The wildly fluctuating stock market is back in the news; the European crisis is the driver between the uncertainty. One day the headline says the crisis is solved, and the market goes up; the next day it says it is not, and the market goes down.
The European Union is unquestionably a political success. It has taken a continent full of countries that have fought wars with each other for centuries, and turned it into a single market with open borders and no hint of fighting. Unfortunately it is looking more and more like a financial failure.
If all of the nation's economies in the union had been of roughly equal strength, the union's common currency would have worked (it did in America). However, weak economies like Greece have used the euro to cover their financial sins, and preservation of the common currency requires strong ones like Germany to bail them out. To do it, they are going to have to borrow money.
But that won't be easy. The European economy has a collective GDP of roughly $14 trillion and a collective debt — government's combined with individuals' — of $63 trillion (this debt does not include any unfunded liabilities for retirement plans or medical care). That works out to a debt-to-GDP ratio of about 450 percent. Owing 4.5 times the value of what you are producing each year makes it hard to borrow more.
As comparisons, look at the U.S. and Japan (I do not include China because there are no reliable figures there). Our GDP is $15 trillion, and our total debt (again private as well as government debt but not unfunded liabilities for Social Security and Medicare) is about $52 trillion, which puts our ratio at 350 percent. In Japan, where the recession has dragged on for more than a decade, it is 500 percent. A small comfort, but we are in better shape than the rest of the developed world.
So the "solution" to Europe's problem means piling new debt on top of old. Japan has shown that can work to stave off immediate panic in the short-run — Japan is still producing Toyotas — but that does not really solve the problem.
The way to lower the debt-to-GDP ratio is to get the economy growing faster than the debt. After the Second World War our booming economy grew much more rapidly than our debt did (although it did go up). And the costs of the war didn't cripple us the way they did Great Britain, whose economy was virtually stagnant.
Looking around Europe today, the best economy is Germany, and German taxpayers are beginning to question why they are being called upon to bail out the Greeks —with the Irish, Spanish, Italians and Portuguese not far behind.
That's short term. Long term, the outlook for these economies is also not good because of their demographics. The birth rate in Europe is below replacement rates, which means that their populations will shrink unless there is significant immigration, which many Europeans are resisting.
Again, Japan is the model here: Her debt-to-GDP ratio is higher than Europe's, her birth rate is the same or lower, her population is aging faster and she does not encourage immigration. Consequently, Japan has been mired in economic difficulties ever since her real estate bubble burst roughly a decade before ours did.
Like it or not, America is not going to get much help as we struggle to get our own economy back in high gear. No matter how optimistic a current headline may be, the long-term problems abroad are very real.
Robert Bennett, former U.S. senator from Utah, is a part-time teacher, researcher and lecturer at the University of Utah's Hinckley Institute of Politics.