A new era of fiscal responsibility: the free lunch is finished

http://www.guardian.co.uk/commentisfree/cifamerica/2012/may/23/new-era-fiscal-responsibility

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When the G8 major economies convened at Camp David last weekend, the continuing crisis of the euro, common currency of 17 European Union (EU) members, dominated the economic discussions. The agonies of Greece, badly divided in recent parliamentary elections, and forced to vote again on 17 June, were at the forefront.

Growing popular support for Greek extremist parties, right and left, deeply concerns other EU members, especially if the hard-left Syriza party, now leading, prevails in the upcoming round. Syriza unequivocally rejects the tough fiscal measures the EU required, at German insistence, to bail Greece out from decades of profligate fiscal policy, and a Syriza-led government would cross all of Germany's declared red lines.

Thus, the once-unthinkable prospect of Greece exiting the euro and returning to a national currency is now undergoing frantic contingency planning in Athens and Brussels. Several EU leaders believe that disciplining Greece by expelling it from the eurozone will chasten other troubled EU economies, with overall EU stability quickly following Greece's departure. Iceland, for example, shows that devaluation can be precisely the medicine necessary for a major economic correction. Although painful short-term, Greece leaving the euro may prove more palatable than years of social turmoil by Greeks unwilling to abandon pursuit of a free lunch.

But this is simply wishful thinking. Greece is just one element of a larger problem across the entire EU. In France, the United Kingdom, the Netherlands and even Germany, recent elections or the inability to form governments have reflected rising voter discontent with policies of fiscal austerity – the painful, German-budget approach to saving the euro. In fact, political turmoil in Europe has reached incendiary levels, even before fiscal restraints have really begun to bite. Imagine how tumultuous things could become when austerity measures actually take effect.

The answer to austerity, however, is not what its opponents like President Barack Obama and some G8 leaders suggest. When they speak of promoting growth, they are not advocating increased private-sector activity: more investment creating new wealth by adding value to material inputs, thereby generating more jobs and growing prosperity. Quite the opposite: they want to expand already enormous government sectors through even greater public spending. "Growth" to social democrats means growth in government's size and reach, not growth in the real economy. This approach directly contributed to our current predicament; and more of the same will only exacerbate it.

Unable to agree on substance, the G8, typically, advocated everything: both austerity and increased government stimulus measures. Such vague and essentially contradictory rhetoric, unsupported by concrete actions, will achieve nothing but more confusion. Partial fixes and inadequate vision have not only failed to resolve the crisis, but likely made it worse. The hard issues cannot be postponed indefinitely, and trying to do so only makes the ultimate outcome more painful.

Consequences of the euro crisis were, unfortunately, also evident at Nato's Chicago summit, after the G8 meeting. The western alliance is preparing to declare victory in Afghanistan and then withdraw, even though so doing will be leaving the door open for Taliban to re-emerge. Nato suffers not only from an appalling lack of US leadership, but also from the hollowing-out of European military capabilities, substantially caused by the same poorly chosen economic policies that produced today's financial crisis: the welfare state's inexorable expansion, squeezing out all else.

So, we see Europe stumbling along a path with only unhappy endings. More countries may exit the euro, or there may be massive transfers of power to Brussels to align fiscal policy with monetary policy. In either case, the eurozone and the EU itself will soon look dramatically different. And without advocates on the continent for more liberty and stronger private sectors, the coming political debates will be about distributing a smaller economic pie rather than enjoying the benefits of economic expansion. This will be bad for Nato and the west generally, and especially bad for Europeans dividing up scarcity.

The United States had, until Obama, avoided the worst excesses of the statism that dominates Europe. With the effects of such policies now plainly in view, one would think the political conclusion for most Americans would be relatively easy to draw. But, just as in Europe, the lure of entitlements, free lunches and no responsibility are seductive to many here, as well. We will see in November whether Americans wish to continue pursuing their cherished exceptionalism, or whether they will metaphorically retrace the paths of many of their ancestors back to Europe.