Martin Feldstein’s Recipe For Southern Europe: Stimulus Now But Combined With Credible Public Spending Cuts Sensible idea. However, the problem is that "Club Med" is too tired and too weak. Limping along is the best it can do

By Paolo von Schirach

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July 9, 2013

WASHINGTON – In a recent piece (see link above) I pointed out that there is no sign of a real qualitative “turn around” in Southern Europe. Greece, Portugal and the others are just limping along, supported by loans from their better off northern cousins. However, these loans are not leading to qualitative transformations. At the moment, they just keep these impoverished societies alive. And there are signs of things getting worse. Under strong pressure from exhausted populations, political leaders in Athens, Rome and Lisbon bargained with Brussels/ECB/ International Monetary Fund to obtain some relief from drastic austerity measures. While this may help calm restless societies a bit, less austerity means more borrowing and therefore, in the long run, adding to the debt and the misery. 

More borrowing is a bad idea

In an insightful FT piece, (An end to austerity will not boost Europe, July 9, 2013), Harvard economist Martin Feldstein points out that more borrowing on the part of already impoverished countries is a bad signal to financial markets. With no end in sight to Club Med’s spending and debt problems, investors will demand higher interest rates in order to lend more cash to unreliable debtors. So, short term relief today will translate into a bigger debt burden tomorrow.

Very sensibly, Feldstein argues that Southern Europe should combine short and medium term stimulus with serious public spending reform. He advises to concentrate investments in new infrastructure and training programs that will give new skills to the unemployed.

It is too late

Well, with due respect, this is a bit like saying to a terminal alcoholic that it may be wise to cut the booze. Sensible idea, of course. But it is too late. While a collective awakening entailing the re-discovery of free market capitalism is in theory possible, this would be a miracle. Southern Europe is largely prisoner of a socialist, welfare-plus-entitlements frame of mind. And this is combined with political systems that reward loyalists with fake public administration jobs. Greece elevated this wasteful practice to an art form. Likewise, poor Sicily has many more public servants than bigger and richer Lombardy. France has many more public officials than thrifty Germany, and so on.

Flawed models

Any serious public administration reform plan would have to include cutting tens of thousands of useless civil servants who are also the (often essential) political backers of the elected officials who gave them the jobs. So, double problem: a political upheaval and an economic disaster, as most of these newly unemployed bureaucrats would have nowhere to go in the private sector. 

Last but not least, very little innovation and enterprise creation in globally competitive sectors, while the better educated young people leave, seeking greener pastures elsewhere.

The sad conclusion is that fixing Southern Europe would require a highly improbable collective shift from “statism” to a genuine “private sector-led” economic model. Such a huge cultural, ideological and psychological turn around would be a monumental task on any good day. Trying to transform the values and the beliefs of millions of depressed and demoralized people in the midst of enduring hardships is next to impossible.

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