European Woes Could Portend Problems for U.S. | Eastern North Carolina Now

   Publisher's note: The author of this fine report is Andy Taylor, who a professor of political science in the School of International and Public Affairs at N.C. State University, and a contributor to the John Locke Foundation, and is therefore a contributor to the Carolina Journal, John Hood Publisher.

    RALEIGH     It wasn't supposed to be this way.

    When Jean Monnet and Paul-Henri Spaak conceived of the European Economic Community in the mid-1950s, they may not have wanted a European superstate. But surely they would have approved of the 1992 Maastricht Treaty that bound the continent tightly and established the euro. They would have liked the 1985 Schengen Agreement that allowed for the free flow of people within the European Union.

    Open trade, few internal barriers to migration, a common and international reserve currency, cultural collaboration, and social harmony today characterize the European project they initiated. And until a few years ago, it was going swimmingly. Now many of the European Union's 27 members are faced with crushing public debt and huge borrowing costs that make, for several of the 17 that use the monetary system, exit from the euro very tempting. All are looking at years of economic stagnation, political turmoil, and a general lack of confidence in the future.

    What went wrong? Quite a lot.

    First, the euro was predicated on faulty assumptions. Monetary union without fiscal discipline was bound to cause problems sooner or later. Growth in such a large and diverse system inevitably is uneven. Struggling countries want lower interest rates and expansions in the money supply, while those doing well desire the opposite to avoid excessive inflation.

    Cultural differences play a role, too. Southern Europeans are used to devaluing their way out of problems; the Germans were so scarred by the role the mark's rapid decline played in Hitler's rise to power they shudder at the thought of even small increases in prices.

    Take away national central banks' ability to manipulate monetary policy, and governments must rely on fiscal solutions. We know how good individual EU countries are at coming up with those. Huge debt burdens as a result of large welfare states mean most of them neither can cut taxes nor increase spending to stimulate expansion.

    Second, most western European countries have tremendous "legacy" costs, financial liabilities in the form of future payments into public pension and health care programs. Some governments made generous promises to workers, particularly in the public sector. Demography is another contributor. Most EU countries will have about two workers per retiree in 2040; the United States will have three. Regardless, France and Germany reportedly have committed future resources to government pension funds that exceed 450 percent of GDP.

    Third, excessive regulation is crippling European industry. Comparative national studies are not always reliable. But a good rule of thumb is that regulation costs European businesses about twice as much as it does their American counterparts.

    Finally, Europe has a population crisis. Germany, its economic powerhouse, is projected to lose about 10 million people by 2050. The populations of countries like France and Italy essentially will stagnate. Compare this to the United States, which is predicted to grow by about one-third by the middle of the century, to approximately 425 million.

    It's not just the number of people. Europe's population is graying rapidly, adding to its pension and health care challenges. Its immigration model also threatens economic health. The U.S. generally has done a good job recruiting talented and productive people in the prime of their lives who accept liberal democratic values.

    At least until very recently -- and as a product of their imperial histories, geography, and policies -- many European countries admitted a disproportionately large number of migrants from Africa and the Middle East, men and women whose cultural and religious values are incompatible with and sometimes hostile to modern Western life. Many of these immigrants were unskilled and came with extended families -- young children and elderly relatives who consumed social services and did not add much economic value.

    Could this happen to us? There are significant differences in the basic situations, of course. U.S. policymakers have much greater control over economic outcomes. We are lucky the dollar is the world's currency, so we hardly pay conversion costs for international transactions, and, as bond yields reveal, the federal government spends very little to borrow and service its debt.

    But there are warning signs.

    At just over 100 percent of GDP, U.S. public debt is greater than that of France, Germany, and Spain. Rather than investing in critical public goods like infrastructure and education, policymakers are plowing resources into welfare programs that incentivize behavior with little social value. Regulation, which sometimes is necessary and can be beneficial if employed intelligently, has become a tool of political retribution. Debates about immigration rarely consider the host country's interests.

    Fortunately, warning signs are not self-fulfilling prophecies. Unless we change our ways, however, they might seem remarkably prescient.