European Debt: Another Brief History

Standard and Poor’s are at it again.  For the last several months, they’ve been running around the world acting like everybody’s international told-ya-so auntie.  A couple of days ago, they landed in (or on) Italy.  The next thing you know, they’re having a five-star lunch on the Via Veneto and downgrading Italy’s debt rating to extra crispy.  What this basically means is Europe’s third largest economy now has less borrowing power than Slovakia, the agrarian little sister of the Czech Republic.  I’m sure Berlusconi shook himself out of his afternoon nap, give it a WTF and asked somebody (a la Barack Obama) “Who do these people think they are?”  The simple answer is S&P are the canary in the mineshaft and right now they’re gasping for air: pay attention!

Like it or not, the Post World War II European Slumber Party is over.  It was a great time, everybody had fun, but now it’s time to wake up, smell the espresso and go back to work.

In fact, the party’s been over for 20 years.  The alarm clock should have gone off in 1989, when the two different Germanys took turns dancing on the Berlin Wall.  At that time, after more than a decade of relative austerity, the prevailing wisdom was “Wunderbar!  Let’s spend the Peace Dividend.”  So instead of putting a couple of drachmas, liras, pesos or what-have-you aside for the eventual rainy day, Europeans actually started overspending again.  In their zeal to continue creating a second Mediterranean Eden of overlapping social programs, nobody bothered to remember the Peace Dividend was an illusion.  There was no significant amount of extra money available to Europe from cuts in defence spending simply because they’d never paid full price in the first place.  American taxpayers had been footing the bill for European defence ever since the days of Stalin.  Ironically, as Americans forgot about the Cold War and closed up shop on the Iron Curtain, Europeans had even less discretionary cash because they had to start buying their own tanks and helicopters again.  Nor was that the only dividend the Europeans were spending.

From the mid 50s until the Oil Embargo of 1973, there had been an economic miracle in Europe.  Called Wirtschaftswunder in Germany and Trente Glorieuses in France, the western continent from the Brandenburg Gate to the Bay of Biscay was doing business.  Believe it or not, during that time period, Greece’s average annual economic growth rate was 7% and Spain and Italy weren’t far behind.  Western Europe was awash with cash.  Once again, however, nobody bothered to stash a few coins in the cookie jar just in case one day the Saudis might start demanding full price for their oil.  But that’s not the real problem.

With mountains of money and American muscle to keep it safe, the Europeans could indulge every socialist fantasy their intelligentsia had ever imagined — from Karl Marx to Charles Fourier.  Social problems were bottomless pits, education and unemployment were subsidized career choices, government departments were bloated with employees, and wages and benefits everywhere went through the roof.  Money was no object and the Europeans threw it around like rice at a wedding.  This was all fine until King Faisal and his friends decided to cut off the goo that lubricated the wheels of European industry.  As oil prices shot up, European industry began to shrink.  This constricted the tax base and put an even greater strain on the social safety net.  In essence, OPEC outlawed miracles.  Unfortunately, the Europeans didn’t see the writing on the wall — or they chose to ignore it.  When revenues were no longer sufficient to cover their obligations, rather than halt some of their more ostentatious social projects, European governments turned to the banks.  To cover the shortfall they borrowed billions against future revenues.  By 1989 this vicious circle was spinning out of control.  That’s why the illusionary Peace Dividend looked so attractive.

Today, after three generations of entitlement programs, any mention of austerity is met with protests and riots.  The party might be over in Europe, but nobody’s leaving just yet.

So, as they say at the accounting firm of Dewey, Cheatem and Howe, “What’s the bottom line?”  It’s very simple.  If nothing changes, there is no way Greece can ever meet its financial obligations.  They either have to completely revamp their economic structure — or default.  There’s no third option.  Likewise, Portugal and Spain must either drastically curtail their social spending or face the same problem.  The IMF recently said that this is a very volatile time, and if everybody isn’t super careful, European debt could slide the entire world into recession.  That’s like saying Chris Rock and Russell Peters are a couple of funny guys and if you’re not careful you could end up laughing.  Recession is the given right now; the only questions are how deep and how long.  Guys like Berlusconi need to tear themselves away from politicking for a couple of minutes, listen to what the money boys like Standard and Poor’s have to say, and act accordingly.  If they do, the recession will be short, sharp and painful.

If they don’t, it’s going to be long, hard and ruinous.

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