Sometimes it is a good idea to see the big picture. For many years now the west apart from Germany has decided to live beyond its means. It has imported its lifestyle from China and other emerging markets, and borrowed money to sustain the spending. More recently a collapse of private sector bank credit and a squeeze on real incomes has started to adjust the way individuals borrow too much. Instead governments have taken up the task of spending and borrowing way beyond the tax capacity of the country concerned. In the case of the more extreme countries, they have been borrowing 10% of national income for extra state spending. This entails borrowing at least one pound in every five spent in the public sector.
Certain European countries decided to bind themselves into a currency union with Germany. Germany kept her costs down, and exported large quantities of manufactured goods to the weaker states in the zone. They ran up large borrowings to buy the goods, inflated their house prices, and spent too much in their public sectors. These countries cannot devalue to get into a more competitive position. They now want Germany to grant and lend them the money to carry on spending. Germany is reluctant to do so.
The US and the UK printed money to keep interest rates down, and allowed their currencies to devalue, to help price themselves back into world markets.
The Euro area is running out of opportunity to sustain the high levels of spending and borrowing. Money lenders are saying to several countries in the zone they are no longer willing to lend at an affordable rate, or at all. The EU and the IMF impose substantial cuts on public spending. The banks are weakened by the losses on the government bonds. They find it difficult to finance a private sector recovery. The more the economies decline, the less tax revenue there is, and the bigger the deficit.
What passes for political debate is usually about tackling symptoms, or seeking to delay the inevitable. Continental politicians hope that China and Brazil will come to their aid and bail out problem countries, or anticipate the IMF arriving with cash infusions for Italy on top of the three countries it is already supporting. If markets fall they seek to prevent shorting, only to discover the market still falls as owners sell. They shuffle governments around, hoping that markets will be impressed if a new team comes in to supervise the old policy.
The truth is markets will only calm down and refinance states at affordable rates again if governments not only say they intend to live within their means for a bit, but manage to do so. The public sectors of the overborrowed states need to do less, and do it better. A lot could be achieved by applying good management techniques to tasks in hand. I know of few public sector activities where it would be impossible to reduce the cost by 10% without damaging the service. The public sector does have to raise pension ages and change future pension entitlements. It does have to cut out less desirable activities and delay some desirable projects.
Savers and investors in markets do not believe the European states are going to transform themselves quickly enough and cut their demands for cash. Until they do so, the crisis remains. There is no choice between cutting public spending and getting growth going. Controlling public spending is a necessary but not a sufficient condition for growth. China does not have to lend us the money to buy her goods and live beyond our means. She can turn to making more goods for her own population. The West has to do better at paying its way in the world, and has to learn to live more within its means.