Saturday, May 5, 2012

The Real Issues in Europe versus The Smoke

The media pushes the notion that somehow there is a "political" problem in Europe.  The Euro, they say, was a bad idea in the first place and should be abandoned.  Conservative as well as liberal economists push this notion.  Why the Euro, they say?  That's what caused the current problem.

A parallel theme is the idea that if Germany would just "step up to the plate" and use government pump priming to get their economy going, all would be well and prosperity would return to Europe.

This is "smoke."  Abandoning the Euro is completely irrelevant to the problems in the Eurozone.  Switzerland is not doing well because it is not in the Eurozone.  Switzerland is not devaluing their currency as a pathway to prosperity.  Nope.  The Swiss Franc is doing just fine and so is Switzerland, other than the fact that the Swiss live in an economic neighborhood that is collapsing around them.

There is nothing virtuous about having your own currency.  If that idea made any sense, then the soon-to-be-bankrupt state of Illinois would simply abandon the US dollar, form their own currency zone based upon the Illinois dollar, and step forth into a new world of prosperity.

The path to prosperity for Greece is not the abandonment of the Euro.  That solves no problems and creates new problems for Greece.  The answer is not a "fiscal union."  The US has a "fiscal union" and the US sovereign debt problems are worse than those in the Eurozone.

All of these suggestions of  "rearranging the deck chairs on the Titanic" are nothing more than smoke.  They appeal to the Krugmans and Obamas and Geithners of the world because they do not involve any hard decisions.  It looks like all you have to do is tax a few rich folks and make some kind of political agreement and then people can have free and expansive retirements, health care, education and -- best yet -- no one really has to work to get these things.  Even better, once you have a job, you can "goldbrick" indefinitely with no fear of termination, because most European countries outlaw job terminations by employers.  Yes, that is the utopia that the Krugmans, Obamas, Geithners envision.  Would that it were so.  Wouldn't life be simple.

But, there is a problem.  There is the same, nagging problem that bedevils the US as well as Europe.  Who pays?  Where will the resources come from to pay for the free retirements, free health care, free education, free this, free that?  The one percenters?  Is that it?

The problem that Europe faces is identical to the problem that the US (and Japan) face.  There are no provisions made to pay for the promises that politicians have made to their citizenry.  Universal health care, huh?  Why pays?  Folks like Obama and Krugman and their allies in the media and academia think that question is irrelevant.

The answer to the question "who pays" in Europe has been the folks who buy European sovereign debt.  As we learn every single day, that solution is evaporating.  European sovereign debt buyers are losing interest in funding elaborate free retirements, health care, vacations, education, and on and on to Europeans who choose not to provide any funding themselves for these things.  Soon, bond buyers of US federal and state debt will arrive at the same conclusion.

There are no more "sleight of hand" strategies available for Europe.  Now comes the inevitable economic and political chaos when we reach the "Emperor has no clothes" stage of the European debacle.  Reality has arrived and disaster is the only outcome.  Older Europeans are going to live out their lives in relative poverty.  That is their future.  There is no other outcome really possible.  The next generation of Americans face pretty much the same future.  There is no available funding for social security recipients twenty years down the road.  Ditto for state and local municipal pension funds.

As the Mariana Island pension bankruptcy this week reveals, when you finally reach the end game and there is no money to pay those who came late in this shell game, there is just no money.  That's it.  The Mariana Island pensioners will be receiving about $ 500 per month in retirement.  That's all there is. Hope that gets the job done!  Good luck with that!  That is the inevitable and inescapable outcome of politicians promising benefits that they have no intention of funding.

So, talking about easy political solutions, such as abandonment of the Euro or having the German economy "step up to the plate," is a fools game.  Nothing short of owning up to the real problem -- promising what cannot be delivered -- can get Europe (and the US and Japan) back on track.  Meanwhile, latecomers to the party -- people expecting lush retirements and free health care in their old age -- are in for a rude shock.  By talking generations of Europeans and Americans into thinking they don't need to provide for themselves, now there is no one that can provide for them.

The political class has caused the problem, but they cannot solve the problem.  There is no easy solution.  Painful outcomes are ahead that cannot be avoided by soothing or strident rhetoric.


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