I’ve frequently commented on Europe’s fiscal mess and argued that excessive government spending is responsible for both the sovereign debt crisis and the economic stagnation that plagues the continent.
But it does seem that things have calmed down, so the readers who have submitted questions about whether the fiscal crisis has ended obviously are paying attention.
I have two responses.
- My first answer is very mature and thoughtful: HAHAHAHAHAHAHAHAHA, are you ;@($&^#’% kidding me?
- My second answer is a bit more guarded and circumspect: No. To be more specific, the immediate crisis may have slightly abated, but I have no confidence that the long-run problem has been solved.
But let me start with some good news. Most of the hard-hit European nations have finally begun the cut spending. And when I say cut spending, I mean they actually spent less in 2011 than they did in 2010 (unlike the fake version of spending cuts that you find in the U.S. and U.K., where spending simply grows at a slower pace).
We don’t have data for 2012, but I wouldn’t be surprised if many of the PIIGS nations also cut spending last year as well.
Now for some bad news. Unlike the Baltic nations, the PIIGS dragged their feet and didn’t reduce the burden of government spending until they had no choice.
Moreover, they all imposed crippling tax hikes. Indeed, the tax increases in Greece were so severe that even the International Monetary Fund warned that the country might be past the Laffer Curve revenue-maximizing point.
So while long-overdue reductions in spending meant less money was being diverted from the economy’s productive sector, higher tax rates have discouraged entrepreneurs and investors from creating jobs and wealth.
So what’s the net effect?
From an optimistic perspective, the fiscal situation should stabilize if governments keep spending under control. Some additional spending cuts would be very desirable since government spending consumes 45 percent-50 percent of GDP in these nations, which is at least double the growth-maximizing level.
“I’m going back in my bottle if you don’t cut spending!”
But even if these nations merely abide by Mitchell’s Golden Rule and restrain spending so that it grows slower than the private sector, that would be progress.
The reason I’m not optimistic, though, is that I don’t sense any commitment to smaller government. I fear governments will let the spending genie out of the bottle at the first opportunity. And we’re talking about a scary genie, not Barbara Eden.
And to make matters worse, Europe faces a demographic nightmare. These charts, reproduced from a Bank for International Settlements study, show that even the supposedly responsible nations in Europe face a tsunami of spending and debt over the next 25-plus years.
So you can understand why I don’t express a lot of optimism about European economic policy in this interview with Canadian TV.
The ostensible topic was European-wide financial regulation, but that topic is really a proxy for the fact that some nations want to bail out their financial sectors. But they’re in such lousy fiscal shape that they can’t borrow the money that would be needed to prop up their dodgy banks.
So I pointed out that European-wide regulation wasn’t the right answer. It wouldn’t make banks safer (since it would be based upon the deeply flawed Basel regulations), but could become a vehicle for nations such as Germany to further subsidize countries such as Spain.
But I hope I got across my main point, which is that these nations are burdened with too much government and their problems won’t be solved with more handouts, regulation, or bureaucracy.
In other words, there’s no substitute for genuine spending cuts implemented by the nation states of Europe.
P.S. Just in case you’re under the impression that only cranky libertarians think government is too big in Europe, I invite you to peruse this research from the European Central Bank, World Bank, and National Bank of Finland.
P.P.S. To close with some European-themed humor, we have three videos: 1) A romantic comedy involving Mr. Greece and Ms. Germany, 2) Hitler learning about the European downgrade, and 3) A Greek perspective on Germany.
P.P.P.S. Heck, I can’t resisting sharing this cartoon, this Dave Barry mockery, and the non-PC map of Europe as well.
International Liberty 
[…] few years earlier, when many of Europe’s welfare states were dealing with a fiscal crisis, I specifically explained why it would be a very bad idea to have “eurobonds,” which […]
[…] crises have since abated, largely because of direct and indirect bailouts. But the underlying policy mistakes haven’t […]
[…] keep in mind that the fuse is still burning on the European fiscal […]
[…] European fiscal crisis has not gone away. Yes, a few governments have actually been forced to cut spending, but they’ve also raised […]
[…] words, the welfare state can give you the basic necessities and allow you to survive (at least until the house of cards collapses), but it comes at a very high cost of lower growth and diminished […]
[…] stated, the ongoing fiscal crisis in Europe is causing more and more people to understand that we can’t remain on the current […]
[…] words, the welfare state can give you the basic necessities and allow you to survive (at least until the house of cards collapses), but it comes at a very high cost of lower growth and diminished […]
[…] stated, the ongoing fiscal crisis in Europeis causing more and more people to understand that we can’t remain on the current […]
[…] el Estado de bienestar le puede dar las necesidades básicas y permitir sobrevivir (por lo menos hasta que la casa se derrumba como castillos de naipes ), aunque a un costo muy elevado de menor crecimiento y la disminución de […]
[…] words, the welfare state can give you the basic necessities and allow you to survive (at least until the house of cards collapses), but it comes at a very high cost of lower growth and diminished […]
[…] stated, the ongoing fiscal crisis in Europe is causing more and more people to understand that we can’t remain on the current […]
[…] whether Europe’s fiscal crisis was over. Showing deep thought and characteristic maturity, my response was “HAHAHAHAHAHAHAHAHA, are you ;@($&^#’% kidding […]
[…] Question of the Week: Has the European Fiscal Crisis Ended? […]
[…] scheme of things, however, I think Europe is still headed down the wrong path. Here’s what I wrote back in January and it’s still trued […]
[…] finish up this post by speculating on what will happen next. I’m actually vaguely hopeful in the short run, largely because governments have exhausted all the bad policy options. It’s hard to imagine […]
Reblogged this on The Conservative New Ager.
