Beyond the placid old Amsterdam canals, the bustling bike lanes and the quaint tulip fields, roils a furious debate about the future of the Netherlands. On the surface, the issue is what to do about the budget deficit. In reality, it is about whose life will become more difficult. Who will pay more? Who will receive less? It is a question coming soon to a deficit-spending country near you: the United States.
In other parts of Europe, in places like Greece and Spain, similar discussions have toppled several governments and have escalated into huge, sometimes violent protests, as people lash out in frustration against government decisions they find intolerable.
I believe that some time next year, with the election in the past, when either Barack Obama has started his second term or Mitt Romney has finished unpacking in the White House, Americans, too, will discover that budget debates are not just academic exercises or political theater. It's a good bet that just as Europe has come up against the reality that deficits cannot grow forever, so too will America. Investors, who have taken losses in the European debacle, will start looking at America's books, questioning its solvency, and demanding change...
...The European economic pact requires countries to keep their budget deficits below 3% of GDP. That became increasingly difficult as the world entered a recession. In Greece's case, the government had been concealing its deficit spending. In other countries, especially those that relied heavily on real estate, home prices collapsed, and tax revenues declined, opening up the budget gap.
The Dutch economy, one of the healthier ones, now faces a 4.6% deficit. There's talk of across-the-board pay freezes and even more social safety-net cuts, among other ideas. Unemployment is just 6%, but the country has returned to recession.
In Spain, the government wants to avoid requiring a bailout the way Greece, Ireland and Portugal have. The newly-installed government of Prime Minister Mariano Rajoy needs to slash the budget by 5.5% of GDP, even more than Greece.
Spain expects unemployment, already the worst in the developed world, to go over 24% this year, about the same experienced by the United States during the Great Depression.
The European crisis is far from over, but it already has important lessons for the United States, where federal deficit figures are treated as poison darts to be thrown among politicians, rather than as an important problem needing adult solutions...
...The United States was right to deal with the recession first before tackling the longer term problem. Europe is proving what the Hoover administration already showed in the 1930s, that cutting spending in a recession is counter-productive.
But, with the economy recovering, the time will soon come for the difficult decisions: Will the government cut defense spending, Social Security, or Medicare? Or perhaps other programs that keep millions out of poverty?
In the Netherlands, the ruling coalition has been brought to the edge of collapse over the choices. The far-right politician Geert Wilders demanded huge reductions in foreign aid. There is also talk of ending the mortgage tax deduction, along with other tax increases...
...Will politicians behave responsibly?
If you hear anyone say tax cuts alone will get the economy growing and fix the problem, don't believe it. Economists say spending cuts and tax increases are necessary.
|
