- The Washington Times - Wednesday, August 17, 2011


Europe’s economic powerhouse is faltering. The vital German economy slowed to a dangerous 0.1 percent level of growth in the second quarter of the year. That suggests the entire 17-country eurozone soon could find itself in a double-dip recession with no quick or easy way out of the misery.

These nations, which share the common currency of the euro, saw their gross domestic product collectively expand 0.8 percent at the beginning of the year. By the second quarter, growth was a paltry 0.2 percent. The most stellar performances came from Austria, at 1 percent, and tiny Belgium, at 0.7 percent. Neither of those is exactly rocketing along. France fared even worse than Germany - bad news, given that these are the two biggest players in the European Union. Spain and Italy didn’t perform too badly - by EU standards - growing at 0.2 and 0.3 percent, but they are likely to do much worse in the future. The tragic Greek economy, surprising no one, shrank. The situation on the Continent is grim.

As French President Nicolas Sarkozy and German Chancellor Angela Merkel gear up for talks, one of the two options that will be pushed is likely the use of “eurobonds” to refinance the rapidly growing piles of debt. These would be backed by the entire eurozone, not just individual countries. The other possibility is a closer fiscal union that would mirror the current monetary union.

Germany so far has refused to consider the eurobond, and rightly so. It is a short-term solution that doesn’t resolve the underlying problem: that the countries in trouble have borrowed far in excess of their capacity to repay. The Greek bailout accomplished nothing despite the more than $300 billion spent. Italy and Spain likely are next in line for handouts, a situation that would only be perpetuated by the eurobond idea. The availability of rescue packages diminishes the incentive to address the underlying problem, which is too much spending. German taxpayers see through this idea and realize that they’d end up being on the hook, so their government has resisted the pressure to go along with the scheme.

A fiscal union, if it imposes fiscal discipline, would be more a credible solution. Based on what has been mentioned so far, however, it seems what would happen is that there would be yet another European bureaucracy looking for ways to rake in more tax revenue by, for example, taxing financial transactions. European bureaucrats, much like our own, want to do anything to avoid reducing the size and scope of governments that have grown too large, spend too much and stifle the private sector with burdensome and expensive regulations. Every dollar or euro of public-sector borrowing gobbles up resources that crowd out private investment and keep businesses from expanding and hiring.

The sovereign debt crisis is a problem caused by governments that forgot the basic tenet: There is no such thing as a free lunch. For decades, they built lavish welfare states on credit, but the bills are coming due. The solution requires hard choices. The path back to economic growth requires drastic cuts in government spending and government regulation.

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