Friday, May 18, 2012

Europe's New "Iron Lady"

By Preston Cooper


Photo by Armin Linnartz.
America should borrow some ideas from Angela Merkel.

This week, members of the G8 - the group of all economies on track to get their rear ends kicked by China - will convene at Camp David to discuss the Eurocrisis, stimulus, and fiscal austerity. In debt-ridden Europe, German Chancellor Merkel has come out as an advocate for austerity, the idea of spending cuts and tax increases as a tool for driving down the debt. While no one likes to tell voters that they'll soon be getting less from the government for more money, it's better than the alternative.

Enter Francois Hollande, newly elected president of France. The socialist leader, also known as Mr. Monkey Wrench, tells Greece and other European countries in crisis to spend more on stimulus programs. The idea here is that a stronger economy will bring in more tax revenues, but I see several problems with this thinking. First, the stimulus will eventually run out, as it did in America, and the economy will be right back where it started. Along with a larger pile of debt. Second, countries such as Greece, where debt exceeds GDP by half, cannot afford to throw stimulus around to see if it will work. They need action now.

Fortunately, Chancellor Merkel remains an advocate for sensible, if unpopular, austerity. Under her leadership the Eurozone may avoid a massive debt crisis. I hope President Obama will borrow a few pages from her book and face reality about our growing debt problem. Fortunately, America has the luxury (ahem) of a debt pile roughly equal GDP, meaning the action we take to reverse its growth can be slower. This translates into less draconian spending cuts and very light tax increases. Waiting even a few more years will result in trillion-dollar cuts and tax hikes on the middle class.

Angela Merkel has earned herself a place next to Thatcher and Reagan in the ranks of great conservative leaders. Unlike President Obama, who pursues meaningless initiatives such as the Buffett Rule and claims they will solve our fiscal problems, Merkel is serious about the situation in front of her. And unlike Congressional Republicans, who use our debt crisis to pursue their own political agenda, she is in it to fix it. I wish her all the best.

1 comment:

  1. The idea that the debt is a serious problem in the short term is an absolute fallacy. History has shown that the most effective way to confront a recession is more government spending and lower taxes. The debt is caused by the recession, not vice versa. If the recession ends, the debt will slowly decrease. But if the government cuts spending now then it will have to fire workers, and the effects will fall on the shoulders of the poor.

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