Europe: The iceberg has been avoided, alas by steering the ship on a yet even more northerly course. Towards more and bigger icebergs. But the lemmings don’t see that ahead there is only the arctic. “A few more icebergs to avoid and we’re on our way to Tahiti” cry the Euro-lemmings.
Europe has pushed the temporary crisis into the future and returned closer to its normal mode of controlled decline, alas at a slightly higher pace. Europe has smoothed out the crisis into the future by spawning another layer of rising redistribution: interstate redistribution. So now the production incentives of both competent and less competent European citizens are blunted not only by the national taxes and indolence inducing local welfare benefits, but also by a whole new layer of nascent redistribution (solidarity is the marketing term) from more competent country to less competent country. Once this new redistribution layer is fully implemented, Europe — who was losing about three to four percent of its relative prosperity every year — by riding a one to two percent growth trendline in a world that grows by five — will now be growing at even less, thus accelerating its compounding decline.
Ponder for a minute what that means. A three to four percent growth trendline deficit relative to the world average, means that Europeans are sliding down the world prosperity scale at about 60% per generation (you can check my simple exponent arithmetic ). So let me state that again. At the growth rates that Europe has been growing in recent decades, every new European generation is losing its once privileged prosperity status by another 60%. By losing perhaps another percentage point in growth trendline, under the additional layer of intercountry redistribution, the loss will increase to 70% by generation. As they say in Greece, referring to times of war and famine : “Now that we’ve eaten the donkey, lets not make a fuss about the tail”.
Americans, with a two percentage point deficit on their US vs world average growth trendline, have a slower decline pace — it works out to “only” 40% loss of world prosperity standing per generation. But that was before ObamaCare and before Americans fully engaged the “dream” of becoming like Europe through HopNChange. Things are pretty grim in the western world these days, but lemmings keep moving forward. The slope is too steep now. Forward is the only possible move…
P.S. It was actually a leftist who said that ” humanity’s biggest failure was its inability to comprehend the exponential function”. Too bad he was not referring to the exponential function of economic growth, and the swift decline destiny of those voter-lemming countries that fail to keep up with it.
PPS. I think voter-lemming will eventually become one of the most characteristic new words for the western democracies of the early twenty first century. Will the voter-lemmings of western democracies let go of their redistribution dreams, or are we going to have to ride the decline all the way to the bottom? It is probably obvious what my bet is, since at every iteration of the decline cycle it becomes harder and harder to muster the strength to escape.
PPPS. Greece no longer has a Laffer curve. At best taxes are capturing an ever greater proportion of a shrinking pie. The size of the pie does not figure into the laffer curve, and that is its main omission compared to the Rahn curve. Greece is taxing everything, even more than it used to. VAT, fuel and other excise taxes hit the middle and lower classes. Mandatory collectivism has eaten all the motivation, all the wealth, and must now i evitably consume its parents: the lower and middle class voter lemmings who dreamed that one day someone more intelligent, someone more competent, or simply someone harder working would leave his family every morning to go and enthusiastically compete with the emerging world (and win!), so that an entrenched majority of voter-lemmings could be insulated from the consequences of mediocrity. These dreams end badly but the same script is playing throughout the western democracies with few exceptions.
PPPPS. My prediction? As soon as things get a bit better, the euro-voter-lemmings will go back full throttle to their old ways (See how the Czech and other countries are already forgetting the lessons of communism). But the additional intra-country redistribution system stays. My bet is that we will see very interesting, surprising things that we never imagined unfolding in the world in the next few decades. Keep an international view — and you bags packed.
PPPPPPS. The centrally planned, high density European cities which embody the city planning aspect of the mandatory collectivism that is so prevalent in Europe, has also suppressed people’s natural desire to have children. I’m not an expert on crowd psychology, but there is an antibiotic like effect. When population densities rise in a small space, people, like microbes, stop reproducing.