Europe shows how a fat public sector consumes an economy
November 14, 2011
At the weekend I went to a talk by one of the most impressive public intellectuals in Australia, Pierre Ryckmans. After the session, I asked him about the deteriorating economy of Europe.
”It’s incredible,” he replied. ”They are living in a fantasy.”
He summed it up with this: the European social democrats, and their allies in the bureaucratic class, have been living in a fantasy world which is now unravelling.
The country of Ryckmans’ birth and adolescence, Belgium, has not had a federal government for more than a year (more than 500 days, in fact). Belgium has been run by a caretaker prime minister.
Brussels, the capital of Belgium and the base of the European Union, is split politically and demographically by a fault line between the (more productive) Flemish-speaking north and the (less productive) French-speaking south, with a large, rapidly growing and unemployment-plagued Muslim minority in the mix.
The first major bank failure in this year’s euro zone crisis was in Belgium, when the Dexia group had to be bailed out by taxpayers. Belgium’s public debt as a percentage of gross domestic product is almost 100 per cent, the highest in Europe outside Greece and Italy, both now in crisis.
So, the EU’s policymakers in Brussels don’t have far to look to find the failure of the intrusive, micro-managing, social-engineering, welfare-dispensing, pension-absorbing public sector – the obese state – that is the root cause of Europe’s malaise.
Government spending is more than 50 per cent of GDP in the euro zone, while government revenues are about 44 per cent of GDP, according to the latest figures from Eurostat.
This deficit spending has been exacerbated by a great structural flaw, the power grab by the bureaucratic class and social democrats when they expanded their reach via the introduction of a single currency, to be managed by 17 different central banks, responsible to 17 different parliaments, reflecting 17 different cultures.
To keep this flawed edifice going, the entire euro zone ignored its own basic premise when the euro was set up in 1999: that a member state’s budget deficit should not exceed 3 per cent of GDP and total public debt not exceed 60 per cent of GDP. Penalties would be imposed for breaching thresholds.
Today, the combined budget deficit of the euro zone is about 6 per cent, twice the accepted maximum limit set down by the euro agreement. The combined public debt is 85 per cent of GDP, more than 40 per cent higher than the safety threshhold the euro members set for themselves. No penalties were imposed.
The supposed paragon of thrift, Germany, which has been setting the agenda in the euro zone, has itself been in breach of the euro zone guidelines, with a 3.3 per cent budget deficit and 83 per cent public debt.
Herein is the fantasy: to maintain prosperity and growth, governments in several countries spent and borrowed trillions of euros to pay for bureaucrats, pensions, welfare payments and social programs. Greece is the most extreme version of this folly.
The real cost of the subjugation of reality by bureaucracy is revealing itself. The weaker support beams of the euro are fracturing.