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€gads!

Merkel didn’t say yes and can’t say no to bailing out the Greeks

Sep 26, 2011, Vol. 17, No. 02 • By CHRISTOPHER CALDWELL
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At that point, in early August, Trichet extended the European Central Bank debt-buying program to Italy in exchange for Berlusconi’s promise of an austerity program. As soon as the ECB acted, however, Berlusconi’s government tried to back out of the austerity. The ECB made it clear that he would need to pursue it if the bank were to continue to buy Italian bonds. Italy said okay. But as the economists Alberto Alesina and Francesco Giavazzi detailed, the austerity plan enacted was not ideal. It relied on tax hikes instead of government cuts. It undid a flexible-work contract that unions had opposed, and it backed off a planned welfare reform.

Last week a rumor began to spread that China had stepped in and agreed to buy Italian debt. The two countries had indeed talked, but at Italy’s instigation. China holds $3.2 trillion in reserves, which the United States was not slow to tap in the last crisis. For Europe, though, it appears Chinese aid will come at a steep price. Speaking at a World Economic Forum event in China, Premier Wen Jiabao called on the EU to recognize his country as a “market economy.” Apparently, those two words have a formal meaning under World Trade Organization rules. A “nonmarket economy” can more easily be subjected to trade sanctions if a trading partner considers it to be engaging in protectionist measures. To declare China a market economy is the trade-war equivalent of unilateral disarmament. 

The involvement of China in Europe’s debt crisis led the financial blog ZeroHedge to note that many observers believed China might be running into a cash crisis of its own. “That’s ok,” the blog commented, “by the time China is insolvent, Chinese stabilization of Europe will be complete, and Europe can boldly step up and rescue China in turn. And so on .  .  . and so on .  .  . in the wacky wonderful Ponzi world of ours.”

The word Ponzi is on many lips just now. It may not literally describe the welfare states of Europe and America, but it is at worst hyperbole. In the United States, Democrats’ endless promises of benefits, Republicans’ idea that funding the state is optional—these amount to promises that if you, the Western consumer, just sit in front of the television eating Twinkies, the Chinese will work to supply you with the luxuries to which you’ve become accustomed, just like back in the days when the coolies built the railroads. China, apparently, views the march of history a bit differently.

The postwar European social model was viable for a long time, but it, too, has always required accounting tricks, and over time these became too elaborate to sustain. First, the demographics of the past favored the system, since the generation of those who would have retired just after World War II had been decimated in World War I. Second, the demographics of the future favored the system, too, as the unusually large Baby Boom generation paid for the generation born in the 1920s—unusually small to begin with and then decimated by another war. Finally, by the time demographics began to look more foreboding, the welfare state had been going on for so long that even people who should have been able to do the math mistook the status quo for a law of nature. They borrowed from the next generation, confident that some trick would be found such as previous generations had enjoyed. When that didn’t work, they cut the military. And when that didn’t work? Well, here we are. 

Christopher Caldwell is a senior editor at THE WEEKLY STANDARD.

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