Europe looks to be serious about the structural change needed to solve its deficit and debt challenge. Will the US follow suit?
With global financial markets shying away from Europe’s weak currency, leaders on the Continent are finally getting serious about their high spending and government debt. Emerging details show just how serious.
Wisely, many countries are going beyond merely cutting or freezing the pay of civil servants. They’re also tackling needed structural reforms – using the euro and debt crisis for a government-sector make-over.
In Germany, the Cabinet has just agreed to the most stringent austerity package since World War II. It plans to cut the public workforce by up to 15,000 employees and pare back welfare, including lower payments to new parents and means-testing for jobless benefits.
The Army is being looked at, and may end up with 40,000 fewer soldiers, from a total of 190,000. (This particular cut, while a budget saver, does not help Germany’s standing in NATO, which is currently at war in Afghanistan.)
Meanwhile, certain subsidies for business will end, while taxes or fees will be applied to the financial sector, nuclear power, and air travel.
Said a resolute Chancellor Angela Merkel on Monday: “Germany as the largest economy [in Europe] has a duty to set a good example.”
In Italy, the government will be turning to regions and local governments to share the burden of federal spending cuts. By necessity, that will force reform down the pipeline.
In Greece, which triggered Europe’s fiscal self-examination as it inched toward debt default, the statutory retirement age for women is being raised to 65, to match that of men. Next month, the government will begin counting the number of its public workers – for the first time. It has no idea how many such workers it has, but they’ll be getting a serious pay cut.
It will also raise the value-added tax (essentially, a sales tax) by two points to 23 percent, and increase taxes on tobacco, fuel, and alcohol (it’s forced to raise revenues this way because of such widespread cheating on income tax – which itself needs reform).
In Britain, the new prime minister, David Cameron, said on Monday that the country should prepare for a squeeze on public-sector pay, pensions, and state benefits. The cuts will affect “every single person in our country.”
Mr. Cameron and his new government have pointed to the Swedish and Canadian government make-overs of the 1990s as proof that a country can slim down, and through that process, become fit for further growth.
The specifics of the remedies for these countries differ, but the Swedish and Canadian models show a need to consult with public, private, and civil sectors; to do a comprehensive review of government spending; to reach a general national consensus; and then to enact a plan speedily. That appears to be the approach in Britain, where talk is of a “once-in-a-generation” transformation of the way government works.
Punishing financial markets and a rapidly sinking euro currency are pushing these countries to make more than cosmetic changes. Their parliamentary form of government, where the executive branch and majority of lawmakers are of the same political party or coalition, make it easier to push through painful, structural reforms than in the United States.
President Obama has lost his filibuster-proof majority in the Senate, and, come November, is very likely to be working with a Congress that has more Republicans in it. He’s also under less pressure than leaders in Europe, because the dollar is still the dominant world currency.
In the US, it’s a concerned public that’s moving Washington to discover its deficit conscience. The White House has taken a series of steps to control discretionary spending, and today Budget Director Peter Orszag ordered agency heads to look for budget trims of at least 5 percent.
Even that, though, is a small step, when everyone knows that difficult reform lies ahead in controlling government spending on entitlements: health care and Social Security.
In Europe, government leaders are now preparing their publics for painful reforms. In the US, will it be voters who teach lawmakers about cutting back?