Until recently life was pretty good in most of Europe. Europeans have had, as Ed Yardeni of Yardeni Research puts it, “the best governments money can buy”. Their leaders “have provided them with all sorts of wonderful social benefits”.
Many have been employed by their governments to provide those benefits to others – those who can’t find jobs they want or those who are retired (rather earlier than people elsewhere). The problem is that the good life is expensive. While income taxes are high in Europe by the standards of everywhere else, they still haven’t brought in anywhere near enough to pay the bills (partly because the bills are too high and partly because of widespread tax evasion).
So while Europe’s government spending has long ranged from 40%-60% of GDP, revenues have ranged from 30%-50%. As a result of that gap, most countries are now running scary ratios of government debt to GDP. Default aside, there aren’t many ways out. The first is slow, painful, and not guaranteed to work – it is the half-hearted attempts of governments to introduce a small amount of what some call fiscal austerity and others call fiscal sanity. That’s what Europe is currently trying to do. The second is the one Britain is working on – talking loudly about mild budgeting while keeping interest rates well below inflation and hoping time will make the debt go away (‘financial repression’”). It’s more likely to work than the first option, but is just as slow and painful.
No one likes either option. That’s why across Europe people are voting to dump austerity for ‘growth’, by which they mean something impossible. They want a return to the pre-crisis days of willy-nilly spending and endless safety nets. But the twin problems of the West – high unemployment and gross indebtedness – can’t be magicked away. You can’t just vote for prosperity, you have to make it. So if Europe and Britain want real growth to return soon, they have do something radical.
What might that be? Suggestions welcome on my blog as usual. But a good paper from Tullett Prebon’s Dr Tim Morgan made the point that before we can reform our system we must recognise the basic problem. The reason modern capitalism doesn’t serve us well is not because it doesn’t work in principle, but because we have adopted a corrupt crony version of it which rewards insiders over outsiders, regardless of success.
We must stop defending the mess we currently have and promote real capitalism. That means slashing the size of the state; attacking regulation; improving the lot of entrepreneurs and introducing a simplified tax system (perhaps the flat tax George Osborne used to be keen on). If Europe – and we – don’t do these things, we may drift into socialism. Then we will do what Mrs Thatcher always said we would – “run out of other people’s money”.