For the last several years, I have been writing about the threats posed by the over-indebted West. These are not only threats to the economies of Europe and the US, but also to the very political foundations of these states. While the United States has so far enjoyed a 'bye" from the debt capital markets, European sovereign states, at least those of the "Club Med," have been less fortunate. Last weekend, European leaders finally started to tackle the burning issue of recapitalizing the precarious Spanish banks before nervous depositors took the issue into their own hands. By end of the day Monday, the markets were unimpressed, but at least the Eurozone is finally tackling the core issue -- as the US learned in 2008 when the TARP was converted into a bank recapitalization fund.
These financial machinations can appear highly technical and esoteric -- and in many respects they are. However, it would be a mistake to underestimate the economic (and potentially, political) reset coming. This was plainly brought home to me on a recent visit to France. My wife Maarit and I spent a few days in the South of France in May where I was speaking at a conference. We stopped for lunch one day at a casual beach restaurant where we have been going for years, and not only enjoyed a typically good meal, but also a lesson in European economic alchemy. When I asked one of our favorite waiters how he had gotten through the unusually harsh winter, he replied that it had actually been a very good season. He and a couple of his colleagues had not only taken their usual overseas winter holiday (Mexico), they had taken a second trip to Miami and New York.
In prior years, I had always admired and marveled at the quality of European life which afforded the average waiter ample time off and the opportunity to travel. However, this year I began to worry. Would the average waiter in San Diego be able to afford, let alone expect, even one foreign vacation each year? Was this a special defect of the American capitalist system, or was my French waiter soon in for a shock? Certainly not the latter if the new French government can fulfill its promises. The freshly elected Francois Hollande promises that France will reduce its deficit to under 3% of GDP – already quite a challenge — but also lower the retirement age to 60 (from 62) while hiring 60,000 additional teachers.
I hope I am proved wrong, but the Hollande fiscal program, like so much of the post-war European agenda, seems destined to continue the financing of this generation's above-budget spending at the expense of their children. If, like my favorite waiter, you are childless, then you are only piling debt onto someone else's children; however, I doubt the crime is this knowing and cynical. Rather, successive generations of politicians have encouraged this inter-generational borrowing by recklessly promising that the average worker can work a 35-hour week; take long vacations; retire at age 60; enjoy free education and healthcare, and still remain competitive in a relentlessly global economy. This is not only bad economics, it is politically exploitive and insulting.
The United States has the benefit of some time (and scale) to avert this train wreck. We would be wise to not to assume that the credit markets only punish Mediterranean-bordering borrowers.