Western governments mainly know just one refrain. They say they need to spend more, so they need increased revenues. When the economy is doing well they want to spend more, so the public sector participates in the success and modernises to keep up with the private sector. When times are bad for the economy they want to spend more, as a counter cyclical boost, to cushion the downturn, to help people in trouble.
Most advanced country governments have done this for many decades post war. They have long since come to the conclusion that their spending aspirations far exceed people’s wish to pay taxes. Though they often say they can do it by taxing the rich more, they know in practice they can only afford the increases in spending if they tax everyone more. Most western governments have in consequence resorted to the idea of borrowing more instead.
The US, the UK, the latin countries of Europe,and Japan built up large debt mountains in the good times prior to the Credit Crunch. As the self inflicted Crunch hit, they decided to spend even more money on bailing out damaged banks instead of demanding an orderly administration of the worst cases, where bondholders as well as shareholders would lose money, and professional counterparties would have been taught an expensive lesson. They then added to this extra borrowing yet more borrowing to provide a fiscal stimulus at a time of recession.
The result of assuming all these liabilities has been to push some of these countries into a debt crisis, and to leave several others dangerously placed, awaiting the market’s verdict and pleasure.
Most commentators now say these governments have to curb their appetite for debt. There remains an argument over how quickly and to what extent. In the UK there is even an argument over what is happening, as very few commentators can be bothered to read the figures, or have a vested interest in misrepresenting them.
So now we are at a crossroads. In Euroland the markets are saying they are not prepared to go on lending at the rates some of the states want. They are also saying they do not trust banks that are full of dodgy government bonds. Euroland’s immediate response is to demand higher taxes. There are plans for a financial transactions tax. There are demands that Greece, Italy and the rest learn how to collect much more tax from their citizens. There are attempts to close down or tax offshore centres.
They are also having a row about how much more to borrow. The high borrowers think it would be a great idea for them to be able to borrow Euros in Eurobond form, where Germany and France were standing behind their borrowings. Although Germany says “No” to this, it is happening by the back door. The European central Bank is lending to weak banks in weak countries, and will presumably raise money to do so on their joint account. The Stabilisation funds also represent the use of the common borrowing account to subsidise loans to the weak countries.
In the end, if they wish to carry on with their dangerous and damaging experiment, they may overcome German resistance to simply printing it. The ECB could carry on buying up sovereign bonds in the weaker countries to keep their interest rates down, printing money to do so. The ECB would then have come of age. It would be just like the Fed and the Bank of England. It would have discovered that elysian field, that place where governments can print money to spend. There would be no tax bill, no tricky interest bill, no need to roll over debt.
Any business faced with the probelms these countries face would get on with task of cutting spending. This never seems to occur to governments. Alternatively they say they are doing it, yet the figures for cash spending keep on going up. They manage to combine clumsy cuts to services, with no progress in reducing the outgoings.
There is just one small snag. Countries that have tried relying on the printing presses have usually ended up with very rapid inflation, a lack of trust in the currency and government, and collapse of the system. It would be wise not to overdo the printing, or to rely on it as the easy way out.