November 14, 2011
Opinion
Illustration: Michael Mucci
At the weekend I went to a talk by one of the most impressive public intellectuals in Australia, Pierre Ryckmans. After the session, I asked him about the deteriorating economy of Europe.
''It's incredible,'' he replied. ''They are living in a fantasy.''
He summed it up with this: the European social democrats, and their allies in the bureaucratic class, have been living in a fantasy world that is now unravelling.
The country of Ryckmans' birth and adolescence, Belgium, has not had a federal government for more than a year (more than 500 days, in fact). Belgium has been run by a caretaker prime minister.
Brussels, the capital of Belgium and the base of the European Union, is split politically and demographically by a fault line between the (more productive) Flemish-speaking north and the (less productive) French-speaking south, with a large, rapidly growing and unemployment-plagued Muslim minority in the mix.
The first major bank failure in this year's euro zone crisis was in Belgium, when the Dexia group had to be bailed out by taxpayers. Belgium's public debt as a percentage of gross domestic product is almost 100 per cent, the highest in Europe outside Greece and Italy, both now in crisis.
So, the EU's policymakers in Brussels don't have far to look to find the failure of the intrusive, micro-managing, social-engineering, welfare-dispensing, pension-absorbing public sector - the obese state - that is the root cause of Europe's malaise.
Government spending is more than 50 per cent of GDP in the euro zone, while government revenues are about 44 per cent of GDP, according to the latest figures from Eurostat.
This deficit spending has been exacerbated by a great structural flaw, the power grab by the bureaucratic class and social democrats when they expanded their reach via the introduction of a single currency, to be managed by 17 different central banks, responsible to 17 different parliaments, reflecting 17 different cultures.
To keep this flawed edifice going, the entire euro zone ignored its own basic premise when the euro was set up in 1999: that a member state's budget deficit should not exceed 3 per cent of GDP and total public debt not exceed 60 per cent of GDP. Penalties would be imposed for breaching thresholds.
Today, the combined budget deficit of the euro zone is about 6 per cent, twice the accepted maximum limit set down by the euro agreement. The combined public debt is 85 per cent of GDP, more than 40 per cent higher than the safety threshhold the euro members set for themselves. No penalties were imposed.
The supposed paragon of thrift, Germany, which has been setting the agenda in the euro zone, has itself been in breach of the euro zone guidelines, with a 3.3 per cent budget deficit and 83 per cent public debt.
Herein is the fantasy: to maintain prosperity and growth, governments in several countries spent and borrowed trillions of euros to pay for bureaucrats, pensions, welfare payments and social programs. Greece is the most extreme version of this folly.
The real cost of the subjugation of reality by bureaucracy is revealing itself. The weaker support beams of the euro are fracturing.
The weekend resignation of Italy's longest serving prime minister in the past 60 years, Silvio Berlusconi, followed the attrition that took the former prime minister of Greece, George Papandreou, just days earlier. These two leaders and their governments were not toppled by voters but by a combination of policy demands from Germany and France and by the global credit market, now deeply sceptical that Europe can contain Italy's debt burden.
Berlusconi is a billionaire and Papandreou is a member of a Greek political dynasty, but both were rendered mere chaff in the wind by forces outside their own countries.
What has not yet been put into sufficient consideration is the deeper problem, the extent to which the euro zone malaise will place strain on democracy itself.
To resolve the crisis, members of the euro zone will have to give up basic rights of sovereignty to a centralised European technocracy with much greater monetary powers. Or some members will withdraw from the euro zone, with the certainty a deep recession will accompany the process.
If there is a middle way, closer to the status quo, it has yet to be revealed with credibility. The status quo is broken. The euro experiment has failed. The European Central Bank, fixated by its legal mandate of restraining inflation, is actively exacerbating the impetus to recession. Whatever happens, Greece is heading for a depression, Italy is in recession, and the entire euro zone will be in recession soon enough.
If all this seems far distant from Australia, it is not as distant as it appears. The same affliction that is dragging down Europe - excessive, unproductive government spending - has become a problem since the federal Labor government inherited a budget surplus and zero public debt in 2007, and then a global financial crisis one year later.
The federal budget deficit now exceeds the euro-zone guideline of 3 per cent of GDP. Public debt has risen dramatically from zero to about 25 per cent of GDP.
The size and scope of government has expanded. Farmers and rural communities have become concerned over basic land and water rights. A regressive and pervasive carbon tax on the economy has been passed into law.
Union militancy has been unlocked via the Fair Work Act. Productivity growth has sunk to near zero. The government has produced a conveyor-belt of gold-plated policy debacles.
Whatever excesses greedy corporate executives, gouging banks and casino capitalism have added to the mix, it is obese government that pushed Europe into financial crisis. Australia's government has thickened in the past four years, a process that really needs to stop.
