Sydney M. Williams
Thought of the Day
“The Death Throes of European Socialism?”May 29, 2012
“It probably is about time to judge the eurozone as a failed idea – and rarely is it wise to double down on failed ideas.” So wrote Tyler Cowen in Sunday’s New York Times, mimicking a piece by Martin Jacomb in last Thursday’s Financial Times. A single currency, while attractive in the abstract, is unworkable without common fiscal unity, regardless as to whether the seventeen Eurozone nations can issue bonds in common. The bigger question: Does the failure of the Euro mark the end of Europe’s experiment with Socialism? It is largely unasked, as leaders in several countries have based their careers on Social Democracy being sustained. Nevertheless, such speculation hovers overhead.
A small number of countries like Sweden (not part of the eurozone) have elected more conservative governments, reduced government spending and limited the role of unions, and so may be able to maintain a more modest version of social Democracy. Baltic and East European countries, recently emerged from the yoke of Communism, fully understand the many false promises of statism, no matter its name.
Democratic Socialism is a function of wealth. Poor nations are concerned about far more basic needs – shelter, adequate food, water sources, and defense against enemies. All societies depend upon a few to protect the many. But, as nations become richer, the greater is their sense of altruism, that more of the wealth should be redistributed, so that no one should suffer. This attitude gives rise to a sense of entitlement. It is not dissimilar to what happens in very rich families. A distant ancestor creates enormous wealth. Succeeding generations, who have benefitted from their inheritance, become increasingly distanced from what they consider to be the “crassness” of the talented founder of the family fortune. Some begin advocating policies that would have made impossible the accumulation of wealth in the first place. Eventually the money runs out and the heirs must go to work. Governments, like families, if they want to provide for the less fortunate, must encourage the creation of wealth. In much of Europe today, as in the United States, money is running out. The people will have to return to work.
The only rational response is an emphasis on free markets, private enterprise and a sense of individual responsibility. We must reduce dependency. People must be free to innovate, to take risks; those with capital must be incentivized to invest. Losses cannot be socialized. Regulation must ensure that no one enterprise grows so large that it risks our system. There should be no Long Term Capitals. When banks, businesses and unions become too large they create the foundation of crony capitalism, a problem with which the U.S. is currently wrestling, from banks “too big to fail” to favored companies like Solyndra. Such actions allow a crony-like, symbiotic relationship to develop between government, union management and large business.
Greece needs a government that will encourage entrepreneurship and investment; and investors need to understand that the opportunity for reward is accompanied by risk and involves individual responsibility.
The urging by many of the more profligate members of the eurozone countries, including France, to issue Euro bonds is simply an attempt to forestall the inevitable. Borrowing the name of Alexander Hamilton to legitimize their decisions is inaccurate and offensive. It is true that the first Treasury Secretary of the U.S. urged the national government to assume state’s debts incurred during the Revolutionary War, but it was not intended that the national government assume debts unrelated to the Revolution. That would be as though Washington would have the citizens of Indiana assume responsibility for California’s fiscal profligacy. When prodigality goes unpunished it only breeds further intemperance. While no one can foresee the future, I find it hard to believe that Americans would allow that to happen. Yet those like François Hollande and Mario Monti would have that happen in Europe!
“Greeks too Western to Pull Off Baltic Rebound, SEB Says.” The Bloomberg headline, quoting the head of Estonia for one of Sweden’s largest banks, is a not-so-subtle stinging acknowledgement that European Democratic Socialism, at least as practiced in the Mediterranean countries, has been an abysmal failure. If they want to resolve their problems, Europeans – not just the Greeks – will have to turn toward free market capitalism. To stay the current course condemns them to a slow but certain death.
The article makes the point that Greeks, for at least two generations, have directed government spending toward maintaining a social welfare system that they can no longer afford. As such, it has become impossible for them to adjust their behavior. The hand-wringing of bureaucrats in Brussels and Berlin, fail to recognize this simple truth. They argue for austerity on the part of the Greek government, but provide no roadmap that would allow stimulus from the private sector – tax cuts, relaxation of regulations and incentives to the aspirational.
David Malpass, in Thursday’s Wall Street Journal, understands the difference, a subject I broached last Monday in an essay: “Europe’s Quandary – Socialism or Free Markets.” Mr. Malpass writes, “The reality is that Greece’s government is imposing too much austerity on others and not enough on itself.” He goes on to add, ominously but accurately, “The U.S. is making the same mistake.”
Mr. Malpass suggests that the best answer would be for Greece to stay in the Euro, reduce spending and ask for Europe’s help as it downsizes government. But, to be successful Greece must also incentivize the private sector. I happen to agree with the people from SEB and suspect that it will only be under the duress of returning to the Drachma that will focus the Greek people’s attention on the necessity to returning to a government that respects and has faith in the individual and that foregoes dependency for personal responsibility. I also suspect that Brussels’ bureaucrats way overstate the disruptive consequences of Greece abandoning the Euro. There is no question that there will be a period of disequilibrium, but that is preferable to the torturous death Greece is experiencing under its current domination from Brussels and Berlin. Returning to the Drachma will give the country the flexibility necessary to move forward.
At the end of the day, the economy of Greece, representing about 2.4% of the Eurozone’s GDP, is a small enough not to cause a systemic problem. However, if contagion were to spread to Italy and Spain, the matter becomes far more serious. Those two countries represent 26.4% of the eurozone’s GDP. Monetary policy alone cannot solve what is in fact a decades-old, political-sociological problem. One could argue that the common currency has served to accentuate existing bad habits. For years, the Euro masked a deteriorating economic situation in Greece. Government spending and union demands continued, while the ability to pay for such entitlements eroded. There was no coalmine in which a canary could sing. Standing alone, the Drachma would have weakened, alerting investors. Instead, a Euro that remained relatively strong allowed profligate nations like Greece to borrow less expensively than would otherwise have been the case, while fiscally virtuous nations benefitted from a lower-valued currency, aiding exports (i.e. Germany.) On the other hand, a single currency has prevented the Greeks from devaluing their currency, as a means of correcting their downward spiraling economy.
A major problem of big governments is they construct bureaucracies that become self-perpetuating, and almost impossible to dismantle. We see that phenomena in Washington (and in capitals like Sacramento, Albany and Springfield.) Additionally, they generate myriad regulations with which all businesses must comply. Regulations become less about ensuring the safety of people and more about protecting unionized government jobs. It seems remarkable, for example, that among the thousands of pages of Dodd-Frank nothing has been done to rein in the size of banks, or the use of credit default swaps – an important contributor to the near meltdown of our credit markets four years ago, and which are now playing an important (and not helpful) role in the unwinding that is going on in Europe.
But back to Greece; while it appears increasingly obvious that Greece will abandon the Euro, it is not so clear that that act alone will cause the Continent to abandon the culture that propagated their Democratic Socialism. That, unfortunately, may take more time and more pain.