Tuesday, September 4, 2012

Reflections on Eastern Europe

For those wondering....I have been traveling through Eastern Europe for the past three weeks, spending time mostly in countries that emerged from Soviet dominance in 1989-91.  I visited some of these countries before the Soviet breakup and the difference is breathtaking.  Freedom is breathed on every street corner.  Gone are the gray and dismal lines of people shuffling along the streets with their eyes on the pavement.  While there may be issues here and there -- there always are issues when people are free -- there is no question that all of these countries are in a better situation.

Putin is, of course, not happy about this.  Gone is the Soviet empire.  Eliminating discord by imposing totalitarian dictatorships is out of style in this part of the world.  These folks appreciate freedom in a way that the western world cannot appreciate, as the western world gradually gives up the freedoms that took centuries to put in place.

I am now in Prague in the Czech Republic, where the dismantling of the Soviet Empire received its first expression in the "Prague Spring" of 1968 and later in the "Velvet Revolution" of 1989.  The President of the Czech Republic, Vaclav Klaus, is a Ph.d economist and is the most conservative leader of any country in the world.  He is chairing the Mont Pelerin Society meetings here in Prague, which is a varied collection of libertarians and conservatives from all over the world.

This Euro is a hot topic here.  None of the countries that I have visited use the Euro but they are all, but one (the Ukraine), members of the European Union.  There is widespread agreement here that the Eurozone will not survive the current crisis.  The numbers provide no prospect of survival.  It is possible to 'extend and pretend' by having the ECB buy Spanish, Italian and Greek bonds.  But, that strategy only puts off, briefly, the ultimate outcome.  The Eurozone cannot pay its bills.   It's that simple.

It is well known here that the US situation is no better.  Besides the well known entitlement fiasco (a $ 70 trillion problem), individual states in the US (Illinois and California) are careening toward bankruptcy at a fast clip.

The Eurozone and the US have essentially the same problem.  As societies get wealthier they decide that their governments need to do things, more things.  But, since these things cost money, these societies simply borrow it -- on the open market -- pledging the resources of unborn generations.  For a while, this seems to work.  But it doesn't work any more.  There is no set of taxes, spending cuts or anything else that can make it work.  The only mystery is when and how it collapses.

Most of the problems in the western world are bi-partisan in nature.  This isn't a situation of Republican vs Democrat.  Both political parties endorse and have supported the growth in entitlements and the growth in the regulatory and tax environment.  The same is true in Europe.  It seems democracy is ultimately a ticket to big government, improperly financed.

But those countries not in the Eurozone are generally in a much better position.  Countries in Asia are sitting well also.  Many of these countries have not shackled themselves to massive entitlement programs and most of them have high domestic savings rates.  As the western world tries to find its way out of an impossible dilemma, the Asia nations and the non-Euro nations of Europe face a much brighter future, even if the present road is a bit murky.

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