The problem in Euroland is not just a problem of a few countries which are no longer competitive. There is a problem of too much government debt. The same issue haunts the US, where there is a poltical war over how to get the deficit down. The UK now has a government which says its main purpose is to eliminate the deficit.
The problem of the west rests in a series of countries that could properly be called DOGS – Democratic overspending government sovereigns. In Euroland these dogs are in trouble, as well as the Pigs. The pressures of democracy have led politicians of many different parties and persuasions to offer both higher public spending and lower taxes than they need to cover the spending in the pursuit of electoral success and wider popularity. They have decided they can get away with this, as they have been able to borrow large sums to cover the gap. In more recent years some have even argued that borrowing more is essential to sustain demand or to lift their economies out of the slump their boom/bust policies created.
In Euroland countries are discovering there are distinct limits to how much markets will lend to governments. As interest rates rise, so countries become unwilling to borrow. They seek subsidised credit from elsewhere. The US and the UK during the recent deep recession turned to printing money. This was advertised as a policy to augment demand at a time of falling output, but it became a convenient way of sustaining very high public borrowings at low interest rates. The new money created was used to buy government bonds to keep the government borrowing rate down.
Euroland is having an internal row about whether it too should extend the eternal credit approach to public budgets by printing more, or whether it just needs to get tougher to control deficits. The US and UK are pledged to cut deficits by raising more in tax and reducing the increase in spending, but meanwhile print some more money.
When you look across the world at the rise of China and India, you see that the west does not have a sufficiently competitive model for modern conditions. Parts of western business and economic activity are still world beating, and earn their producers good incomes in the global market. The more western economies rely on state activity and subsidy, the narrower the base of competitive activity, and the more money the country needs to borrow to sustain its relatively high living standards.
Euroland needs to worry not just about the Pigs but also about the Euroland Dogs. German cars, French food and wine, and Italian fashion may still be world beaters, but in too many areas now the production and the incomes are moving to the east from the west. That is why the west needs to change its model and get on top of its debts.