Thursday, March 12, 2009

In Defense of 'Socialist' Europe

Europe gets a fair amount of bashing from Americans, especially conservative ones and especially over different economic approaches. But we Yanks should be careful not to assume that we have nothing to learn from our friends on the other side of the Atlantic.

In the debate between New World and Old World, Americans point to higher taxes, higher unemployment rates and a less friendly climate for entrepreneurship on the part of Europeans. The Europeans respond by pointing out America's weaker social safety net, pockets of poverty and a less-than-universal health care system. Some Americans look wistfully at the European way of doing things and wonder why we cannot be more like them. And some Europeans look at America and wish they were starting a business or making an investment there instead of in their own country.

The fact is that different countries with different cultures and histories collectively make different choices. How a nation makes a trade-off between prosperity and security is its own business. The French, for example, have opted for a medical system that seems very good and other generous social benefits and, in turn, seem willing to tolerate a society in which a large portion of the population has guaranteed employment while a minority have permanently dim prospects for employment.

One thing that Europeans seem to understand well, however, is the danger of inflation to an economy. After all, countries like Germany can remember a time when printing money destroyed the economy. When the euro currency was founded, the requirements for participation included an annual national deficit of no more than 3 percent and a total debt not to exceed 60 percent of the gross domestic product. These were strict standards that were not easy for every country to meet, and not every country has been able to adhere to them. But say what you want about Europe's large amounts of social spending, Europeans do at least understand the importance of paying for it.

So it should be no surprise that, when the U.S. government started lobbying European governments to pass their own stimulus bills along the lines of the one passed in Washington last month, ahead of the G20 meeting to be held in a couple of weeks, the Europeans said, thanks but no thanks. Maybe they are just being cheap or stingy. But I think they are merely heeding the lessons of history and have rightly seen that this is not the right time to pile on debt that will take many years to pay off.

As The Wall Street Journal suggested this morning, Europe is actually a good test case for economic czar Lawrence Summers's assertion that every dollar of deficit spending yields $1.50 in economic growth. "If that were true," wrote the Journal, "Italy would be the richest country in Europe, instead of merely one of the most indebted."

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