As the European Union debt crisis moves towards an ostensible resolution on December 9th, complications arise. Ratings agency Standard & Poor’s has warned that the failure to reach an agreement may result in an unprecedented downgrade of as many as 15 EU countries simultaneously. “Systemic stresses in the euro zone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the euro zone as a whole,” S&P said in a statement. Cutting through the economic jargon, a “resolution” of the crisis comes down to a single choice: there will either be a European Union, or individual countries will retain some semblance of national sovereignty.
As has become routine, the focus of the crisis centers around two European leaders, German Chancellor Angela Merkel and French President Nicolas Sarkozy. They are attempting to hammer out a plan that calls for more cooperation among the 17 countries that use the euro, most of which centers around tighter fiscal controls to prevent member states from overspending.
Yet the fundamental differences in each leader’s approach seem irreconcilable. Merkel would like to change the EU treaty itself, making rules regarding borrowing and spending stricter, and imposing penalties on countries that persistently engage in fiscal irresponsibility. Sarkozy agrees–sort of. He likes the basic concepts, but resists ceding more power to the bureaucrats in Brussels.
The reason? Unlike Merkel, Sarkozy is facing a difficult re-election in April. It is an election in which upstart challenger Marie Le Pen is currently ahead of Sarkozy 23 to 21 percent, according to a survey by Ifop for France Soir and a poll taken by the Harris Institute. Why does she resonate? Part of the reason is her contention that “France sacrificed to the EU basically all it had–the national currency, sovereignty over its territory, and independence in political and economic decision-making, eventually losing the status of a nation and accepting the role of a vassal of the EU and the dying Euro.”
It is a sentiment that resonates far beyond the borders of France. And that sentiment is largely triggered by a single concept: austerity. Austerity packages reveal the divide between what Europe’s socialist governments have promised and what they can actually deliver. Moreover, they reveal the unrealistic expectations of people long immersed in the cradle-to-grave entitlement mindset that is no longer sustainable.
Portugal offers some insight into the disconnect. Its parliament put together an austerity package that includes salary cuts, tax hikes and an increase in working hours for a country already enduring a recession. The package was necessary in order to secure a $104 billion loan in May of 2010. Yet Portugal is expected to remain in recession, and unemployment is expected to reach a record 13.4 percent in 2012. As a result, the country endured a union-organized strike on November 24th that shut down Portugal’s transport system, and triggered massive discontent throughout the nation.
Parliament reacted by reinstating previously suspended 13th and 14th month salary payments for civil servants earning less than 1,100 euros a month instead 1,000 euros. In other words, Portuguese civil servants have come to expect two extra months of salary every year. Anything less is an effrontery. One that rankles even more when it is presented as a necessity to save the European Union, as opposed to Portugal itself.
Italy offers another example. The new government, run by technocrat Prime Minister Mario Monti, has put together an austerity packed called “Save Italy.” It aims to raise more than $13.4 billion from a property tax, a new levy on luxury items, an increase in the value added tax (VAT), a crack down on tax evasion, and an increase in the pension age to 66. As with Portugal, unions have expressed opposition, and two of them announced a two-hour strike against the measures scheduled for December 12th. Also like Portugal, recession is almost inevitable, if not occurring already.
Why is recession inevitable? Two reasons. First, nothing in either of these austerity packages, or those of other EU nations involved in the same process, does anything to boost economic growth. As is pointed out here, four-out-of-five of Italy’s reforms involved raising taxes. Higher taxes are inimical to growth.
Second–and this is a four-star cautionary tale for the United States–the size and scope of government has become so large that cutting it down to manageable levels requires layoffs and spending cuts that will lead to recession. This paradox could have been avoided before the socialist parasite became big enough to devour the national host. Now some measure of pain is inevitable.
Yet it is resistance to that pain, at virtually all costs, that drives both the Keynesian-inspired stimulus machinations in America and the bailout mentality in Europe. Nobody, from the governments who engaged in reckless spending and financial institutions that underwrote it, to the people who benefited from unsustainable “goodies” bestowed as a result, want to bite the fiscal bullet. Everyone wants the grand unwinding of trillions of dollars of debt to be as painless as possible.
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