Europe in Crisis: What Lessons to Learn?

Nothing feeds jolly bankers and dyspeptic pundits more than a tasty crisis, and this year’s turmoil over the Euro has provided an especially rich diet to critics of state-owned enterprises and public sector social programs. “What we’re seeing in Greece is the death spiral of the welfare state,” wrote the columnist Robert J. Samuelson. “Virtually every advanced nation, including the United States, faces the same prospect. Aging populations have been promised huge health and retirement benefits, which countries haven’t fully covered with taxes. The reckoning has arrived in Greece, but it awaits most wealthy societies.” Harvard economist Jeffrey A. Miron honed the knife even sharper. “Tax increases will not fix things,” he wrote. “Only major cutbacks in entitlements can avoid fiscal collapse.”

Deficit hawks and lenders on both sides of the Atlantic gleefully bash “the European social model,” with demands for “Austerity Now” and calls for privatizing everything from British highways to the Acropolis. “If you need to save money then you must sell your jewelry,” said Frank Schaeffer, of Germany’s Free Democrats, part of the country’s ruling coalition. The Greeks “must privatize to raise money.”

More thoughtful economists, especially those of a Keynesian bent, quietly counter that Europe’s social safety nets helped pull the old continent out of recession. They also warn that tough austerity budgets will bring real suffering to large parts of the population, put the brakes on continued recovery, and drive Europe into a double-dip recession. Do European decision-makers really want a lost decade similar to the one that once-powerful Japan Inc. suffered following its economic collapse in the late 1980s?

With the exception of wartime, “the public finances in the majority of advanced industrial countries are in a worse state today than at any time since the industrial revolution,” warned Citigroup’s top economist, Willem Buiter, in a recent OECD report. “Restoring fiscal balance will be a drag on growth for years to come.”

In the United States as well, even Democratic congressmembers sound gun-shy about government spending, while President Barack Obama has formally turned to his National Commission on Fiscal Responsibility and Reform, led by former Republican senator Alan Simpson and Bill Clinton’s former chief of staff Erskine Bowles. According to Bowles, Obama told them that “everything’s on the table,” including Medicaid, Medicare, and Social Security. But, the “everything” excludes outlays for the war in Afghanistan, the continuing military occupation of Iraq, and costly weapons systems that we do not need and cannot afford.

Strikingly, even as the ax blows fall, few Americans bother to look at how Europe actually works. On the Left, observers generally embrace the public sector, whatever its failings. On the Right, they universally decry “bloated pub...