The Terrible End of Europe's Nanny State

If Germany does not keep up the lending, it will be a sad day, for Germany

By David Warren

Austerity is the mot-du-jour almost everywhere at the moment. It reigns in Spain, for instance. (“Austeridad.”)

As Jim Flaherty said, in hailing the Spanish bank bailout, it “doesn’t solve the problem but it’s a step in the right direction.”

Let us examine that statement for the briefest moment, leaving aside such interesting but tangential questions as, whose money is bailing?

The problem is structural, not fiscal. The fiscal solution does not really get at the problem. Instead, it kicks the problem down the road.

If gentle reader managed somehow to run up a credit card debt, beyond the ability of his grandchildren to pay, the problem wouldn’t be the balance (or shall we say, imbalance) revealed in his bank statement. That would be a symptom of the problem.

Not to comment on his lifestyle; but he must be using this credit card to buy things, even if he is merely kiting his debts from one card to another. (“Financial services” count as “goods,” statistically.) At some point he presumably bought something — or some things — he could not afford.

If his bank then intervened, to raise his credit limit in return for gentle reader’s solemn sovereign promise to start living within his means, we might say the move “doesn’t solve the problem but it’s a step in the right direction.”

We can understand why the bank would be so obviously naive. The alternative is to call in the card, and cut its losses. Those losses — multiplied by the million others lured by easy credit into playing the same game — would take the bank down, today. Better that the cows come home, tomorrow.

The solution is not an “austerity plan,” per se. This is anyway a solution that is not being seriously tried. The Spaniards, and Italians, are using the word “austerity” a lot, but their new, fiscally-conservative governments, aren’t delivering on their promises. They’re just using the word to soothe the nerves of international bankers and investors.

Austerity plan? What could gentle reader do, in the analogy above? By now his debt service costs (the compounding monthly interest) have begun to swamp the rest of his spending. It is the one thing he can’t cut, or the liquidators move in. He must somehow make that “minimum payment.” He long since passed the magic point where he could just cut down on shopping.

In the words of Simon Nixon, writing in The Wall Street Journal:

“The euro zone’s real problem is a crisis of competitiveness, a legacy of decades of entitlements, privileges, overgenerous welfare systems, inefficient bureaucracies, unnecessary and burdensome regulations and high taxes,” i.e. the Nanny State. He also mentioned, “corruption, vested interests, … and closed shop.”

The writer is referring to the structural problem, which underlies the little issue of the fiscal one.

The thing about corruption, vested interests, and so forth, is that the beneficiaries do not willingly part with their lolly. They take to the streets when it is threatened. The mere word, “austerity,” gets them out there, even before anything has been done, as we have seen in Montreal, Athens, and elsewhere. And now you need more money for the police.

But of course, we have democracy. “The people” quickly tire of this show, and elect whomever promises to kill the crow of “austerity,” and thereby restore peace in the family. Hence election results in France, and prospective election results in Ontario, and Canada, where the people decide it is time to try the socialists (again); or in Quebec, where the alternative is the separatist socialists.

Angela Merkel, the German chancellor, has a plan. The structural problem in Europe (no different from our structural problem) will be solved. This will be done by creating a new uber-megabureaucracy, to overlook the national financial megabureaucracies. The new uber-finanzminister will tell the little finanzministers of the euro member states what they can and can’t borrow, thereby knocking them into shape. (That way, she can stop telling them.) Europe will move toward “greater integration.”

Let me humbly (though irrefutably) suggest that this, too, merely kicks the problem down the road. And the road does not go much farther.

Merkel is trapped, of course. She is in the position of the bank, in the analogy above. The German economy depends on selling things, to the various spendthrifts in the European markets, and if Germany does not keep up the lending, it will be a sad day, for Germany.

From this, heroically oversimplified analysis, it will be seen that two things are necessary, if we are to pull out of our “structural” death spiral. One is to discover some sovereign bankruptcy mechanism, by which our grandchildren may disown their grandparents’ debts. And the other is to dismantle the Nanny State. It really doesn’t matter in which order these are done.

And since neither can be done, I foresee terrible disorder.