January 23, 2004

The European Experiment Stumbles

The dollar-standard is beginning to resemble Fidel Castro's Cuba--a regime whose best days are behind it ...but that refuses to gently into that goodnight. It shambles on, week after week, one foot seemingly in the grave, not quite dead yet. One obvious reason why the dollar is falling but no one is yet bailing on U.S. bonds is that...there aren't many better alternatives...other than gold. Certainly not the euro. The euro, for all its strength, represents an economic zone that has profound problems of its own. Wednesday's FT reported that: "Europe's apparently doomed attempt to overtake the US as the world's leading economy by 2010 will today be laid bare in a strongly worded critique by the European Commission. "The Commission's spring report, the focal point of the March European Union economic summit, sets out in stark terms the reasons for the widening economic gap between Europe and the US. "It cites Europe's low investment, low productivity, weak public finances and low employment rates as among the many reasons for its sluggish performance. And it today's Atlanta Journal-Constitution we find the following: "The EU's executive agency said Europe is falling further behind the United States after a standstill year in which European job growth evaporated, public finances deteriorated and the average unemployment rate rose to 8.1 percent. "In an annual survey of how the 15 EU nations fare in trying to become economically more dynamic, European Commission President Romano Prodi said governments lack political will to overhaul the continent's economies. "His report lamented a ``substantial gap'' between Europe and the United States in the ability to rally risk capital and money for research and development, quickly process patent applications and spend generously on information technologies." Europe shares many of the same demographic problems with the U.S. ...an aging population that's been promised an easy retirement. In both economies, fulfilling social welfare promises is already causing substantial and recurring government deficits. Governments don't have the will to raise taxes or cut spending. And so they keep spending....borrowing from the future. This diverts the economy's available savings from real capital investment, the kind that would create jobs and income. Instead, governments merely redistribute income and transfer money, not creating any new wealth. This strategy of wealth confiscation and redistribution is as home in Brussels as it is in Washington. And you can imagine the glee Eurocrats must have felt ten years ago...thinking about wielding the political power to bend whole nation states to their dream vision of a pan-European welfare state. But politics and reality have gotten in the way. Europe is not quite centralized economically...nor is it Federal politically. It's somewhere in between...and struggling. And the economic solution is probably harder than the political solution. Politically, Europe can agree to disagree, saying goodbye to Jacques Chirac's vision of a European counterweight to the U.S. Economically, though, much of Europe (except the U.K.) has hitched its wagon to the euro. What is the chief weakness of the euro (other than the structural failings of Europe listed above)? The EU has 15 different fiscal policies and a one-size-fits-all monetary policy. Fifteen different governments deal with fifteen different sets of labor, budget, and economic issues...and ONE central banks aims to chart a monetary course to suit all needs. Since the birth of the Federal Reserve and essentially a common currency for the United States, we've seen exactly what centralized monetary policy leads to...unrestrained money creation and chronic government budget deficits. Moral buck passing abetted by the printing press. There's no reason to think the fate of the euro will be any different than the fate of the dollar. The euro's time of death will be later, and its cause of death will be different. But in the end, it will be just as dead.


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