Stardate 20030813.1357

(Captain's log): Scott wrote to me about the last couple of articles I wrote, and I responded (respectively in red and blue):

If the culture of elitism is firmly entrenched in European culture as tightly as you believe, then there is no way for Europe to ever catch up to the U.S. There's no way for them to even keep pace.

Yup.

Repeated attempts to hamstring US influence via the UN and ICC indicates that they know this -- and would rather smack down the US diplomatically rather than fairly on the field of cultural battle.

Yup.

Viewed from this perspective, the EU is Yet Another Attempt to restrain the US; if you're correct about the elitist culture, then it too will fail. (We are already seeing it fail; France's deficits will probably result in exceptions for France, which is just more of the same elitism on a larger scale.)

Yup!

And I sent him a link to an article I wrote a while back about the underlying motivation behind formation of the EU and the purpose of its new constitution. One of several goals motivating the formation of the EU is to try to create a single nation which is large enough so that it can stand toe-to-toe with the government of the US and look it squarely in the eye, something no European nation can do now. In response he mailed:

OK. If this is all true, then we as a nation have nothing to fear economically from an EU, because its philosophy will doom it to stagnation (as we are now seeing). They can't field a military, because France/Germany will insist that they be in charge of it, and there's no way that will happen -- so we have nothing to fear militarily as well.

Looks like we hold all the cards. The only danger comes from ourselves, and our willingness as a nation to continue cleaning up the world's crap. As has been said many times, if we lose faith in ourselves, that will be the beginning of the end.

I would imagine that the EU heads will eventually submit to the "blame America and Israel" game when it becomes clear that they have no economic growth. That prospect alone is a good reason for keeping troops in Germany.

They have been using the US – and Israel – as scapegoats (or distractions) for a long time now. It's reached the ludicrous point where Europeans who are broiling in a heatwave curse at the US for not ratifying the Kyoto accord. But I am not as sanguine long term about the situation as Scott seems to be.

A first rate modern military takes a long time to create and is extremely expensive, thus requires a major budgetary commitment for at least a decade, if not longer. For them to create a military capability even a quarter the size of ours in terms of credible projectable power, there would have to increase their defense spending by something on the order of two percent of GDP.

Europe's leaders are really good at setting lofty goals and giving lip service to them. Every once in a while they'll all get together and agree that some particular thing is essential and all promise to do it. Then they go home again and nothing happens. They've all promised one another that they'll increase defense spending, but none of them actually did.

They made plans about three years ago to become the world economic leader in information technologies by 2010, but there's no sign that anything will come of that. They also all agree that they need to reduce the regulatory burden on their businesses, especially with respect to labor and employment laws, and that they have to begin to reduce entitlements so they can reduce taxes, but it's a lot easier to say those things to one another at a summit than to say them to angry voters and rioting labor unions, and there's been little actual progress.

Ordinarily during a boom, demand for products rises and businesses will then expand to increase their output so as to take advantage of the opportunity. But that doesn't really happen in Europe.

In most of Europe now, if a business hires a lot of people during a boom, they are at serious risk of being stuck with a huge workforce during a bust that they can't afford to pay and aren't permitted to lay off. It's theoretically possible to have mass layoffs but the procedure is slow and involved and can be halted by bureaucrats or employee lawsuits. So businesses which expand aggressively during boom times face a great risk of bankruptcy during the next downturn, whenever that might come. On the other hand, with taxes as high as they are most of the potential financial reward for that kind of growth is confiscated by the state. Companies which grow and hire and produce more revenue will pay a lot more taxes, but they won't actually make a lot more profit.

There's little to be gained by expanding and creating jobs but businesses which do so have a much higher chance of going bankrupt. Obviously with high risk and low reward, the rational play is to not take that chance.

