Belmont Club

Odds Against Tomorrow

If misery loves company then Stefan Auer’s new article on European finances puts the American economic crisis in perspective. The Old is as broke as the New. And worse, it is really old. Quoting a recent study by the Max Planck Institute he says, “Europe, too, is basically broke.”

In addition to extremely high sovereign debt, most European countries – with the notable exception of Ireland and France – have problems with demography that the US does not have. European societies are ageing, and fewer children means that a steadily declining number of people have to serve the state’s growing welfare obligations.

The lack of money is already reflecting itself in cutbacks in welfare services in the UK, whose government plans to shed 500,000 public sector jobs. Today the French government formally raised the retirement age from 60 to 62, a decision which the unions have been fighting and have vowed to roll back. “The law to make French people work two more years for their pensions has been one of the most fiercely contested reforms among austerity measures being taken across Europe.”

“The protests are not stopping, we just have different views on how to proceed,” Jean-Claude Mailly, head of the more radical Force Ouvriere union told RMC radio. “We still think that demonstrating is not enough … we have to ramp it up … we need a strong day of public and private sector strikes.”

The government appeared equally determined.

Police in wielding riot shields cleared pickets and burning tyres at dawn at Total’s TOTF.PA Grandpuits oil refinery southeast of Paris. Scuffles broke out at the plant and one person was carried away on a stretcher after being trampled.

But whether all the protests in the world can produce a single more Euro to support pensions is a doubtful proposition.  Since the end of the Second World war European governments have spent their money on providing entitlements for their populations, leaving the burden of defense to the United States and a handful of European governments.  But money problems also means that European defense budgets, which have on average been a much smaller percentage of national income than America’s, are also also going to shrink.  Already small they are heading for the vanishing point. The BBC recently reported that Hillary Clinton, a politician not known as a hawk, expressed the worry that European defense spending would shrink to merely symbolic proportions.

It is unusual for a US Secretary of State to express such concerns so openly. … Washington has long made clear that in terms of military spending, its European Nato partners must try harder.

Nato struggles over the past few years to persuade some of its NATO allies in Europe to provide sufficient forces willing to face combat in Afghanistan with few caveats, and supply crucial equipment such as helicopters, led to bitter jokes amongst US troops.

They would say the acronym Isaf (International Security and Assistance Force) actually stood for “I Saw Americans Fight”.

And that was before the recession.

The UK is one of the few European countries to spend more than 2% of its GDP on defense. It was the heavy hitter in Europe. But as Defense Tech points out, the heavy hitter is now reduced to deploying aircraft carriers without aircraft.

The British army, already cut a third since the end of the Cold War, will lose another 7,000 soldiers, dropping to 95,500 Tommies from 102,500, one-sixth the size of the U.S. Army. Also gone will be 40 percent of the British army’s tanks and 35 percent of its artillery, thus making it very difficult to replicate the sort of armored blitzkrieg that Britain carried out against Iraq in 1991 and 2003. In the future Britain will be able to keep only one brigade of about 7,500 soldiers in the field long-term, well below the number deployed today in Afghanistan.

Both the navy and air force will also see manpower reductions, about 5,000 in each case. Only 40 new F-35 fighter aircraft will be bought, down from initial projections of 138. The navy will lose its Harrier jump jets and its flagship, the aircraft carrier Ark Royal. Britain will be left with one aircraft carrier but, ludicrously, without any carrier-strike aircraft until 2020. The Royal Navy will be allowed to finish building two new aircraft carriers, but only one will be operational; the other may be sold or mothballed. The navy’s fleet of destroyers and frigates—its workhorses—will shrink to 19 from 23, the lowest number of warships since the days of the Spanish Armada. A decision about replacing Britain’s aging Trident submarines, which carry its nuclear deterrent, has been postponed.

The Western Welfare State is out of both guns AND butter.  One person who isn’t worried is Paul Krugman. Krugman argued that these problems were the caused by the insufficient determination to print more money. Britain, he says, is a victim of the austerity “fad”. Just crank up the deficit machine and voila, butter and more butter.

But trendy fashion, almost by definition, isn’t sensible … the new British budget announced on Wednesday and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the Treasury secretary who told President Herbert Hoover … it boldly goes in exactly the wrong direction. It would cut government employment by 490,000 workers — the equivalent of almost three million layoffs in the United States — at a time when the private sector is in no position to provide alternative employment. It would slash spending at a time when private demand isn’t at all ready to take up the slack.

Why is the British government doing this? The real reason has a lot to do with ideology: the Tories are using the deficit as an excuse to downsize the welfare state.

He is not alone in that belief. The EU for example, continues to believe that Corpulence is Beautiful, especially when what is corpulent is itself. Bill Carmichael writes in the Yorkshire Post that Brussels believes now is precisely the time to increase their budget and salaries.

As nations across the globe make drastic cuts in public spending in the teeth of the worst recession for more than 80 years, one institution is entirely immune to any hint of austerity – the European Union. MEPs in Brussels showed they were entirely detached from reality this week by approving moves to extend maternity leave to 20 weeks on full pay, in a move that would cost British businesses about £2.5bn a year at a time when many are struggling for survival.

If that was not bad enough, our European masters then blithely demanded an inflation-busting increase in the EU’s budget of almost six per cent.

It is not certain that European taxpayers will agree, if they are asked. But cuts by themselves are unlikely to do more than slow the rot. The future itself has become bleak. Something has to change to bring productivity back into the future. UPI reports that student debt and unemployment are at all-time high, a fact which suggests that their investments in education are not likely to show a return unless something changes. That number, bad as it is, stands as a veritable beacon of hope among other, harder-hit countries. Arab News, for example, says that half of all Yemeni graduates are unemployed. The Guardian describes the problems of young Liverpudlians who can’t a job and can’t continue to collect a jobseeker’s allowance due to Tory cuts.  The youth employment situation Europe is so bad that the New York Times reports that one argument being marshaled against extending the retirment age is that it keeps graduates out of the job market.

“If older people work two years longer, we will be unemployed for two years longer,” said Maximilien Berne, an 18-year-old high school student who traveled an hour to make the march in Paris on Thursday. Myrtille Carpentier, 16, one of his classmates, said: “We are the future of France but nobody ever asks our opinion.”

This is an admission that the game has become a zero-sum affair. Only by dumping the old can the youth be served and vice-versa. If the pie is no longer growing that all future politics will be about the apportionment of the crumbs.  The fate of youth itself seems to have changed. The “future of France” won’t be much of a future without a job. A sixteen year old raring to deploy his productive skills in the world represents potential, but a person the same age facing a decade on the dole represents a liability. These are the hard issues that are now confronting a generation which once had it good, but are wondering if they can have it good for much longer.

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