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Europe 2010: A Glimpse of America’s Economic Future?

Posted By Terry Miller On May 10, 2010 @ 5:30 pm In International | Comments Disabled

The Greek financial crisis and its spillover effects in Europe provide a scary look at America’s possible economic future if we don’t get our economic house in order.

Underneath the big bailout numbers ($146 billion rescue package for Greece; trillion dollar support for the Euro and European government bonds) are three related economic developments:

1. The Greek government is defaulting on its economic promises to its citizens – Wage concessions and overly generous pensions, work rules and social spending bought votes and support for the government.  Now the bills are due and the government can’t pay.

2. European government borrowing is becoming more expensive – Interest rates on Greek debt topped 12 percent during the recent crisis.

3. The value of the Euro is falling, down by about 7 percent against the dollar over the last two weeks – This increases the costs of imports to European citizens and fuels domestic inflation.

In Greece’s case, its economic over-extension is the product of years of heavy government involvement in economic decision-making.  When economic policy is driven by political considerations, the line of least resistance is often to spend more now and pay later.  Governments can, at least for a little while, avoid the market discipline that keeps private firms’ costs for both labor and capital in line. European labor costs, in particularly, have grown wildly out of line with world norms, and capital costs have failed to account for real risks of sovereign over-spending and default.

The U.S. has historically maintained more separation between government and business, avoiding the politicization of economic decision-making that has characterized European systems. Unfortunately, that wall of separation has all but collapsed under the weight of TARP, the stimulus bill, automotive bailouts, and the health care bill. What took years to develop in Europe seems to be happening in an instant in America.

The Greek crisis is providing a great object lesson for America.  If the United States continues to rush down the European economic path, we can expect a default on government promises (Medicare, Social Security, Health care), higher interest rates on U.S. government bonds or even a flight by foreign investors like China to alternative investments, and a drop in the value of the dollar, raising energy and consumer costs and spreading inflation throughout the economy.

As Ebenezer Scrooge asked the ghost of Christmas yet to come: Must these things be?  America has two paths, one good and one bad, from which to choose.  The good path is to cut government spending, reduce taxes and regulation, and unleash the entrepreneurial energy of Americans. Call this the high growth path. It’s the traditional American way, and the philosophy underpinning the Index of Economic Freedom [1].  The bad alternative is to increase spending, raise taxes, and increase government control of economic decisions. That is a low growth path.  It worked in Europe for a while. Not anymore.


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[1] Index of Economic Freedom: http://www.heritage.org/index/

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