So it's hardly surprising that the businesses there are making hiring and investment decisions extremely cautiously, and are tuning their businesses to survive the next downturn, whenever that might be. In the current business environment, the only businesses which are safe are those which operate at recession levels all the time, even though that means not taking advantage of the opportunity offered by a boom. That basic business psychology is one of the biggest reasons why Germany's economy has stagnated for the last ten years, a period in which the US economy expanded dramatically. Some of that was a bubble, but a lot of that growth was real and permanent, only it didn't happen in Germany. The only way to change this basic psychology and encourage business leaders to become more aggressive about investment and expansion is to reduce the risk and/or raise the potential reward. In other words, to reduce the risk associated with aggressive hiring by making it easier for them to perform layoffs, and to increase their reward by reducing their taxes and letting them keep more of the resulting profits.

The trap the European governments are in now is that their leaders have no way to maneuver or relieve the situation. It isn't politically possible to substantially reduce entitlements, so they're stuck with huge government outlays which only get worse when the economy slows. They can't run significant deficits (or at least they aren't supposed to), which means they have to cover those outlays with tax revenue, so means they can't reduce taxes enough to make any difference. They can't use monetary policy to stimulate the economy because they all gave up their currencies, and the European Central Bank was chartered with the sole goal of preventing inflation of the €uro and has not been as aggressive as the Fed at cutting interest rates to provide economic stimulus. That's caused the Euro to rise relative to the dollar (or the dollar to fall relative to the Euro, depending on your point of view), which has made European exports and European vacations expensive and less competitive for Americans and for anyone else whose currencies tend to track the US$.

It's politically impossible for them to significantly reduce the regulatory burden on businesses, especially with regard to making it easier for them to lay off employees. So the basic factors which lead business leaders to make investment and expansion decisions conservatively and defensively won't change, and the governments there don't have any other ways of applying stimulus. This doesn't tend to make one optimistic about the future, and even as the US seems to be recovering from its most recent recession, Europe's economic problems are getting worse and forecasts for growth have been reduced several times.

All of which tends to suggest that there is no way Europe will be able to come up with the kind of new money (2% of GDP) that would be needed to actually create a modern military which even remotely rivaled ours. It's not clear they're even going to be able to keep making all the entitlement payments they are committed to, and they may be forced to reduce defense spending even further.

Nor does it look good for the future. Reducing social spending is politically difficult now, but at least it's possible. But the proposed EU constitution seems to imply that those entitlements are a constitutional right, and that a lot of existing labor protection may also turn out to be. If the EU constitution is ratified as currently written, then the policies now in place which have crippled Europe economically would be cast in stone.

Karl Zinsmeister wrote a superb article last year about the fundamental economic problems that Europe currently faces. And he shows that even without the EU constitution, the long term prospects are extremely grim.

He lays out the long term demographic problems that Europe faces primarily due to chronic low birthrates. That means that the population in most European nations is dropping, and the average age of the population is rising, and as time goes on there will be proportionally more retirees drawing government pensions compared to the number of workers in private industry who are producing goods and paying taxes. Short of some sort of drastic change in the fertility rate (which doesn't seem likely) the only solution to this is augmentation of the workforce via immigration. Unfortunately, Europe has also been far less successful than the United States at integrating immigrants into their societies and economies, and immigrants are more likely to land on the dole than they are to get jobs.

And since most of their immigration is coming from Islamic nations, there are political and cultural risks involved as well.

Zinsmeister says that since 1970 the US has created 57 million new jobs, while in the same period Europe has created 5 million, most of which were in government. The basic statistics are pretty stark:

72 percent of the U.S. population is at work, compared to only 58 percent in the E.U. American workers also put in more hours. And U.S. workers are more productive--an E.U. worker currently produces 73 cents worth of output in the same period of time a U.S. worker creates a dollar's worth.

And the general trend in Europe is to continue to reduce the work week while continuing to implement policies which give businesses a disincentive to invest and hire. If there's any way out of this trap, I haven't seen any discussion of it.

