Old World nations struggling to tackle debt need to consider growth
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.