European Profligacy

In his 1992 book The Culture of Contentment John Kenneth Galbraith said the cyclical failure of political systems to recognise and adapt to paradigm shifts was caused by the comfort of their beneficiaries: “Individuals and communities that are favoured in their economic, social and political condition attribute social virtue and political durability to that which they themselves enjoy. That attribution is made to apply even in the face of commanding evidence to the contrary.” This blindness to reality is more deep-seated in democratic systems because “the controlling contentment and resulting belief is now that of the many”.

This is, arguably, what is happening in Europe. On May 6 Greece’s two main parties, the socialist Pasok and the right-of-centre New Democracy, lost more than 40 per cent of their vote share, making the formation of a new government impossible and forcing new elections. One might be excused for believing they are being punished for their past actions. In fact, they are being punished for the opposite — trying belatedly to rectify the policies that have pushed Greece off the economic cliff. Asked what they thought of reality, Greeks voted to return to the economic fantasy land they used to inhabit. Greece’s looming return to the third world was caused by excessive public spending and borrowing, sluggish growth and an over-generous social welfare system. Greece is responsible for its sorry state — and for dragging the entire eurozone down into the same abyss — but the best voters could do was to reward angry populists from the radical Left and the radical Right who blame dark conspiracies and external forces for Greece’s troubles and, most importantly, plan to dump their problems at someone else’s door. Good luck with that. Austerity hurts — but previous profligacy could no longer be afforded.

This folly is not exclusively Greek. On the same day that Greek voters embraced their neo-Nazi and Stalinist pied pipers, France too elected to take a holiday from history and pretend that the costly privileges which left Europe with an unbearably burdensome public debt can be preserved not by cutting spending but by doing more of the same. If politics had its own Disneyland, it would be Europe. France’s new president believes he can restore the retirement age to 60, hire 60,000 more public servants, tax the rich and borrow more to finance economic rebirth. Yet in a country where government spending makes up 56 per cent of GDP and the rich are already overtaxed, these ideas appear more reckless than austerity. François Hollande thinks he can spare France the problem of borrowing costs by having the European Central Bank issue Eurobonds to finance public projects designed to boost growth, but this is not going to solve the debt problem, merely shift it from one account to another.

Yet the French bought into it — not before giving almost 30 per cent of the first-round vote to right-wing populists or unreformed Communists. As in Greece, there is nothing like a crisis to revive idiotic political doctrines. The centre must share responsibility for the current crisis. But its belated and reluctant embrace of those measures which are not just painful but also necessary if European economies are to survive the storm is being punished precisely because it is trying to force reality on a contented society.

The problem is not austerity versus growth. It is that our social model —whether in France or Greece or elsewhere in Western Europe — no longer works. With varying degrees of recklessness, European governments have sustained high standards of living and shrinking economic growth by increased public spending without factoring in the unintended consequences of this policy: that sluggish growth would leave them unable to finance a growing public debt and pay an ever-expanding welfare bill.

With only moths left in the state coffers, governments have no other choice than to tighten the belt or hang from it. Greece cannot pay state salaries and finance its debt without the massive bailout it was awarded last year. Spending money it does not have to spur growth would not generate enough revenue quickly enough even in the best of circumstances — so borrowing more and initiating stimulus packages is not an option. Reducing taxes to release a revenue-generating spending spree would be short-lived unless it could also jump-start the private sector. But this is unlikely until major structural reforms in the labour market occur, red tape is removed and borrowing is available again for investors to take risks. Austerity is the only path to recovery although it is strewn with painful steps; it is already causing the contraction of the economy.

All this was avoidable if Western European economies had reformed themselves when growth was relatively robust and public debt had not yet spiralled out of control. But contented societies refused to burden themselves with the necessary sacrifices.Now it is too late to emerge from this train wreck without significant casualties.

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