There are really only a few ways this can end. First, the voters in Europe could come to their senses and face the reality that their current policies are unsustainable. They'd have to accept a radical reduction in entitlements, a radical reduction in business regulations, and a lot of other changes all of which would be viewed in the short term as being hostile to labor and friendly to business. There would have to be broad acknowledgement that Socialism isn't economically sustainable. But before there can be any chance of that kind of political change, things are going to have to get a lot worse. And if things do get worse, that's probably not how the voters would react.

For one thing, the kind of people who would feel that way and help push the system away from socialism won't be there. Europe has a safety valve to release capitalist sympathizers: they emigrate to the US. People who hate the US system will stay behind and it will be those who will end up trying to solve this. (It's one of several ways in Europe is badly damaged by brain drain.)

So what's far more likely is that the voters will blame business leaders. They're generally thought of as villains now, and eventually someone will point out that if business leaders are unwilling to take the risk of expansion, then the government will need to force them to do so. The business leaders should be making their decisions on the basis of social conscience, not in crass pursuit of profit. Profit is evil anyway, and if the leaders refuse to serve their nations the way they should, well then we'll damned well force them to do what's right. And that way we can get job growth without having to eliminate the extremely important and obviously just job protection regulations or reward the filthy money-grubbing capitalists with tax cuts.

More and more economic policy on a more and more detailed level for the entire EU would be made by politicians and bureaucrats in Brussels. And over time the European system would rely more and more on centralized economic planning, and the European Union would progressively (heh) morph into the European Soviet Socialist Republics.

I expect the first "European Five Year Plan" to be issued before 2020. And of course, this would not really solve anything; it would just change the details.

So in the end what you'll get is economic collapse. There are various ways in which this can play out, but none of them are good. And as long as Europe is locked in this economic death-spiral, they are unlikely to be a military threat to us, and at least that's a blessing.

But what comes after the collapse or emerges politically during the collapse? The historical record suggests a new rise of Fascism is the most likely outcome. In the midst of economic chaos, with a huge population of unemployed and people who are dissatisfied, charismatic leaders will appear who will blame the problems on foreigners and claim they can solve the problems if only they're given unrestrained power. Once elected, they abolish elections, dismantle most of the programs which are causing trouble, and actually do improve the business climate. But they do other things, too, and few of them are likely to be good.

The classic example of this is the rise of the Nazis after the fall of the Weimar Republic, but that's by no means the only example of that kind of thing from European history. Historically speaking, when things go to hell in a handbasket, Europeans tend to look for charismatic and nationalistic demagogues who promise them pride and glory in exchange for strict obedience. That's a price Europeans have seemed almost eager to pay.

We can't discount the possibility that in fifty years the EU and most existing national governments in Europe will be gone, replaced by a new Fascist dictatorship, which among other things chooses to make the investment in a modern military and which hopes to use it in yet another round of world conquest.

And we might not be able to interfere before this point, because France has nuclear weapons. Even though Europe won't have the ability to threaten us using conventional forces for the next few decades, they do have the ability to threaten us with nuclear conflagration. Of course, if they nuked us we'd also nuke them, but the threat of it means that we might not be able to significantly interfere to prevent the rise of a new Europe-wide Fascist state, which could follow historical patterns and become militaristic and expansionist.

If that happened, the world would become a very interesting but much less safe place.

So don't go getting too complacent. For the next few decades we've got the cards, but that doesn't mean we can ignore Europe.

We can't anyway. A hell of a lot of our trade is with Europe, and we have a lot of investment there. If it collapses, it will affect us too. But there isn't a lot we can do to help the situation. There isn't any way we can make them acknowledge the long term dangers of socialism. On the contrary, they seem to be embracing socialism ever more closely. Until the majority of voters in Europe accept that socialism must be abandoned, they'll continue to decline relatively speaking.

Until there is such a change, about all we can do is to stand back and watch them slowly die, while doing our best to protect ourselves as much as we can from the consequences.