- The Washington Times - Thursday, November 8, 2012

The desire to keep on spending in the face of economic crisis is universal. In Greece, parliament voted Wednesday to implement $17 billion in spending cuts, and the reaction was swift and violent. Public-service employees and others affected by the proposal erupted in riots on the streets of Athens.

The move to trim the indebted nation’s outlays cleared the way for the European Commission, the European Central Bank (ECB) and the International Monetary Fund to send a check for $40 billion. This bailout cash will give Greece some breathing space and enable government employees to cash their paychecks. It also leaves unresolved the cause of Greece’s vast debt, currently estimated at 175 percent of gross domestic product. That’s particularly troubling because it appears there will be no country left in the European Union (EU) able to bail out Greece — or any other ailing nation — the next time bills come due.

Germany, the EU’s powerhouse economy, is being dragged down by the weight of the recession infecting its neighbors and trading partners. Germany adopted labor-market reforms that helped the country survive the initial impact of the debt crisis. Its economy grew at more than 4 percent in 2010 and 3 percent last year. The party seems to be over, as growth fell to 0.5 percent in the first quarter and 0.3 in the second quarter. The third quarter might well be in negative territory, as industrial production is down.

The rest of the Continent is no healthier. The European Commission’s latest forecast expects the region to grow a minuscule 0.4 percent in 2013. One of every 2 youths in Greece and Spain can’t find a job. France, the second-largest economy in the EU, hasn’t been able to grow by more than one half of 1 percent since 2010.

The ECB can’t solve this problem by cutting interest rates to stimulate economic activity because the rate already is down to 0.75 percent. ECB President Mario Draghi has indicated that no cuts will take place in the immediate future.

That leaves only one path to recovery: Adopt the tough reforms that politicians have been putting off until now. Italy and Spain finally are waking up. Even though those nations have increased taxes, they also are exploring labor-market reforms so critical to returning their economies to a growth path. In France, labor costs average $44 per hour — 13 percent higher than in Germany — reducing its potential for economic growth. Louis Gallois, former head of the parent company of Airbus, has called for a cut in payroll taxes as a way to decrease the cost of employment and for slashing regulation to restore French economic competitiveness. It remains unclear whether the socialist French President Francois Hollande, who wants a 75 percent marginal tax on high-income persons, will pay heed. Ignoring Mr. Gallois’ sensible suggestions will let France slip further into recession.

Reducing the size of government and increasing labor-market flexibility are essential for a country to get out of a low-growth trap. That’s something President Obama needs to realize as well.

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


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