While the problems of excessive sovereign debt, vulnerable banks, and political upheavals — both domestic and international — have been pushing their way to the forefront for several years, the situation in Europe has grown critical, and the crackup is accelerating. The euro currency unit, if not the European Union itself, is disintegrating before our eyes. In just the last two weeks, the financial, economic, social and political stress has toppled two European prime ministers — Greece’s George Papandreou and Italy’s Silvio Berlusconi. By the time you read these words, who knows what other convulsive event(s) may occur?
While politicians, government officials and central bankers work feverishly to contain the crisis, one senses that any day could see plunging stock prices, major bankruptcies, domestic riots, dramatic new policy by the European Central Bank, or the fall of a government. Sooner or later, we could see sovereign defaults as countries threaten to drop the euro and leave the EU.
Can the euro and the EU itself be saved? Not in their present form. The problems are so far advanced that neither, as presently constituted, is viable.
The bailout plan unveiled in October is woefully inadequate. The announced trillion-euro fund is chimerical. Every EU member is heavily indebted already; even Germany’s debt is 81.1 percent of gross domestic product, according to the Wall Street Journal.
They simply do not have the money. The only possible source of such a colossal sum would be a combination of exotic financial engineering — using leverage, smoke and mirrors — and a European version of quantitative easing, i.e., creating new euros ex nihilo.
Even if they could scrape together 1 trillion euros, that amount pales in contrast to the many trillions in combined sovereign debt of the essentially bankrupt PIIGS (Portugal, Italy, Ireland, Greece and Spain), France, Belgium, et al. Greece’s 360 billion euros of sovereign debt is merely the tip of the EU liability iceberg.
As complex as the unfolding crisis is, the causes underlying Europe’s manifold problems are simple. Europeans (like Americans) have forgotten how to live within their means. Debt burdens have ballooned to where they are practically unpayable without radical monetization and currency depreciation.
The fatal flaw of modern liberal democracy is the ability to vote for government benefits. The modern democratic welfare state is doomed. As Herman Van Rompuy, the president of the European Council, has stated, “We can’t finance our social model anymore.” He is right.
Too many people on both sides of the Atlantic want more than they can afford and are willing to use the state to get somebody else to pay for it. In the case of the EU, the Greeks, Italians, etc., want the Germans — the “little red hen” of Europe — to pick up the tab.
Voters in democratic states rebel against government “austerity” — the current buzzword that means “living within your means.” Consequently, many sovereign governments have a date with bankruptcy and all its attendant chaos.
To preserve the present order of the euro and EU, more than a dozen overindebted governments would need to cut spending significantly and devise a credible way to reduce their indebtedness.
These major changes in domestic budgets would have to be palatable to the voters in those democratic states. Returning to the path of fiscal sobriety is hard enough in one country; to expect such a reformation in over a dozen countries simultaneously is quixotic. The euro as we know it is toast.
Europe will grow increasingly turbulent. Observe and learn from these sad events. They are a sneak preview of things to come here at home in the not-so-distant future. Modern liberal democracy is bankrupt.
Dr. Mark W. Hendrickson is an adjunct faculty member, economist, and fellow for economic and social policy with the Center for Vision & Values at Grove City College.
