World leaders congregating at Camp David this weekend for the G8 summit came to the joint conclusion that austerity measures, which drastically reduce government spending in troubled economies, are not the path out of the economic crisis for European nations. That heads of state favor centralized economic planning during a recession is disappointing but not surprising.
The leaders lobbed platitudes towards proponents of limited government and free markets by pledging a “firm commitment to implement fiscal consolidation,” which sounds vastly reminiscent of President Obama’s vague pledges to eliminate redundant federal agencies when he took office. I wouldn’t hold my breath waiting for cuts in spending. At the end of the day, this meeting is an endorsement of central planning. Dictating that investment must be steered towards infrastructure and education indicates a lack of respect for the resource allocation of the free market.
The lone voice of reason has been German Chancellor Angela Merkel, who made a case for reducing government’s debt and regulatory burden as a path to economic growth. Although Germany still faces budget issues, their situation is not nearly as bad as the rest of Europe’s, largely because of steps they took in the years prior to the economic crisis. Germany took steps to decrease pension benefits and reformed its tax code to encourage economic growth. Furthermore, Germany has taken pains to make unemployment “uncomfortable,” keeping the safety net from morphing into the hammock it resembles throughout much of Europe.
The European crisis is long-term and structural, and cannot simply be weathered by a short-term stimulus of its economies. The reason why European nations are going bankrupt is the existence of their expansive welfare states. The benefits, distributed in the name of equality and economic security, encourage people to leave the productive sector of the economy and become wards of the state. Unsurprisingly, this depresses economic growth, as the relative benefits of finding and holding down a job decline thanks to generous handouts for the jobless. Unless Europe is willing to drastically reduce these entitlements and reduce or eliminate defined benefit pension plans continent-wide, they will only continue to accelerate towards the cliff of bankruptcy.
The United States would be well served to pay close attention to what is going on “across the pond.” Europe is showing us the ultimate outcome of overly-generous welfare and pension benefits. Fortunately, we will have an opportunity to get our act together as we watch Europe plunge off a cliff. Furthermore, we benefit from the fact that the dollar is used as the world’s reserve currency, allowing the federal government to borrow at a lower rate than we would have access to otherwise. This won’t last forever if we don’t improve our long-term financial outlook.
To do this, the United States must make structural changes to entitlement programs such as Social Security and Medicare, while decreasing the incentives the welfare system provides to not work. It is clear that European leaders are rejecting the measures which would revive their economies and save them from bankruptcy. If we are unwilling to make even minor changes to our welfare state and entitlements, then we will soon be joining them.
