The latest news on the U.S. fiscal crisis is that President Obama is changing is mind on negotiations with Congressional Republicans. The man who would rather negotiate without preconditions with Iran’s Islamist thug regime than democratically elected American legislators has been pushed to the negotiation table by the looming threat of October 17. That is the date when, according to the Obama administration, the U.S. Treasury runs out of money and will default on its debt. Therefore, in order to avoid having to do the unconstitutional, namely to not make debt payments, Obama chooses to sit down with the only people on the face of the planet that he would never negotiate with.
In theory, if the president had ordered the Treasury not to make debt payments he could have been impeached. We will not know for a long time what has been going on behind the scenes in DC over the past couple of weeks, but it is noteworthy that the president suddenly decided that it was better to show a glimpse of leadership on the federal budget situation. It is an open question what the outcome will be, but at least there are talks and different views are being vetted, allowed to clash and then pave the way to an informed compromise. It may not be the best compromise in terms of fiscal policy, but the very fact that there is a vigorous debate in Washington, DC – and that the sides involved can take such harsh stances that the federal government shuts down for a while – is ultimately a sign that the American constitutional republic is in fact working.
As I explained recently, while the Europeans may be laughing at the American “bickering” and government shutdown, their own fiscal house is far from in good order. While there is a hot political fight over how to get the U.S. debt under control, the Europeans seem to have given up entirely on that front. Consider these numbers from Eurostat, reporting changes in debt-to-GDP ratio from first quarter of 2011 to first quarter of 2013:
Source: Eurostat; seasonally adjusted numbers.
Over the past two years, 23 out of the EU’s 27 member states (not counting rookie member Croatia) have increased their debt-to-GDP ratio. Portugal is worst: in the first quarter of 2011 their government debt was 95.1 percent of the Portuguese GDP; in the first quarter of 2013 it was 127.2 percent of GDP, an increase by 32.1 percentage points in two short years.
For the EU-27 as a whole, debt has increased from 80.2 percent to 85.9 percent. This is partly due to the fact that almost all of Europe’s economies are standing still, but the main reason is of course that the variables that drive spending in Europe’s welfare states are still in place. Much of government spending in a welfare state is on autopilot, driven by eligibility variables in entitlement programs. In Denmark, e.g., conventional wisdom among economists is that the legislature can directly affect about three percent of the annual government budget – the rest is governed primarily by welfare-state entitlement programs.
Needless to say, there is a connection between a GDP that stands still and a welfare state that has to dole out more money through its entitlement systems. But this only reinforces the point that Europe has a big debt problem: if structural spending systems run away with the government budget, you don’t sit around with your arms crossed. You dismantle those spending systems.
If you don’t, you will keep on borrowing. Which, again, is precisely what the welfare states in Europe do. Of the 27 EU states, 25 increased their debt in euros – only Hungary and Greece had a nominally smaller debt in Q1 of ’13 than in Q1 of ’11 – and the decline in the Greek debt was entirely due to the partial default almost two years ago. In terms of growth, their debt is back on an out-of-control path.
In total, the 27 EU states have borrowed another 1.1 trillion euros over the past two years. Five countries now have a debt that exceeds 100 percent of their GDP: Greece, Italy, Portugal, Ireland and Belgium. This is compared to two countries, Greece and Italy, two years ago. France is heading in that direction, with a ratio that has increased from 84 percent in 2011 to 92 percent today.
These are all bad numbers. But what is worse is that there is no debate in Europe about how to stop this debt growth. The austerity policies put in place by the EU, the ECB and the IMF have been embraced as fiscal policy gospel by Europe’s political leaders. Since austerity has been in place for four years now in some countries, and since the outcome has been utterly disappointing, it is high time for Europe to reconsider its current path.
For that to happen, though, you need an open and honest debate. America has an open and honest debate. Europe does not.
Guess who will prevail in the end…