“Cameron to Europe – Wake Up to Reality”

Sydney M. Williams

Thought of the Day

“Cameron to Europe – Wake Up to Reality”

December 15, 2011

Why should David Cameron, Britain’s Prime Minister, support a decaying system of Socialism in Europe? That may not have been what he said, but it could easily have been his message. The basic problem confronting both Europe (and the U.S.) has been one of promising what is no longer affordable – entitlements that were feasible decades ago when the workforce was substantially larger than the numbers in retirement. All the ministers and diplomats that have gathered in Lisbon, Brussels, Frankfurt, Rome and Paris, since the European Economic Community was first formed in 1957, have not addressed the shift in demographics coupled with too generous healthcare and retirement benefits that are a root cause of today’s debt obligations. “Carpe Diem” and the Hell with tomorrow has been the attitude of too many, especially those in the periphery of the Euro zone.

Europe, a continent that has seen more than its share of devastating wars over the centuries, essentially disarmed after World War II, and has lived peacefully for sixty-six years – a remarkable achievement given the last two Millenia. For defense, they have relied largely on the generosity of the United States via NATO. However, now that our federal debt has exceeded our annual GDP and our deficits are equal to more than 6% of our GDP (both numbers substantially above minimum Euro standards,) there is the real possibility that cuts in U.S. defense spending may be felt in Europe – just as Russia has become more aggressive in indicating a desire to rebuild the union they once had. Defense costs may be rising for the region, just as budgets are being squeezed, in Europe and the U.S. As much as we might wish it, DNA technology has been unable to remove the feckless gene present in political leaders that has led to wars in the past.

A European common currency – a grand idea in concept – suffered from a lack of fiscal and political unity. The ability to centrally levy and collect taxes and to direct public spending is critical to any such union. The Euro, as introduced, allowed profligate countries like Greece to benefit from relatively low interest rates, enabling them to maintain an unsustainable lifestyle, while more prudent nations like Germany were able to expand their exports, because the Euro proved a cheaper currency than the Deutschmark would have been.

Unification has never been easy. The merger of East Germany and West Germany, countries with a common history, language and heritage took more than a decade. One hundred and fifty years ago, Germany and Italy were comprised of separate states. However, their unions were made up of individual states bound by a common language, culture and a shared history. The European Union never had such advantages. Since size helps in trade, there are benefits to union. But, in my opinion, Europe put the cart before the horse when they went with a common currency before addressing the more difficult questions of political and fiscal union.

The consequences are a mess. Should the Euro break apart – still my guess – German exports will suffer and interest rates will rise for most of the Mediterranean nations. However, all would not necessarily be dark. Germany’s cost of money would likely decline further and Southern Europe’s export markets should pick up, as should their tourism. As long as any break-up is handled carefully, the effects, while certainly negative, should be manageable.

The agreement that was reached in Brussels last week – the agreement vetoed by David Cameron – would have, according to The Guardian, “conferred intrusive rights on European institutions to enforce budgetary policy in countries breaking the Euro’s debt and deficit rules.” Essentially, Cameron chose national sovereignty at the risk of isolation. The Prime Minister, again in the words of The Guardian, “demanded that any transfer of power from national regulators to an EU regulator on financial services be subject to a veto; the UK be free to place higher capital requirements on banks [and] that non-EU institutions operating in the City but not in the Eurozone, such as American banks, should be exempt from EU regulation.” Jeremy Warner, in the UK Telegraph heralded David Cameron’s decision, pointing out that there was nothing in the measures that would relieve their financial pressures: “With no fiscal or monetary transfers to compensate, peripheral nations are being forced into repeated rounds of self-defeating rounds of austerity in order to survive and pay their debts. The default mechanism of currency devaluation is also denied them.” Niall Ferguson, writing about David Cameron’s decision in The Daily Beast, added: “But he has done the right thing. And he will swiftly be vindicated by events on the cut-off continent.” The German demand for balanced budgets, given current financial conditions, would condemn periphery nations to prolonged depression. “There is,” Mr. Warner adds, “virtually no chance any time soon of these countries regaining competitiveness against an ever more competitive Germany.”

At bottom, the problem is a simple one: living beyond one’s means. After almost three decades of suffering and an enormous loss of population (1914-1945), Europe was ready for a new start. Democracy, with a socialist bent, was appealing. Birthrates blossomed in the immediate post-war years, providing the workers by the mid 1960s that allowed those who had fought in the War to retire early and comfortably. However, birthrates plummeted, beginning in the early 1960s. At the same time, longevity began to increase. Nevertheless, increasingly generous pension and health plans continued to be promised. Nobody did the math. Those baby-boomers – the pig through the python – are now beginning to retire…and now there are not enough workers to support their retirement.

While David Cameron has been roundly criticized by pro-Europeans in his own country and by many of the other 27 members of the European Union, he has done them a favor – forcing them to wake up to the root causes of their deficits and debts. Confidence in markets cannot be fully restored until politicians acknowledge policy mistakes that have led to this situation.