Lessons from Europe's Winners and Losers
Spain probably has to spend the equivalent of 20% of GDP bailing out its bankrupt banks. It won't quite bail them out: the $85 billion of subordinated debt of the banks -- two-thirds of which is owned by individuals -- will be vaporized, so Spaniards will lose a good deal of their savings. If Spain has to reduce debt payments to creditors like Greece, other European banks (mainly French) will get hung out to dry just like the Spanish banks. Their subordinated debt will vaporize, and the French will lose a large part of their savings. It's easy to fix a financial crisis when you can put the damage back to individuals, insurance companies and pension funds. A lot of Europeans will get poor, fast. And the Chinese, or the Germans, or the Canadians, or someone with ready cash will come in and recapitalize the bankrupt banks. The Germans will be left with a lot of loans to the European Central Bank. They'll live with it.
The worst possible thing would be to pour more public money into corrupt and inefficient economies and subsidize their failures, as President Obama proposed at last week's Group of Eight summit. Reforms would help. Some of my conservative colleagues seem to think that if you sprinkle supply-side fairy dust on the Club Med economies they will roar back to growth. In fact, labor market reforms would work wonders in Italy, which has very low private debt, lots of public assets, and many pockets of strength. In general, though, these economies deserve the nasty wake-up call they are going to get. The trouble with the southern Europeans is that they insist on combining familial amoralism with state dependency: everyone views the state as an enemy when it comes to paying taxes, but insists on handouts and protection from the state. In the case of Spain, you can't get there from here, as the Maine farmer told the tourist. (Portugal is an exception. The stoic Portuguese work had and pay their taxes, which gives that small country a better shot than Spain.)
Spain should serve as Schreckensbeispiel (a horrible example) to Americans. If we do not give Americans the opportunity to realize their dreams, be the best in the world, hit the ball out of the park, go for the gold, we will fail as a nation. In a winner-take-all world the devil takes the hindmost. If we penalize the winners, we guarantee that all of us will fail. Spain shows how quickly a seemingly prosperous country can come apart when its entrepreneurial engine stalls. If we don't eject the most anti-business president in American history, we will look not like Europe, but like Spain.
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