Last week, Eurozone leaders scrambled to patch the latest leak in the fracturing dam that’s keeping the euro from being washed into history’s reservoir of flawed economic concepts.
The European Union, a 17 country currency union without common fiscal governance is akin to 17 members of an extended family having equal access to a joint bank account. While some members work hard and contribute their savings, others borrow against the joint account to finance irresponsible lifestyles.
Now, a decade after the euro became their common currency, Eurozone leaders are attempting to correct that fatal flaw by getting all family members to sign a pledge promising to suddenly become prudent and responsible.
Getting all 17 members to sign that pledge is proving difficult enough, but even if they do, what are the chances that they will actually mend their ways?
That would require a fundamental structural change; including repeal of labour laws that make businesses wary of hiring workers because laying off or terminating employees for poor performance is a costly bureaucratic nightmare. It also means downsizing bloated government bureaucracies, reducing excessive public sector compensation and reforming extravagant social programs.
But rather than focusing on measures needed to stop the fiscal hemorrhaging, Eurozone leaders have been fixated on trying to convince financial markets to lend even more money, digging their vast debt hole even deeper.
Fast running out of financial glue to patch the fractures, the Eurozone is asking for International Monetary Fund support which, in turn, is pressuring its members to contribute cash to a massive bailout fund.
Prime Minister Stephen Harper has rejected the IMF’s demands on the basis that “Europe is one of the wealthiest parts of the planet.” Indeed, it would be hard to explain to Canadians that; while we reduce spending, reform EI and move the pensionable age from 65 to 67, we send cash to support countries such as France whose new Socialist President is promising to end fiscal austerity and reverse former President Sarkozy’s hard won increase in the pensionable age from 60 to 62.
It isn’t difficult to grasp the concept that you can’t solve a debt problem with more debt. Yet amazingly, even after massive government cash injections have failed miserably, the Keynesian myth that stimulus spending is the universal antidote for re-starting economic growth lives on.
Politicians, the media and much of the electorate are demonstrating Einstein’s’ definition of insanity: “doing the same thing over and over again and expecting different results.” Maybe Stevie Wonder gave the answer to that question when he sang “When you believe in something that you don’t understand, then you suffer superstition.”
This tragic debt abyss that has destroyed the hopes of millions of unemployed young Europeans would not have happened if political leaders had paid heed to the wisdom of economist Friedrich Hayek.
Published in 1944, Hayek’s The Road to Serfdom took the polar opposite view from Keynes’ interventionist theories. The book created a huge sensation as it challenged the post-war anti-free market command and control “government knows best” mentality that had developed out of the militaristic requirements of fighting a war.
Hayek believed that freeing the private sector from the bureaucracy and interference of government was the key to economic prosperity. He rejected the socialistic model wherein governments direct and organize economic activities according to a blueprint that “directs the resources of society to conform to the planners particular view” in favour of creating the conditions where “individuals are free to use their knowledge and initiative” to build wealth creating enterprises.
It’s tragic enough that those trillions of euros of government spending not only failed to stimulate economic recovery, but actually built up a debt mountain that now prevents it. Moreover, that runaway deficit spending has actually thrown roadblocks in the way private sector investment, the only engine of growth that has ever lifted countries out of recession.
As the sovereign debt crisis has deepened, reports of pending financial Armageddon have driven down consumer demand and funding ongoing fiscal deficits has squeezed private sector capital formation. The resulting investor pessimism has reduced risk capital availability for early stage entrepreneurial enterprises that spawn tomorrow’s business champions.
This is the tragic legacy that Eurozone leaders are passing on to the next generation. Just as Hayek could have predicted seven decades ago.
Gwyn Morgan is a Canadian business leader and director of two global corporations.