Thursday, May 20, 2010

A Ray of Sunshine?

One view of the economic crisis currently engulfing Europe's PIGS (Portugal, Italy, Greece, and Spain) offers some hope for the future, not just there, but perhaps here in the U.S.

This optimistic perspective argues that fundamental reforms to over-regulated economies, over-spending governments, and overly-generous social and labor programs are possible only during times of crisis. It won't be quick, and it won't be easy, but the crisis gives politicians political cover to do the things that must be done - cut government spending, cut entitlement programs, and deregulate business and labor.

There is historical precedent for this.
"Finland became one of the world's most competitive, tech-driven economies and built the world's best-ranked education system only when its economy went into a free fall after the collapse of the Soviet Union, its main trading partner at the time. Germany began to reform its calcified economy and labor markets a decade ago only after years of relentlessly rising mass unemployment led to widespread protests and national discontent. The newest poster child for crisis-driven reforms is tiny Latvia, (where) the country's economic crisis has made it possible to drive through necessary reforms that would be impossible under normal circumstances. These include deregulation and wage cuts that are deeply unpopular now, but will improve the country's competitiveness, create a more stable basis for future growth, and generate new jobs for many years to come."
The drive for fiscal responsibility is currently driven by Germany and its concept of Schuldenbremse (debt brake). The concept is to limit government deficits to 0.35% of GDP.
"The consequences of a debt brake could be a reduction in the size of European governments. With state spending averaging 50.7 percent of GDP across the EU (compared with 38 percent in the U.S.), taxes are already so high that governments in Europe are running out of room to increase them without strangling what's left of their economies."
Since Germany is the mainstay in propping up Greece for the moment, they are seizing the opportunity to push for EU-wide fundamental economic reforms (got to love those Germans - they're going to take over Europe, one way or the other).

If (and that's a giant IF) Europe succeeds in taking advantage of this crisis to push through EU-wide reforms, then some experts predict that "by 2020, Europe's governments will—out of simple necessity—have become more efficient and less intrusive, the EU will have turned itself into a borderless and dynamic single market, and the continent's least competitive economies will have been forced to reform and innovate."

The parallels between the current European economic crisis and the looming U.S. one are obvious. We can only hope that we integrate the lessons learned from Europe and the simmering political unrest here and take the necessary steps sooner, rather than later.

Rahm Emanuel may look forward to crises ("You never let a serious crisis go to waste"). However, I prefer to avoid them. The first step to dodging (or at least minimizing) this one takes place next November. Step 2 occurs in Nov. 2012.

Choose wisely...


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