Quo Vadis, Europe?

The Greek election last Sunday restored a rather fragile status quo in Europe. Instead of the immediate threat of a Greek secession from the euro, and the equally immediate threat of a ripple effect through countries like Spain and Portugal, the election gave Europe some breathing space. As you would expect, the political leaders of the EU and its major member states are using this space to frantically search for a way forward.

The question is: where does that way forward lead?

This is a question that, of course, the Europeans need to find an answer to, but it is also a very important question for America. There are two reasons for this. First, Europe is in such big trouble that the continent could actually sink into a permanent state of industrial poverty. One wrong turn, and Europe could experience the same decline that brought Argentina down from being one of the world’s most prosperous nations after World War I and all the way through the 1950s, to a nation with one foot in the industrialized world and one foot in third-world poverty. The Argentinian decline was caused in large part by irresponsible welfare-state policies, precisely what has pushed Europe to the edge of industrial poverty.

Secondly, for the last several decades America has slowly but steadily adopted more and more of the European welfare state, and since the current crisis in Europe is caused by the welfare state this means that we can safely expect to end up in the same dire straits where Europe finds itself today. How long that will take is an open question, but I stand by my prediction from 2010 that under our current fiscal and welfare-state policies we won’t go much beyond 2015 before we start sliding into the dungeon of austerity and the Dark Side of the Welfare State.

It is not an exaggeration to say that Europe’s future prosperity is at stake. But so far this has not even registered on the European political radar. Not that the leaders of the EU are unaware that they need to do something – they just aren’t aware of the right thing to do. They seem to believe that all they need to do is make minor adjustments to their current political and economic project, and everything will work out just fine. The EU Observer has a story that illustrates this well:

Italy’s technocratic leader Mario Monti is warning of dramatic consequences should leaders at next week’s EU summit fail to find concrete solutions to save the euro and prevent contagion. He told reporters in Rome on Thursday (21 June) that the doomsday scenario at the EU summit would invariably lead to higher borrowing costs on all EU countries. “There would be progressively greater speculative attacks on individual countries, with harassment of the weaker countries,” he said. An EU summit stalemate would risk turning Italians even more against the EU, he noted, with his government pushing through unpopular labour reforms, tax hikes and pension cuts.

This is, in a nutshell, what is wrong with Europe’s crisis management. They have made up their minds, solidly and permanently, that the euro and everything that goes with it is the way to the future. The euro came with a number of policy measures that were designed to preserve Europe’s welfare states, primarily budget balance mandates for the participating states. As the world can see, those measures have failed miserably, which would lead you to re-evaluate the intelligence in trying to preserve the welfare state. But not so in Europe. There, they accept the welfare state as an axiomatic truth – something that cannot be questioned under any circumstance – and design all their policies based on that.

On the contrary, the EU Observer reports:

Monti is also calling for a fuller banking union, a European deposit guarantee, and “new market-friendly policy mechanisms” to help struggling countries. The mechanism would apply to countries who “respect the rules on public finance and structural reforms”.

This is yet another layer of government spending and “lending” (which is spending by another name when it goes to countries like Greece and Spain) that aims to feed the struggling welfare states with even more revenue. The purpose is of course to preserve the welfare state at all cost.

Preservation of the welfare state comes with a hefty price. As Greece and Spain have shown, this price consists of sustained and ever harsher austerity policies. Such austerity drains the economy of taxes – if they go anywhere, it’s up – while giving less back. The result is even less opportunities for people to become independent of government. The economy is depressed, the tax base shrinks and the budget deficit grows.

As far as the Italian prime minister Mario Monti is concerned, Europe needs more of the same. But more of the same also means more of the same expanding support for totalitarian policies in Europe: in the Greek election some 40 percent of the voters supported parties with totalitarian policy platforms. This is a direct result of the desperation felt by many over the situation that Greece finds itself in today. And nothing says the same won’t happen in other parts of Europe.

Of course, no politically sane person wants to see totalitarianism rise in Europe. But the totalitarians in Greece, from Communist Syriza to fascist New Dawn, are promising to end the austerity policies and to restore the welfare state. This is of course impossible, or else it would have been done already. But the appeal of the totalitarians lies in their willingness to offer anything for a vote, and precisely for this reason, Europe’s leaders need to quickly learn the lesson from Greece. If they continue to try and save the welfare state with ever tougher austerity measures, the end result is going to be a destructive combination of industrial poverty and authoritarian governments.