Markets scare Europe into action on spending

Europe and the US take steps to control government spending as financial markets (and voters) roar their disapproval over deficits and debt. But countries must do more than nip and tuck. Structural reforms are needed.

European and US stock markets are shaking and the euro currency keeps falling, largely over debt woes in Europe (though Korean war talk is also a factor). Now’s the time to remember the words of Rahm Emanuel: “You never want a serious crisis to go to waste.”

In today’s context, the advice from the White House chief of staff would mean this: It’s time for developed nations that are overloaded by deficits and debt to finally clean fiscal house.

No politician likes to do that, because it usually means spending cuts, tax increases, or structural changes that the public resists. But this is the perfect excuse. More than an excuse, actually, because if financial markets continue their disapproval of unlimited government borrowing and spending, they will exact a steep price in less capital for economic growth, stability, and standards of living.

Encouragingly, governments are beginning to heed the markets’ growl.

In Britain, the new coalition government this week announced a series of starter budget cuts, to be followed by an emergency budget next month, and plans to seriously cut Britain’s deficit within five years. As Queen Elizabeth said in her opening of the new parliament today: “The first priority is to reduce the deficit and restore economic growth.”

Hip hip hooray, Your Majesty.

In the fiscally messy European countries that make up the PIIGS (Portugal, Ireland, Italy, Greece, and Spain), sacrifice and austerity have crept into the government vocabulary. Ireland, which led the herd in adopting an austerity program last year, is now being followed by the rest. Greece, Spain, and Portugal are all freezing or cutting salaries of public employees. Italy is set to announce the same, as well as more drastic measures.

And in the US, it’s voters who are scaring politicians into action – “tea party” followers and others. The White House on Monday proposed a constitutional version of the line-item veto and lawmakers are attacking earmarks – even as Congress considers one (last?) stimulus push this week.

Some of these efforts can be classified as eye-wash, temporary, or shallow attempts to cut government spending. But they indicate a gathering momentum toward fiscal responsibility. Some countries are even daring to start in on the hard stuff, or at least, prepare the way for it.

In Europe, that means restructuring unaffordable pension systems for an aging population and freeing up the rigid labor market by making it easier to hire and fire. Several countries are taking steps toward the former, while avoiding the latter. On paper, at least, Greece plans to raise its retirement age, and France is also focusing on raising it. Germany recently did so.

In the US, Social Security still needs fixing, but the far bigger debt worry is government health care. America’s short-term deficit prospects are actually improving, according to the nonpartisan Congressional Budget Office.

“We’re now in rescue mode,” Carl Bildt, Sweden’s foreign minister, told The New York Times. “But we need to transition to the reform mode very soon.”

Hmmm, has he been listening to the markets, and perhaps to Mr. Emanuel?

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