Tuesday, May 8, 2012

“Europe’s Elections”

Sydney M. Williams

Thought of the Day
“Europe’s Elections”
May 8, 2012

In France, the Socialist candidate, François Hollande, won the Presidency. In Germany, Angela Merkel’s party, the conservative Christian Democratic Union, received only 31% of the vote in the northern state of Schleswig-Holstein, the Party’s worst showing in that region since 1950. Change is in the wind in Europe.

However, it is Greece that needs to be watched most closely. For the first time, both Communists and the Golden Dawn (neo-Nazis) will be represented when the Greek Parliament next meets. Together, they garnered about 14% of the popular vote, which indicates the level of frustration Greeks are feeling. Ninety years ago, in the aftermath of World War I, much of Europe, with its infrastructure annihilated, an overwhelming level of debt and a disillusioned populace, descended into anarchy. The response was Fascism in Italy and Spain, Nazism in Germany and Communism in the Soviet Union. And the consequence, as we all know, was World War II and the deaths of perhaps 100 million people.

As the Wall Street Journal noted yesterday, with this election Greece will have the most fragmented Parliament since the restoration of democracy in 1974. The largest gains, in percent terms, were made by the extremists at either end of the political spectrum. The Coalition of the Radical Left, including the Communist Party, won 16.4% of the vote, triple what they won three years ago. “Other” right leaning parties, including the neo-Nazi Golden Dawn Party, won about 18% of the vote, more than three times what they won in 2009. Greece’s two mainstream parties, Pasok (socialist) and New Democracy (conservative), garnered 33% of the vote, compared to 77% in 2009.

There seems little doubt that the origin of Europe’s problems lie with the failure of socialism. It was understandable that following the Second World War people and governments were exhausted. The desire to live peacefully was foremost in people’s minds. At the end of 30 years of war and depression, Socialism was seen as providing what would be best for all. That meant having the wealthy and middle class fund a welfare state; and that they did for many years. Incomes and wealth tended to coalesce around a neutral level. But it was a fiction that did not allow for people’s behavior and desires. People, as Immanuel Kant has noted, are not perfect. It makes little difference whether they work in public or private sectors. Greed infected some in private business; corruption became rife in the public sector. Demand for government assistance began to exceed the ability of government to provide. Unions, working hand-in-hand with government, became intransigent, and utterly unrealistic, in their demands. The law of diminishing returns also applies to tax rates – a lesson Art Laffer demonstrated thirty-five years ago in the U.S. Productive people either leave the country (many emigrating to the United States) or, more commonly, join with bureaucrats to find ways of eluding tax obligations (think Warren Buffett and General Electric.)

In addition and equally harmful, paternalism generates dependency. As states assume an ever-increasing role in the lives of more and more of their people, it is only natural that correspondingly smaller numbers of people generate (and retain) most of the wealth – creating the antithesis of socialism’s goal. It is why socialism never works over the long term, and why democratic capitalism, while not perfect, is the only system that does.

Socialism ultimately leads to despotism, as those who lived in Eastern Europe in the post-war period learned. A consequence of democracy is that it allows criticism. For the young especially, the grass often seems greener on the other side of the fence. In his 2005 book, Post War: A History of Europe Since 1945, Tony Judt wrote of Rudi Dutschke, West Germany’s most prominent spokesman of the 1960s student movement: “When Rudi Dutschke paid a fraternal visit to Prague, at the height of the Czech reform movement in the spring of 1968, local students were taken aback at his insistence that pluralistic democracy was the real enemy. For them it was the goal.”

The biggest risk to capitalism is the socialization of risk, which is what happened in the U.S. in 2008-2009, and continues to this day both here and in Europe. The Dodd-Frank Bill essentially institutionalizes the concept, in that “too big to fail” banks are permitted, nay encouraged, to get bigger with no mandatory, concomitant increase in equity capital, and are not allowed to fail; thus taxpayers take the hit. Capitalism’s greatest restraint is the threat of bankruptcy. Remove that fear and more leverage will be taken on and more risk will be assumed. As Allan Meltzer, professor of economics at Carnegie Mellon, has often said, “Capitalism without failure is akin to religion without sin.” It is impossible to live in any system pain free. There are always winners and losers. The key is finding a system that provides the greatest opportunity for the most people, while retaining human decency and a moral sense.

An essential problem with the Euro is that it was created without any centralized fiscal or political authority. The currency exists, but there is no central taxing authority. It is hard to believe that it can survive as it is. The Euro has afforded Germany an exceptionally low valued currency, while doing the opposite for countries like Greece, Italy, Spain, Portugal and Ireland. In other words, had Germany still been using the Deutsche Mark and Greece the Drachma, Germany’s exports would have been lower and tourism in Greece would have been greater. Freely trading currencies adjust to changing economic conditions. On the other hand, interest rates in Germany would be even lower than they are, while bond vigilantes would have given earlier warning to Greece’s wayward ways. A strong Euro and relatively low interest rates during the 2000s lulled Greece and other PIIGS nations into believing that their profligate ways could continue.

But the election in Greece has thrown a wrench into the machinery of the Eurozone. The two centrist parties, Pasok and New Democracy, while receiving only a third of the popular vote will get half the seats in Parliament because of a peculiarity in Greek law that grants the party with the most votes (New Democracy) an extra 50 seats. But that means Parliament will not be representative of the way people voted. Conventional thinking in Europe seems unaware of the depths of the feelings of the Greek people. That supercilious and unrealistic sense, still rampant in Brussels and Berlin, could be seen in an EC spokesperson quote yesterday. Bloomberg reported: “The European Commission said the next Greek government needs to abide by bailout terms agreed by its predecessors, and voiced confidence Greece will stay in the Euro, spokeswoman Pia Ahrenkilde Hansen told reporters in Brussels today. She called on Greece to form a ‘stable’ government.” Yes, Pia. Of course, Pia. Whatever you say, Pia! Regardless of Pia’s pleas, however, instability and uncertainty reign in Greece.

What Greece needs is a new start. It seems implausible that they can do it with the restrictions levied by the Eurozone. Officials in Brussels and in Athens should be searching for a way that allows Greece to exit the Euro in the least disruptive manner, even if it is over a period of years. Profligacy, as practiced in Athens, is no longer an option. Austerity, as prescribed by Berlin or Brussels, does not appear viable. Those who claim that the best route forward is growth are correct. But there are diametrically opposed philosophies as to how to achieve growth. Should the state lead? Should private enterprise lead? Or should it be some combination of the two and, if so, what should be the balance. Supply-side economics – my choice – suggests the best way is via the private sector. But, no matter which path is chosen, the immediate future is likely to get worse. There is no way to avoid that. The hole they have dug is too deep. But if the people have confidence that a way forward has been found, things can improve quickly. The biggest risk is that a charismatic, telegenic leader arises from one of the extremist parties, as Hitler did in Germany, Mussolini in Italy or Franco in Spain.

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