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Failing To Curb Deficits, Europe Lives In The Red

Failing to Curb Deficits, Europe Lives in the Red

By Brett Linley

In the modern world, it feels like it’s almost a given that a country will live outside of its means. Today, Europe provides further evidence that they are not, in fact, the exception to the rule. Per the Financial Post, France is the first in Europe to burn through their tax collections.

As of Nov. 7, all the money the government raises through its taxes – and this being France, there are literally dozens of them – had been spent. The rest of the year is financed completely on tick.

The rest of the continent is not far behind. Only Germany, Malta, Cyprus, and Sweden will make it into the new year on money raised by taxes. For the rest of the European Union, central governments will have to resort to borrowing, at the latest, by December 6th.

Spain ran out of money on Saturday. Over in Romania, the bank account was empty as of yesterday. Next week, Poland will be out of cash, followed by Italy, which will be officially skint on Nov 26. In the UK, our politicians will have officially spent all the income tax, corporation tax, VAT, fuel duty they take from us by Dec 7.

For countries like France, the money has run dry even as taxes have gone up. As put by the article, “A government which last managed to balance the books in 1980 used up all its money with 55 days of the year still left.”

For countries like France, the money has run dry even as taxes have gone up. As put by the article, “A government which last managed to balance the books in 1980 used up all its money with 55 days of the year still left.”

The clear culprit, then, is the persistent deficit culture that has enveloped most of Europe. The problem isn’t just that these countries run deficits. Truly, the problem is the degree to which the deficits are built into their economies.

While many countries have historically used deficits to fight recessions, Europe is in no such condition. In fact, “The EU as a whole is forecast to expand by 2.3 per cent, the fastest pace in a decade.” It is clear that instead of using deficits as a tool, the EU is using them as a crutch.

Per the Federal Reserve Bank of St. Louis, the United States currently stands with debt at roughly 103% of GDP. As imposing as that figure may seem, many countries in Europe are not far behind. Some have even exceeded that. Greece is at 176% of their GDP, surely bringing up the EU average of 89%.

Clearly, this kind of financial malpractice can’t continue forever. Should a recession hit, it would be much harder to inject fiscal stimulus in any kind of useful way. With so much government money already flowing through the economy, the marginal value of that extra government dollar lessens.

It appears unlikely that these deficits will ever be paid. If countries can’t cut their spending during periods of economic growth, they can hardly be expected to when the economy inevitably turns. While a few fiscally responsible countries exist in Europe, many are setting themselves up for disaster.

A potential debt crisis could also test the limits of the European Union. Greece’s debt issues led them to consider leaving the Eurozone in the not so distant past. Germany, notoriously skeptical of inflation, is probably one of the few EU countries that would be better off alone. We can expect that many Germans would be skeptical of being asked to inflate their own spending to support their less-thrifty counterparts.

Eventually, the party will come to an end. The bills will come due. It is fair to say that even John Maynard Keynes, great proponent of deficit spending during times of economic distress, might be surprised by this spending free-for-all. Other European countries need look no farther than Greece to see how the Eurozone becomes stressed when it’s time to pay the piper. It is true that, to quote Keynes, “in the long run we’re all dead.” The unfortunate truth, however, is that the long run is now.

 

 

 

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