When the European Union announced recently that it had settled on yet another massive round of borrowing, the Versailles Peace Treaty came to mind.
That settlement, which ended the First World War, is now recognized as lunacy. It imposed reparations on Germany that no European nation could have paid.
Even if the country’s entire monetary reserves and industrial plant had been confiscated, along with the personal wealth of all its people, the total would have been nowhere near sufficient.
That became clear almost immediately, as the Reich Chancellery was forced to borrow huge sums to pay what it owed.
But if Germany couldn’t find the original amount demanded, how was borrowing going to help?
Yet the allied leaders went along with this nonsense. Why? For the same reasons that drive the EU now — because political realities demanded it.
Amid the ruin of war, there was no telling the people of Britain, France or Belgium, not to mention Canada and the U.S., that Germany couldn’t pay. “Squeeze her till the pips squeak” was the common refrain, and squeeze the politicians did.
To no avail. Germany collapsed, with consequences we all remember.
And now Europe’s leaders are at it again. Over the next 18 months, they plan to borrow $1.5 trillion (in Canadian dollars) to “stimulate” their economies. And who are they “borrowing” it from? Essentially themselves.
What possible reason is there to think that will work? It didn’t before. Between 2006 and 2013, most of the Continent’s countries doubled their sovereign debt holdings. Far from re-inflating their economies, it produced the opposite effect.
Countries such as Italy, Spain and Portugal now suffer unemployment levels not witnessed since the Great Depression. Youth unemployment in Greece — which spent and borrowed more lavishly than anyone — exceeds 50 per cent.
Or consider Japan. Since 1990, economic growth in that country has marched steadily downhill, to the point where it has basically flatlined. And yet Japan’s public debt quadrupled over that period. If borrowing cures economic malaise, Japan should be an Asian tiger.
I’ve heard it argued that the recent uptick in America’s economy supports a borrow-and-spend mentality. Leave aside that U.S. politicians manipulate their economic data to match the election cycle. If stimulus borrowing made sense, America’s middle class should be rich. They’re not. One in six men aged 25 to 64 has no job. One in four American workers earns less than $10 an hour.
Yet over the past seven years, the country’s national debt doubled, from about $8 trillion US to $16 trillion. The people who benefited from this avalanche of government borrowing were, overwhelmingly, the very rich. An economic recovery that is not.
Some die-hard addicts point to John Maynard Keynes. Didn’t the great guru promote increased government spending during downturns?
Yes, he did. But he also recommended we run surpluses afterward, to pay back what we borrowed. That hasn’t happened.
In Canada, for instance, and we are a model of fiscal sanity compared to Europe, our federal government managed only 13 surpluses over the past six decades.
And that is precisely the problem. The EU has already overextended its debt load to such an extent that the private sector runs and hides.
Corporations are sitting on record cash holdings, for fear of an imminent crash. You can’t borrow your way out of trouble, when borrowing is the cause of that trouble.
But Europe’s politicians today, like those at Versailles, cannot face hard truths. Their populations won’t stand for it.
So they will go on borrowing from each other, in paper promises that will never be redeemed, until the roof falls in. Europe’s last round of comparable madness brought a second world war. Who knows what awaits us this time?
