Euro-Zone Trapped In Vicious Cycle

What should a country do that has WAY too much debt and WAY too little economic growth?   If it spends money it doesn't have to generate economic stimulus, it worsens its deficit and adds to the risk of default.  If it embarks on austerity, thereby reducing spending, it imperils economic growth, which worsens its deficit and adds to the risk of default.  Talk about being between "Ba-Rock and a hard place"!

The increasingly struggling Euro-Zone nations and the U.S. have taken diametrically different paths to addressing their economic and financial problems.  After the passage of the huge International Monetary Fund (IMF) led rescue, European Union (EU) nations are each passing significant budget cuts to bring their gaping budget deficits under control.  

The United States is taking the opposite approach.  With policy makers fearing a re-newed slip into the second dip of this "Double-Dip Hyper-inflationary Depression", the Obama Administration is putting the final touches on a new $200 billion stimulus package.  In addition, because of the desperate situation of so many municipalities, another $50 billion is being considered to save the jobs of teachers, police and firemen, whose jobs are being cut to balance city and state budgets.

In Europe, austerity is being reluctantly accepted by Greece, Italy, Portugal, Spain, Ireland, Germany, Great Britain, Hungary, Romania, the Netherlands and Iceland, as well as others.  The only major exception has been France.  In each case, austerity comes at the cost of future economic growth.  The reduced presence of government will trim about 0.5-1.0% off from future economic growth, but satisfies the conditions laid out by the IMF.  This identical approach, imposed on Argentina in 2001, failed miserably.

The United States is desperate to jump-start the employment situation, which has yet to show much signs of reversing, unless of course, we as a nation, decide that having an army of census workers is a good use of limited government funds.  After having spent some $2 trillion on various bailouts and stimulus, all we have to show for it are roughly 400,000 new civil servants, a budget deficit of $1.5 trillion and rising, more than 8 million jobs lost in the last two years and rising personal backruptcies.

How long will it be before some nation tries that tried and true approach of starting a military war?  It worked to bring the world out of the "Great Depression", perhaps it can work again.  Sadly, the world is running out of peaceful options.

A better solution is the combination of both approaches.  The austerity programs in Europe target the overblown government sectors and trade unions, who have enjoyed an un-deserved free ride for decades.  No nation can have a large part of its citizenry living off a diminishing pool of productive workers.  Ultimately, the productive ones will balk at the higher taxes imposed on them combined with the use of funds to support those that are living on the dole.  A recipe for class war?

Government spending needs to be targeted at areas that produce Gross Domestic Product (GDP) and employment NOT on transfer payments to people who are not motivated to add to society.  The biggest reason for problems with budgets is runaway entitlement spending on those who receive from others yet produce nothing.  In exchange for any govenment handouts, the recipients need to do something to earn their keep such as repairing our nation's crumbling infrastucture or performing community service.  Subsidizing sloth. or dependenc, merely generates much more of it.

Countries can simultaneously reduce spending and get more out of less if they prioritize it correctly.  We need to be cognizant of how much GDP each dollar of spending creates, and emphasize those activities.  If spending merely transfesr money from the productive to the un-productive, it should be phased out over time, and ultimately, entirely eliminated. 

The choice of policies does NOT have to be either/or.  Unfortunately, it is highly doubtful that government will ever get smart about spending OUR money.

Marko's Take

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