Pain for Europe

Many of us are waiting to see if Europe crashes, pushing the world into a second recession. The Business Roundtable tweeted this article, which I thought made some great points:

A SPECTRE is haunting Europe: the spectre of public debt. The debt-to-gross domestic product ratio for the European Union is projected to reach 80 per cent this year. Some recent growth in public indebtedness reflects weak economic conditions, but structural budget deficits have also increased sharply.

That’s not just Greece and Spain, but the entire EU. 80% of GDP is far far too high a debt level. Hell I think even 20% is too high.

First, particularly after the industrial unrest of the late 60s, labour market regulations entrenched union power while shutting young people and older workers out of the labour force. Second, as rigid labour markets undermined productivity and fed excessive wage claims, greater, increasingly opaque subsidies were provided to businesses. Third, as subsidies proved insufficient to maintain private sector jobs, public sector employment and the pension system were expanded, locking in entitlements to future public expenditures. And fourth, governments tolerated erosion of the tax base through tax evasion and the growth of the black economy.

Inevitably, the outcome was a loss of competitiveness.

Lessons we should not forget.

Can the situation be turned around? History shows that durable fiscal consolidation involves cuts to public expenditure, rather than increases in taxation. Such cuts are not impossible. After all, between 1995 and 2006, general government expenditures as a share of GDP declined by 10.8 percentage points in Sweden, 8 percentage points in Denmark and 12.7 percentage points in Finland.

And we should be aiming to get expenditure as a share of GDP down to under 30%.