Starving the beast in Europe

Starving the beast in Europe

John Maynard Keynes once said that in the long run we’re all dead. Europe is rediscovering that truism painfully. On Wednesday, Britain announced some of the most thoroughgoing spending cuts since World War II. Other European countries, Greece and France being two prime examples, have taken similar steps.

This is a role reversal in the world of ideas and policy.Traditionally, it the US that frets about how to “Starve the Beast" and Europeans have, by their worldview, more “humane" ideas. What explains this role reversal? And is it a role reversal in the first place?

There are two factors at work here. First, the deficit level in these economies has gone up dramatically in the wake of the global financial and economic crisis. Bank bailouts and stimulus packages have their costs. To give one example, in Ireland, bailout costs after helping ailing Anglo Irish Bank Corp. may touch $69.5 billion. The country’s fiscal deficit in 2010 is an astounding 32% of its gross domestic product (GDP). These debt levels are unsustainable.

The bigger problem for these economies is their demographic profile. European Commission economists estimate that between 2004 and 2050, Europe’s young population (age 0-14) will fall by 18% and its working age population (15-64) will drop equally drastically by 16% (around 48 million). Its elderly population (65 years and above) will surge by 58 million (around 77%) during this period. In practical terms, for every four working age persons for one elder, this ratio will fall to two working age individual for one elder.

These estimates were made in 2006, before the financial maelstrom hit Europe. If these governments resort to aggressive fiscal stimuli, the Keynesian prescription to overcome the problem of growth, to prop their weak economies (Euroland—the area within the European Union covered by a single currency— GDP growth in 2010 is expected to be around 1.5% and 1.0% in 2011)—they will only add to the debt to be paid by future generations. Given Europe’s age profile in the decades ahead, this burden will be crushing to say the least.

It is hardly surprising that Keynesian nostrums are out of favour in Europe. These policy choices, if they can be called choices at all, are driven by dire necessities and not ideology, as some opponents of the British cuts described the steps taken by its conservative government.

Keynesian or Hayekian: what’s Europe’s flavour now? Tell us at