What are we supposed to do with Europe? Many of the continent's nations have run up deficits that make the U.S. look thrifty, and well over a year after their problems came to light, they're still holding the worldwide recovery back.
Because the eurozone nations have a common currency, the normal recipes to fix their troubles aren't available:
- Greece and Spain can't just print money to pay off debts, as the United States will probably do in some manner.
- Entitlements in Europe are ingrained in society at a level that is not approached in the United States.
- Tax rates were already relatively high, and governments have little latitude to increase them, something we could easily do here (fiscally, if not politically).
Whatever Europe is trying to do, it doesn't seem to be working.
Why You Can't Shrink Your Way to Prosperity
Austerity measures and budget cuts have shrunk government spending. But when the government is a major provider of employment in a country, such choices can have a disastrous effect. In fact, spending cuts have contributed to keeping unemployment elevated and, sadly, done little to lower deficits.
It's a downward spiral: Lower spending leads to layoffs, which lead to lower consumer demand, which reduces tax revenue (even sometimes when there are tax increases) and leads to more government spending cuts.
So how in the world do we fix this?
Just Swallow the Bitter Pill Already
One of the main reasons budget deficits are growing in Greece and Portugal is that borrowing costs are ballooning for their high levels of debt. Reducing the deficit by cutting spending and increasing revenue will help, but there's only so far those measures can go. Eventually, debt levels need to come down.
Instead of slowly bleeding out, as it's doing now, Europe needs to rip off the bandage. Just default, get it over with, and deal with the consequences.
That's what the U.S. did with the auto industry, helping it through an orderly default, and it's time to do the same thing in Europe.
If Europe doesn't, we'll all be dragged down together.
The Dominoes Will Fall
The world has become so intertwined that when Greece sneezes, the U.S. gets a cold and China comes down with the measles.
The U.S. stock market has had its eye on this crisis for months, and China has even been rumored to be looking at buying European debt to avoid an economic disaster within its own borders. A long, drawn-out solution to this debt crisis isn't good for anyone. What's the likely ending?
- The bailout package being discussed by Germany, France, and other EU countries will probably get passed, but it isn't nearly big enough to solve the problem.
- Some sort of default by Greece, maybe Ireland, and maybe Portugal will probably take place. It's just too hard when you can't print money, debt costs are rising, and austerity measures aren't helping.
- U.S. businesses and U.S. investors will continue to use uncertainty in Europe as an excuse to sit on their hands and not invest the money we need in the domestic economy to have a real recovery.
Or, we could have a different, better ending for all. The EU could face the music, accept that its debt problems are affecting the economic recovery around the world, and realize that someone is going to have to fail. Then we could take the next step forward.
Until Europe stops sitting on its hands, my headline stands: It's Europe's Fault.
Motley Fool contributor Travis Hoium really does like Europe but can't stand its debt situation and doesn't have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, and check out his personal stock holdings.