European Debt Crisis Is Sliding

European Debt Crisis

is sliding towards one of two unwanted outcomes: a European slow growth, and high unemployment environment; or the Japanese story of "lost decades." The U.S. is facing an economic crisis: national debt in excess of 15 trillion, high unemployment rates, low GDP growth, and runaway unfunded entitlement programs. Yet, the vigor of the U.S. economy has always provided the engine of prosperity both domestically and globally. Can the European and Japanese economies, which face similar difficulties, provide a view into the U.S. economic future?

Japan's Economy

The standard logic suggests that Japan since the late 1980's has experienced two "lost decades" triggered by the popping of a real estate and stock market bubble. Yet, as Eamonn Fingleton points out in the Myth of Japan's Failure, the reality of the Japanese economy is not one of declining prosperity, but rather growing affluence. Japan's strong Yen has appreciated 87% against the dollar since 1989 (Fingleton 2) enhancing Japanese consumer purchasing power. Additionally, Japan has low structural unemployment of 4.2%, and a "physical infrastructure which keeps improving and evolving" (Fingleton 2).

Why then "lost decades"? Two words: growth and debt. The Japanese economy has slow GDP over the last two decades, along with a surge of sovereign debt. While slow GDP growth and explosive debt growth have not yet caused a serious issue, at some point the debt swell will trigger a downward cycle ending in default. The lesson for the U.S. is clear; beware the accumulation of debt brought on by overspending.

European Union Economy

The European Union is facing multiple sovereign debt crises from Greece to Italy. These potential debt defaults are the result of excessive government spending across Europe, and EU leaders are developing rescue packages to address the effect of such a sovereign debt blowup.

Yet, such measures ignore not only debt, but the impact on economic growth, with rescue measures tied to austerity and tax increases. While Adam Davidson's The Other Reason Europe is Going Broke attempts to place Europe's economic crises into a debt component and an economic growth component; the reality is that they are one and the same. European economic growth has lagged the U.S. considerably since the early 1970's largely due to government involvement in the European economic model. Heavy spending on the entitlement state, financed by higher tax rates has sapped economic strength from Europe. For the U.S., the sovereign debt crisis in the EU highlights the dangers of an expanding entitlement state, which weakens economic growth through ever increasing drains on the private sector.