Belmont Club

Midnight Express

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The concern rippling through the financial markets is only incidentally to do with Greece. The Greek economy is very small relative to the global economy. A commenter called it “a rounding error”. The significance of the Greek debt crisis is the light it sheds on a bigger problem of European debt, which this diagram from the NYT illustrates.

That is the can of worms that is now opening up. Whether or not the sudden fall in the Dow Jones was exacerbated by a technical error should not obscure the main problem. The world has been living beyond its means. As Real Clear Markets explains:

Virtually every country in the EU spends more than it takes in and has made long-term fiscal promises to an aging work force that it can’t keep. A little over a year ago, economist Jagadeesh Gokhale, writing for the National Center for Policy Analysis, produced a pithy – and scary – summation of the fiscal challenges faced by Europe. Don’t read it if you have trouble sleeping.

“The average EU country,” he concluded, “would need to have more than four times (434%) its current annual gross domestic product in the bank today, earning interest at the government’s borrowing rate, in order to fund current policies indefinitely.”

In other words, Europe would have to have the equivalent of roughly $60 trillion in the bank today to fund its very general welfare benefits in the future. Of course, it doesn’t.

Things haven’t changed much since that study was done. So suppose they don’t put aside all that money. What then? By 2035, Gokhale reckons, the EU will need an average tax rate of 57% to pay for its lavish welfare state.

Today, Greece is only the tip of a very large iceberg. Portugal, Spain, Italy and Ireland together owe $3.9 trillion in short- and medium-term debts, an amount larger than their combined GDP, estimated last year at $3.3 trillion.

Only a realignment of spending with receipts can cure the patient. An analyst at the Economist exemplifies the problem European policymakers find themselves in. He argues that by refusing cut Greece loose they have made Portugal and Spain suspect. But they were also afraid that by cutting Greece loose they would make Portugal and Spain suspect. It’s a classic double bind.

This is the contradiction in the rescue plan. EU governments and the IMF refuse to discuss the possibility of an eventual rescheduling of Greek debt for fear that it would spark uncontrolled contagion. In fact, the logic may increasingly be the opposite. By refusing to admit that Greece faces an obvious solvency problem, whereas Spain, Portugal and Ireland do not, Europe’s policymakers have made it harder to draw a clear distinction between Greece and the rest. As a result contagion has intensified…

But Portugal and Spain are suspect — as well as many of the larger EU economies too. Their problems can be fixed to be sure. But they cannot be fixed by any kind of bridging loan, “put” or ‘shock and awe’ intervention. None of that will work in the long run. However things are stabilized in the short term, eventually a scaling down of the welfare state — and indeed the size of the Western state itself — will be necessary. There’s simply not enough money to sustain it. A wave of change, but not the kind of change that President Obama imagined, is following right behind the financial tsunamis. All of his ill-timed “investments”, like bloated Federal Health care, immigration “reform”, and cap-and-trade have come at a time when they simply can’t be borne. Institutions like featherbedded unions, monopolies and obsolete gatekeepers should view recent events in the same way that dinosaurs who looked up at an enormous descending meteor should. The enormous tower of quangos, EU commissions, massive agencies, vast entitlements is trembling beneath that most quotidian of assaults: lack of supply, “like a cut flower in a vase; fair to see yet doomed to die.”


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