in the decades ahead. The time to practice real austerity is now, in Europe and at home.

Nita Ghei is a contributing Opinion writer for The Washington Times.