Prior to the great crisis of 2007, the governments of the European Community (according to its official statistical service Eurostat) spent 47 percent of GDP, against 19 percent for the US federal government. Including state and local government spending, the US total rises to 36 percent (of which 6 percent is pensions), but the comparison is far from exact. There is quite a difference between spending that is supported by taxpayers through referenda authorizing bond issues, and tax-and-spend mandates executed through the central government. Most of the pension payments, moreover, reflect income from pools of savings paid by pensioners rather than the proceeds of taxes on current income. A fairer pre-crisis comparison would put US government spending at a little over 30 percent of GDP vs. just under half for Europe.
In 2009, government spending as a share of GDP rose to 51 percent in Europe, and to 36 percent in the US with the Obama stimulus plan. The above table shows that the variation across European countries is fairly small. The former Communist countries of Eastern Europe have lower ratios of government spending to GDP, but “old Europe” falls within the same range.
With Obamacare, America’s number will rise into the low 40 percent range. If the present administration realizes all of its ambitions, the American profile will look more like Europe’s. And that would be disastrous news for America.
It takes a very long time to bankrupt a major economy. France and Germany are great repositories of skills, technology, and industrial organization. But the weaker parts of the European system already are bankrupt. The Greek bailout plan will only increase Greece’s debt while reducing economic output, making its position far less tenable two or three years down the road. Now that investors know that Greece will pay its debts only if other European countries cover them, its cost of refinancing will skyrocket and the cost of servicing its debt will continue to rise.
The chain breaks at its weakest link. As I observed in a post earlier this week, by 2050, three-fifths of Greeks as well as Germans will be retired. Neither country can sustain a welfare state with an inverted population pyramid. The Greek economy may be a toy next to Germany’s, but both are suffering from the same disease. Greece showed symptoms first.
What the global sovereign debt crisis should tell us is that the European socialist model leads to disaster. It should be a horrible example for American politicians. The lesson Americans should draw from the market turmoil of recent weeks is that America requires a sharp about-face, away from the statist direction of the Obama administration.
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