As I have explained on numerous occasions, Europe’s crisis is not a regular recession. It is a structural crisis that will change the European economic landscape for the foreseeable future. The children now growing up in Europe will live a life less prosperous than their parents, who are now in their 30s or even 40s, who in turn find themselves having to work harder than their parents to achieve the same standard of living.
With youth unemployment exceeding 20 percent in most EU member states, and GDP basically having ground to a halt, the young in Europe are fighting an uphill battle to just get a start on some kind of self-determined life. This, together with widespread unemployment among adults and no end in sight to the crisis, opens the door to a grim future for the Old World. The only way to avoid this scenario is for Europe’s political leaders to give up on the welfare state and let loose the private sector. Free-market Capitalism, for short.
Sadly, that is probably not going to happen. Instead, more and more voices are calling for the continent to double down in defense of the welfare state. The EU Observer reports, starting with an essentially valid but not exactly meaningful criticism of current austerity policies:
Up to 25 million more people in Europe are at risk of poverty by 2025 if governments continue with austerity policies, international aid agency Oxfam has said. In a study released Thursday (12 September) ahead of an EU finance ministers’ meeting this weekend, Oxfam said there are lessons to be learnt from deep cuts made to social spending in Latin America, South East Asia and Africa in the 1980s and 90s, where it took 20 years to get back to recover.
So long as austerity is focused on preserving government in a tighter economy, it will have disastrous effects on the economy. If instead austerity was motivated by a genuine ambition to roll back, and eventually eliminate, the welfare state, then the situation would be much better for the private sector. A roll-back strategy combines spending cuts with well-designed, targeted tax cuts to give the private sector room to replace what government is cutting back on.
Unfortunately, rolling back government is the last thing Europe’s politicians want to do. Their sole purpose with austerity is to save as much as they can of the welfare state, even if it means destroying the future for generations of Europeans. What Europe needs is free-market reforms, lower taxes, a gradual privatization of the welfare state and constitutional reforms to guarantee that big government never happens again.
Again the voices in favor of such reforms are few and far between while the voices with the opposite message are loud and high-pitched. Euractiv again:
“These policies were a failure: a medicine that sought to cure the disease by killing the patient. They cannot be allowed to happen again. Oxfam calls on the governments of Europe to turn away from austerity measures and instead choose a path of inclusive growth that delivers better outcomes for people, communities, and the environment.” Greece, Ireland, Italy, Portugal, Spain and the UK – countries that have pursued budget cuts most aggressively – are soon reaching the rank of most unequal countries in the world. “The gap between rich and poor in the UK and Spain could become the same as in South Sudan or Paraguay,” said Natalia Alonso, head of Oxfam’s EU office.
This is precisely the wrong way to go. Income differences are irrelevant, and to see why, let’s ask Natalia Alonso where she would prefer to live the life of a poor citizen, the United Kingdom or South Sudan.
Nevertheless, the consequences of this focus on “inequality” is that strong voices are pushing for a restoration not of the prosperity-producing private sector, but the prosperity-consuming welfare state. By throwing in comparisons to deplorably poor, undeveloped countries with questionable property-rights traditions and economies perforated by corruption, statists turn a blind eye to structural and institutional factors that really matter in building free, prosperous societies. The Euractiv article on the Oxfam report is a case in point. Having mentioned South Sudan and Paraguay in passing it moves focus back to Europe:
As an example, mortgage laws in Spain see banks evict 115 families from their homes every working day. Meanwhile, almost one in ten working households in Europe now live in poverty and the trend is worsening, the report notes. Child poverty is also rising and workers who do get paid often do not have enough to support their families. In the UK and Portugal, real wages have fallen by 3.2 percent over 2010-2012. The real value of wages in the UK is now at 2003 levels. Italy, Spain, and Ireland all recorded decreases in real wages over this period. Greece has recorded a fall in real wages of over 10 percent.
Yes, Europe is turning into an economic wasteland, and poverty is returning. As an example, Greek unemployment is still rising, hitting 27.9 percent in July. But to somehow compare that poverty to what the South Sudanese experience is intellectually disingenuous. Europe’s population is sinking into industrial poverty, a new form of poverty, best compared to what people in Eastern Europe experienced under the Soviet era. They had access to most of the basic products you expect in an industrialized society, but at basic quality and with no prospect of ever being able to improve their lives. This is a bad future for Europe, and a waste of an economic heritage from generations of hard-working Europeans, but it is still a life vastly better than the life the poor endure in South Sudan.
That said, the medicine for eliminating both forms of poverty is largely the same. Industrial poverty is the result of the welfare state, and can only be eliminated through the elimination of the welfare state. That means doing away with the destructive consequences of decades of social democracy, returning instead to free-market Capitalism.
By the same token, the only remedy for poverty in an under-developed country like South Sudan is free-market Capitalism.