- The Washington Times - Tuesday, February 14, 2012


As the smoke cleared from another weekend of riots in Athens, more gloom descended on Europe. On Tuesday, Moody's Investors Service dished out downgrades for Italy, Spain and Portugal, among others. Though Austria, France and the United Kingdom hang on to their valued AAA ratings, Moody's slapped them with a negative outlook. That means there is a 30 percent chance they will join the downgrade club in the near future.

France already has lost the coveted AAA rating from Standard & Poor’s, leaving Germany as the only large country in the European Union with a clean credit rating. That doesn’t bode well for the EU’s future.

Moody's justified the downgrades by focusing on the “uncertainty over the euro area’s prospects for institutional reform of its fiscal and economic framework and the resources that will be made available to deal with the crisis.” The agency also cited “Europe’s increasingly weak macroeconomic prospects, which threaten the implementation of domestic austerity programs and the structural reforms that are needed to promote competitiveness.”

Simply stated, the ongoing debt crisis and the EU’s failure to deal with it have created recession. With nothing but slow growth on the horizon, the downgrades were inevitable. In fact, the downgrades may not have gone far enough.

Greece has promised to pass a budget that will include spending cuts of about $4.4 billion, or 1.5 percent of its gross domestic product, as part of the deal to get the next round of bailout cash in March. Banks are to be recapitalized, public-sector companies will be privatized, and various structural reforms will be put into place. One key reform is a proposed 22 percent cut in the minimum wage. Though this particular reduction has served as a rallying cry for leftist agitators, the supposedly “austere” minimum wage in Greece still would be higher than that of Italy or Spain, which are richer countries.

A high minimum-wage policy serves as a barrier preventing the unskilled from entering the workforce because it increases an employer’s expense to hire people. Cutting the minimum wage is one of the most effective ways to reduce that county’s horrific 20 percent unemployment rate. Similarly, if the Parliament follows through on promised changes that would reduce similar protectionist schemes designed to limit competition in professions that include stevedores and tourist guides, there could be an increase in new jobs from lowering the cost of those jobs. That also assumes an end to the looting and violence that would allow Greece to present itself to the world once again as an attractive tourist destination.

Proposed cuts would still leave Greeks with one of the EU’s most generous pension systems. Half-hearted austerity measures aren’t enough to fix the problems that Moody's reminds us extend well beyond Greece. Without growth, the EU will remain trapped under the weight of its own excess. The Continent needs deep structural change and a rethinking of the role of the government. Only by allowing free markets to play a greater role - free of regulatory fetters - can Europe hope to escape this stagnation.

Nita Ghei is a contributing Opinion writer for The Washington Times.

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