The European disease: a continent that holds itself back

Athens. Much of western culture and law can trace its origin back to this city of 2,500 years ago.

The ancient Athenians learned that democracy is fragile and can lead to bad outcomes, not that other governing systems have proved to be more successful over the long run.

One of the fatal flaws of democracy is the recurring irrationality of the people to vote for benefits for which they are unwilling to pay. The idea of getting something for nothing is so powerful that politicians have used the same con everywhere on the planet for thousands of years.

The end is always the same. The music stops when the cupboard is empty. Greece is exhibit A at the moment in displaying what happens when a country spends more than it produces without restraint. At some point, the lenders say: “No more. You must live within your means.”

For Greece, this has resulted in a 30 per cent drop in real per capita income during the last decade and an unemployment rate of 18 per cent.

Indeed, Greece was the first EU country to go into a managed debt default and a reduction in living standards to reflect “pay as you go”. Unfortunately, however, it will not be the last.

At some point in the not-too-distant future, both Italy and France are going to face a day of reckoning when they, too, will no longer be able to live on borrowed money.

There is no mystery to the European disease: excessive government spending is not justified on a cost-benefit basis, including many “green” projects that have failed, tax rates far above the revenue and welfare maximising rates that have only undermined the desire to work, save or invest, and regulations that make no economic sense and are so numerous and complex they only serve to undermine the rule of law.

Europe, as well as other parts of the world, is also killing itself by not having babies. Most European countries now have fertility rates well below that needed to keep the population stable (forget about growing).

A shrinking population adds to the relative burden of taking care of the elderly, with fewer workers to support an increasing number of retirees. And in Europe, an unsustainable downward spiral is underway.

Europeans have also undertaken many foolish “big green” projects that failed to reduce CO2 emissions and made the cost of energy non-competitive with the rest of the world.

The Germans are now going back to building coal plants. At the same time, the United States has embraced fracking, allowing it to move to cleaner energy (natural gas) and reduce both CO2 emissions and electricity costs.

Modern Europe is the result of the denial of physics, biology and microeconomics by too many politicians and two generations of ignorant voters.

The United States is now growing at more than twice the European rate and is enjoying full employment. In fact, there is no large developed state that is even close to the United States in terms of economic performance.

China continues to do well, but despite very rapid economic growth, its per capita income is still less than a fourth of the US’s. China has a long way to go, particularly in the modernisation of its financial system, which is still largely state-owned.

The main reason the United States looks so good is that Europe looks so bad. Despite its recent success, the United States still could do better. As an American, it is disappointing to see how many US politicians (mainly Democrats) have studied the causes of European stagnation yet are advocating many of the same policies that are destroying Europe.

On average, living standards are about one-quarter lower in the EU than in America, and unemployment rates are twice as high.

There is nothing inherent in the geography, climate, natural resources, or peoples of Europe that keeps them poorer. It is merely a function of bad policies and poor leadership.

What Europe, and the UK in particular, needs is a new Margaret Thatcher. A person clear-eyed enough to see what needs to be done, with the toughness and strategic sense to deliver it.

There are islands of success within Europe which can serve as good examples. Little, land-locked, resource-poor Switzerland has managed to build a strong economy and a very civil society with the rule of law.

The Swiss have even managed to earn a higher per capita income than the United States. If Switzerland can succeed, as it has, then there is no reason the other nations of Europe cannot do equally well – they simply need to stop making all the wrong choices.

Written by Richard Rahn

Richard W. Rahn is chairman of the Institute for Global Economic Growth and Improbable Success Productions.
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