What America Can Learn From Europe's Problems


While America’s attention is focused on our own upcoming election in six months, changes are taking place across the Atlantic, reigniting fears of a euro zone collapse and uncertainty over the European Union’s future.

Memory spans are very short in politics. Voters in Europe are forgetting that it was decades of reckless spending, cradle to grave entitlements, and living beyond their means that blew up their economies to unsustainable levels of debt. Instead, they want to believe it’s the two years of austerity measures and budget reforms (now being implemented after the damage was done) that are causing their economic problems. The election results in France and Greece over the weekend share one common result: a sound rejection of fiscally responsible practices.

What’s going on in Europe, from their economic troubles to their election struggles, illustrate very meaningful lessons that Americans should be taking notes on.

As expected, François Hollande beat Nicolas Sarkozy in the runoff French presidential election. Sarkozy lost popularity in part due to enacting reforms long overdue within the French system. When Sarkozy first entered office in 2007, a bloated public sector, high state spending, excessive corporate and payroll taxes, and a rigid labor market were dragging down the French economy. Sarkozy solved those problems by enacting pro-growth corporate tax reform to attract business and investment, raising the retirement age from 60 to 62 to make pensions more solvent, and by repealing the Socialist-imposed 35-hour limit work week to increase French productivity.

But austerity is never popular. Fiscal responsibility is no “fun.” Promising generous entitlements and less work, careless of how realistic it may be to deliver or what it will do to the state’s finances, will always trump fiscal responsibility in the short term when it comes to winning elections. And how does Hollande plan to pay for it all? By raising the top bracket income tax rate to 75%.

Sound familiar?

While raising taxes so that everyone “pays their fair share” sounds tempting to many, all France and the United States need look to is Great Britain. In 2010, Britain decided to raise its top tax rates to 50%. The first revenue returns came in for the government earlier this year, and the revenues have plunged, leading to a double-dip recession. Not quite the desired effect. But of course, the left wants to believe it’s the sound economic practices and fiscally responsible policies of David Cameron’s government that are the cause of Britain’s economic woes, not the tax hikes.

Prior promises of high taxing and high spending policies have led the PIIGS countries (Portugal, Ireland, Italy, Greece, Spain) to astronomically high levels of debt as a percentage of their GDP (at 207%, 1,239%, 136%, 179%, and 170% respectively) which have wreaked havoc on their finances. The U.S. is not too far behind, with our record $15.7 trillion debt now eclipsing our entire GDP at 100% and joining our European delinquents in having our credit rating downgraded. And while these countries may not retain the ability to print as much money as they want due to their shared currency, the numerous installments of QE in the U.S. have led to rising inflation and a devalued dollar.

In Greece, Sunday’s election has in all likelihood produced a stalemate. Seven parties have cut up the vote in Greece in such a way that no coalition among like-minded parties will be able to put together a majority coalition government. The election result rattled investors, sending the euro to a three-month low and safe haven German government bond futures to record highs. Analysts expressed deep gloom about Greece’s fate with Citigroup saying the odds of an exit from the euro zone had risen to 75% from 50% previously. On top of that, the Greek government (if one can be put together) needs to come up with an additional €11 billion in cuts by the end of June to receive more bailout cash or else its banks risk default again.

As much as Americans like to complain about the two party system in the U.S. (including me), sometimes I understand why we have it. It’s to prevent too many divisions causing an election stalemate, like we’re seeing in Greece (or even Belgium).

What if the Democrats broke up into three parties: one focused on advancing labor union agendas, one focused on implementing green energy and environmentally-friendly policies, and one focused on social issues and civil rights for minorities and the LGBT community? And what if the Republicans split into 3 parties: one focused on religious and social conservative agendas, one focused on fiscal conservative policy and foreign policy issues, and one libertarian faction focused on scaling back foreign policy and abolishing the Federal Reserve?

Would all those interests be able to form a coalition government? Perhaps. Then again, perhaps not. And you thought we have gridlock in Washington now?

On a continent rich with histories of fallen empires, Europe indeed still provides many lessons which many Americans can learn from.