Tee­ter­ing Europe

Old World na­tions strug­gling to tackle debt need to con­sider growth

The Washington Times Daily - - Opinion -

Euro­pean mar­kets may have calmed re­cently, but the debt cri­sis is far from over. Trou­ble looms over Italy and Spain. The Euro­pean Union has been scram­bling to find the re­sources to help them. The mag­ni­tude of Italy’s and Spain’s li­a­bil­i­ties makes that im­pos­si­ble, so the EU is look­ing to build a fire­wall.

Bailouts are no so­lu­tion, and fire­walls are a tem­po­rary fix. Only sus­tained growth can pull Europe out of this morass. That won’t hap­pen with­out deep struc­tural change that al­lows in­no­va­tion and mar­kets to flour­ish. Although the Or­ga­ni­za­tion for Eco­nomic Co­op­er­a­tion and De­vel­op­ment (OECD) is be­gin­ning to open its eyes to the need for growth, the group still re­lies upon tech­no­cratic so­lu­tions. The Euro­crats are cling­ing to the same nostrum of bailouts and in­creased cen­tral­iza­tion, as if what has failed be­fore will some­how work this time.

In a re­port re­leased Tues­day, the OECD ac­knowl­edges that the EU lags “in terms of in­no­va­tion per­for­mance.” It is the Cen­tral and East­ern Euro­pean coun­tries that have grown at rates in the range of 4 per­cent and 5 per­cent an­nu­ally. Thanks to poli­cies which the OECD it­self calls “sound,” growth fig­ures were a mere 0.3 per­cent for Italy and Por­tu­gal. The re­port rec­og­nizes the gap be­tween the best-per­form­ing coun­tries and the worst has grown, but it fails to con­nect the dots.

In­stead, the OECD rec­om­mends an even larger $1.3 tril­lion per­ma­nent bailout fund. Ex­ist­ing plans would cre­ate a Euro­pean Sta­bi­liza­tion Mech­a­nism (ESM), with about half that amount, $664 bil­lion, serv­ing as a res­cue stash. Ger­many has dis­played fis­cal pru­dence and adamantly re­fused to fol­low the lead of its prof­li­gate neigh­bors, but that might be chang­ing ahead of a meet­ing of fi­nance min­is­ters on Fri­day. Chan­cel­lor An­gela Merkel’s re­solve is weak­en­ing, as she’s say­ing she would con­sider fund­ing a tem­po­rary in­crease of the ESM, which is sched­uled to come into force in July, to $930 bil­lion.

A tril­lion dol­lars isn’t enough. Italy and Spain, the next most likely can­di­dates for bailouts, have a com­bined public debt in ex­cess of $3.3 tril­lion. Such sums do noth­ing to solve the growth prob­lem iden­ti­fied by the OECD. For ex­am­ple, de­spite the ag­ing pop­u­la­tion, the youth un­em­ploy­ment rate ex­ceeds 20 per­cent. The OECD’S so­lu­tion is to pro­pose yet more cen­tral­iza­tion, in­clud­ing over cor­po­rate gov­er­nance. The re­port ac­knowl­edges some busi­nesses don’t grow and thrive, but it fails to ask why. High taxes and bur­den­some reg­u­la­tion sti­fle en­trepreneur­ship; fur­ther cen­tral­iza­tion of EU au­thor­ity isn’t the an­swer.

Un­til Europe gets se­ri­ous about dis­man­tling the bur­den­some panoply of reg­u­la­tion and un­der­tak­ing real struc­tural re­form, it will not re­turn to sus­tain­able growth. That, in turn, will drag down growth for the rest of the world. Less reg­u­la­tion is the an­swer, not more debt.

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