Western debt crisis shows 10 contradictions
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People's Daily, September 29, 2011
The first contradiction exists between the Western political system and its expensive social welfare programs. The Western political system features the separation of powers and relies much on elections. A successful election candidate requires four elements: great strength, positive personal image, eloquence and nice-sounding promises. In order to win elections, political parties ignore the actual financial capability of the government and vie with one another in promising better welfare, thereby resulting in ultra-expensive welfare programs.
The sharp contradiction between increasingly expensive welfare programs and extreme democracy has led to a second contradiction: one between election promises and financial capacity. In order to fulfill election promises, political parties need to increase the government's financial capacity. In order to increase the financial capability, they need to raise taxes.
The Western world's steadily aging population, rising labor costs, and industrial "hollowing-out" situation have resulted in a third contradiction: one between economic downturns and tax increases. Euro zone GDP growth decelerated to 0.2 percent quarter on quarter in the second quarter of 2011, after 0.8 percent in the first quarter. This was the weakest economic growth of the euro zone since 2009. Meanwhile, Germany, the economic engine of the euro zone, posted a quarterly GDP growth of 0.1 percent. GDP growth in France ground to a halt in the second quarter.
Politicians who seek re-election find it hard to increase taxes in times of economic decline and have no choice but to turn to deficit financing. This leads to a fourth contradiction: between successful re-elections and huge government debt. Politicians propose issuing new debt in order to win re-election, and a debt crisis can arise as the government keeps issuing new debt. In order to resolve the debt crisis, the government needs to cut deficit spending, which may cause public discontent, reduce domestic consumption, aggravate the economic downturn and increase unemployment. These negative results will in turn lead to declines in tax revenues and increases in deficit spending. Hence, the fifth contradiction arises between debt crises and the economic downturn as well as social unrest.
Currently, demonstrations and riots are happening from time to time. A country cannot resolve its high debt problem and then ask for help from other countries, which has resulted in the sixth contradiction: the conflict between the willingness to give assistance and the aid price of Germany and other countries.
So the question is whether Germans will foot the bill for the Greeks. German Chancellor Angela Merkel is facing a difficult choice between the euro and votes. This is also the reason why Germany, France and other countries have been just paying lip service. Neither Germany nor the European Central Bank can solve the problem. As British and the United States are independent currency countries, they can depend on debt monetization (disguised debt repudiation) to ease emergencies, such as proposing new quantitative easing polices and government assistance to central banks to pay matured debts. Such an approach however is not that easy for European central banks to take and may result in high debt countries scrambling for "monetizing quota."
The seventh contradiction is one between the system of European central banks and debt monetization resolutions. At present, the financing demands of both high-debt Western countries and the western banking system have reached a peak. The ratio between financing demands of the West's banking system and its total liability has amounted to between 30 percent and 40 percent. Thus the eighth contradiction has come into being: the conflict between financing demands of high-debt countries and banks' needs.
If the methods above cannot solve the problem, debt extension will turn into the only choice. But debt extension will lead to the ninth contradiction: the contraction between long-term and short-term pain. The short-term pain will cause the countries with heavy debts to go broke, but will the long-term pain ultimately solve the problem? The long-term pain solution may lead to more pains and make more countries go broke in the future. Since the short-term pain and long-term pain both cannot solve the problem, will it work to further build the euro zone into "a country of Europa?" Is it feasible to let the euro represent monetary system of the euro zone and let the "country of Europa" represent the financial system of the euro zone?
Then, the 10th contradiction will show: the contradiction between the monetary system and the financial system of the euro zone. No one will give a proposal of founding a "country of Europa." Even if somebody really gives such a proposal, the result will not be promising. Germany will say "no:" Why should I pay the bill for Greece? Greece will say "no:" I would rather be the king of a small country than a citizen of a big country.
Of the 10 contradictions above, the primary one is the contradiction between the super-high social welfare level and political system of the West. If the West does not solve the "ultra-democracy" issue of its political system and the "advocacy of super high social welfare" issue of its culture, the 10 contradictions will hardly be solved and even if the West has a temporary solution, the solution will lead to more problems that are much more severe.
