The European Disunion

Pardon my schadenfreude, but I was pleased to read an article in Sunday's Washington Post that questions the long-term viability of the European Union. Here's an excerpt:

For many Europeans, that greater good no longer seems to matter. They wonder what the union is delivering for them, and they ask whether it is worth the trouble. If these trends continue, they could compromise one of the most significant and unlikely accomplishments of the 20th century: an integrated Europe, at peace with itself, seeking to project power as a cohesive whole.

Although the Washington Post columnist seems to be wringing his hands over the possible outcome, those trends could be the awakening Europe has needed for half a century. There even are religious parallels as Europeans finally realize that governments don't create and endow individuals, but it's the exact opposite: individuals create and endow governments. And sometimes they create a monster.

When times are good, everyone gets his fill, and there still is plenty left over to feed the monster, so no one notices that it is growing. But when food is scarce, the monster demands to be fed more and more while the people starve. Only then do they whisper that maybe it's time to slay the beast, and the Washington Post columnist thinks that might happen in Europe.

Except for the Thatcher years in the U.K. and a few bright spots in Eastern Europe after the fall of the Soviet Union, the continent has been drifting toward big-government socialism since the close of World War II. Some even blame the Marshall Plan. (Typical -- always the Americans' fault.) But the formation of the EU and the recent global recession turned Europe into a real-world laboratory for studying political science and economics. That threatens big-government socialists, but it encourages conservatives and libertarians, because no sane economist would endorse much of anything Europe has done since the war.

For instance, Germans cheered the adoption of the euro in Greece because they could loan the Greeks money and not worry about devaluation when the loans are repaid. So far, so good. But the Germans loaned billions of Euros to Greece mostly for consumption, rather than investment. The Greeks used the money to buy German beer and Volkswagens, not machine tools.

What's the ROI on beer? That's debatable, but it certainly doesn't lead to much construction of new factories or production of durable goods. Now all that beer has been flushed into the Mediterranean Sea, and the Greeks can't repay the loans.

The ill-fated experiment demonstrates two important economics lessons: First, it's risky to pay people to buy your products -- especially when they ignore Lesson Two, which is that there is good debt and bad debt. Good debt is used for investments that produce a return greater than the interest fees; bad debt is used for consumption, which typically provides esoteric and temporary returns.

Last year, I pointed out that government planners prefer to stimulate demand when they should be stimulating supply. As supply grows, demand inevitably follows at some market-clearing price, but the converse is not necessarily true. Demand stimulation usually just leads to inflation and waste, as we saw in the recent housing bubble.

Western Europe also is providing some fascinating political lessons to those willing to observe them. When times were good and birthrates were plummeting, France needed workers to do "trivial" tasks while the gentry enjoyed "meaningful" careers in government, taxpayer-subsidized aerospace firms, or consumer-subsidized agricultural firms. French professionals worked 35 hours per week and then retired early to a taxpayer-supported life of sipping wine.

Meanwhile, Muslim immigrants who had been allowed into the country to do manual labor began forming their own autonomous enclaves, much as they did in Pakistan before it split from India. Initially, the French considered the immigrants as not being good enough to be true Frenchmen. But now the Muslims consider the decadent French as not being good enough to be Muslims.

The irony is delightful. Well, maybe not so much for the French. The affluent Muslim theocrats effectively bribed France into accepting Sharia finance laws while the poor Muslim theocrats start riots in Paris suburbs whenever the police try to enforce French laws.

The economics lessons seem obvious: Socialist countries eventually go broke, just as irresponsible trust fund kids eventually go broke. There also are political science lessons to be learned from the French immigration lab experiment: If you don't demand assimilation, you will get disintegration.

In my own defense, the pleasure I got from reading the WaPo article isn't so much schadenfreude as it is optimism. Our president and his Democratic Party appear to suffer such low self-esteem that they look to Old Europe for guidance. And now their European idols are failing. Half a millennium ago, when American natives first encountered European explorers, they thought they were gods. Then, supposedly, one of the Europeans accidentally cut himself with his sword, and the Americans' eyes were opened: "Behold, a god that bleeds!"

Perhaps history is repeating itself. But five hundred years ago, the Europeans brought individual freedom and prosperity to America; now they offer government tyranny and socialism. This time, I'm rooting for the natives.