Stop the Charade

It is time to come to the realization that the European social experiment is broken beyond repair. Europe’s struggle with industrialization during the last 200 years was tumultuous, to say the least. It was full of revolutions, uprisings and wars. There were several failed experiments with redistributive income arrangements, such as communism, socialism and fascism. At the heart of the problem was a large population pool, crowded into a relatively small landmass, and an unwillingness to accept the class distinctions demanded by capitalism. Such incongruities led to violent outbreaks and social unrest. In the aftermath of World War II, Europe decided to embark on a new social order that required a great deal of concerted cooperation between labor, capital and politicians. Labor agreed to provide the skilled work force needed for manufacturing in return for generous social benefits and wages, and industrialists agreed to pay the necessary tax rates to keep the system afloat. Several Northern European countries successfully implemented the model, allowing for narrow differences in income distribution while generating high rates of economic growth. However, other countries were less vigilant on tax collection, thus forcing them to supplement the shortfall with large increases in government debt. Unfortunately, the birth of the euro, a dozen years ago, only made matters worse. It allowed the less diligent countries, such as Greece, Spain and Portugal to borrow at Northern European rates while living Mediterranean lifestyles. At the same time, real wages soared across the periphery. Today, the region is insolvent and on the verge of bankruptcy. Unfortunately, nothing is being done to put its house in order. Therefore, it is time to stop the charade.

Europe is in the midst of an economic crisis, but one would never guess it by taking a look out the window. The restaurants are full, the shops are brimming and service remains atrocious. The EU may talk about austerity and reforms in order to calm investors, but the reality is that European living is still good. Spain, for example, was a backwater of poverty and misery only half a century ago. Yet, some of the social guarantees that are legally mandated to all workers are risible, such as more than four months of paid maternity leave, three days of bereavement, three days of moving leave and up to two years of unemployment benefits. Up to recently, the Portuguese government paid up to four years of unemployment benefits. Additionally, most Europeans enjoy highly subsidized health services, transportation and housing. There are also huge subsidies for post graduate education. Therefore, most of the income received by European households is disposable. This is the reason why so many European truck drivers and nurses choke the streets of Ibiza and Saint Tropez. At the same time, Europe continues to spend lavishly on generous agricultural transfers. The Common Agricultural Policy (CAP) represents almost half of the European Union’s $100 billion budget. Much of it is inefficiently used. It is said that most of the residents of Sardinia own at least one cow, in order to be classified as dairy farmers. Although they are pretty to see, many of the olive groves that fill the arid hills of the Iberian Peninsula would be totally unviable if not for the generous CAP subsidies. Europe’s enviable lifestyle was thanks to the low interest rates that were demanded by international investors. Unfortunately, the charade is finally over and Europe will have to reign in its lifestyle.

The concept of European unity was viable as long as there was ample money to go around. However, international investors and Northern European taxpayers are no longer willing to foot the bill. The idea that European leaders would do anything to preserve the union’s integrity was debunked when France, the greatest of the EU champions, threatened to block the appointment of Mario Draghi as head of the ECB, unless Italy made its board director resign to make space for a Frenchman—thus eliminating the notion of an independent bank. This occurred in the midst of a horrible financial crisis. Likewise, Europe’s refusal to meet its military obligations, while embarking on new expeditions in North Africa, reveals its lack of commitment to regional defense. Europe is nothing more than a collection of narrowly-interested inefficient countries, living beyond their means and financed by the enormous amount of liquidity that was created after 9-11. Its determination to push Christine Lagarde, an incompetent, politically-minded lawyer, as the head of the IMF, instead of Agustin Carstens, the most successful economic policymaker on the planet, confirms that they have little regard for multilateralism. It is time to give up the ruse and return Europe to the income levels that are more representative with its productivity and output.

 
Reproducido de The Emerging Market Adviser
BCP Securities