Carts and horses
Purchasingb2b: October 2011
“In the developed world, we’ve deluded ourselves
that we can solve what ails us economically with just this
much more fiscal stimulus, a tad more central bank easing.”
There’s an old saying about putting the horse before the cart instead of the other way around. This comes to mind with all the talk out of Europe these days. The Euro-zone seems to be disintegrating because of the indebtedness of members such as Greece, Italy, and Ireland. Some people are predicting that if Europe breaks up, economic disaster will result: a prolonged period of recession or even depression as the pieces get put back together. But it seems to me that this gets the entire situation backwards. That is, it confuses the cart and horse. That’s because “economic disaster” has preceded the break-up and it will cause the break-up, not be the effect of it.
In 1997, the 17 member states of the European Union signed a document called the Stability and Growth Pact. Its purpose was to maintain fiscal discipline. There were two key provisions: each country committed to annual budget deficits of no more than three percent of GDP (this included the sum of all public budgets—federal, provincial and municipal); and national debt would be 60 percent or lower of gross domestic product. There was a reason why these benchmarks were established. History—and common sense—tells us that when budget deficits swell, the urge is to solve the problem by printing more money. The 60-percent debt threshold meant that interest payments would never be so onerous as to crowd out other spending.
At the end of last year, debt to GDP in Greece was 130 percent. It was 118 percent in Italy and 93 percent in Ireland. There are two members of the EU that are popularly understood as being the most “responsible.” We’ve seen Germany and France take leadership positions in holding the union together. It might surprise you to learn that Germany’s debt to GDP is 74 percent—about 25-percent higher than the upper limit it committed to only 15 years ago—and that France’s is 84 percent. But I suppose that in the land of midgets, the dwarf is a giant.
And this tells me that the Eurozone staying together, or breaking up, is less rather than more important. The real issue is European public policy and structural deficits that can only be addressed if there is a serious re-examination of the welfare state. In the developed world, we’ve deluded ourselves that we can solve what ails us economically with just this much more fiscal stimulus, a tad more central bank easing. Uh-uh. Europe—and North America—work too little and then spend too much on what we can’t afford. Only after we put the production horse before the consumption cart will things change fundamentally. b2b
Toronto-based Michael Hlinka provides daily business commentary to CBC Radio One and a column syndicated across the CBC network.