Ideas@TheCentre

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An immaterial benefit: Learning from Europe’s mistakes

Oliver Marc Hartwich | 27 April 2012

In looking at Europe, Australia may well see its own future. In some ways, Australia is just 20 or 30 years behind the developments in the Old Continent. Australia’s population is also ageing, albeit starting from a younger level. Australian governments have recently relapsed into financing their massive public spending increases on borrowing, just as European governments did in the 1970s and 1980s. And Australian government programs now sound as least as ambitious as EU initiatives—and they will probably end up at least as wasteful and inefficient.

The European public debt crisis is a wake-up call to those who believe in running a country on ever more feel-good programs, welfare initiatives, and industry assistance. The crisis of Europe is a crisis of government that has become too big. This is where the massive debt burdens originate—only a small component of government debt is the result of the financial crisis. The financial crisis did not cause Europe’s problems. It only made them apparent.

Perhaps this is the greatest benefit to Australia from Europe’s current woes. Europe provides us with a clear warning. It shows us what happens when government spending grows continually faster than government revenue. Such a scheme of financing government ultimately becomes a Ponzi scheme when eventually more debt needs to be raised to just pay the interest on previous borrowing.

Australian politicians keen to implement their next flagship policy should be sent on a mandatory field trip to Greece or Portugal each time they want to spend extra money (or maybe not, since both countries are still nice places to visit as tourists). The lessons from Europe’s decades-long spending binge need to be learned and understood. Australian governments should refrain from adding any extra programs to existing spending commitments for as long as the budget remains in deficit. Not only would this ease Australia’s dependence on offshore funding but it would also reduce our vulnerability to global economic shocks and prevent us from edging closer to a situation similar to the one in which Greece, Portugal, Spain and other European countries find themselves.

Dr Oliver Marc Hartwich was until recently a Research Fellow at The Centre for Independent Studies. He is taking over as the Executive Director of a new think tank, the New Zealand Initiative, in Wellington, NZ. This is an extract from his report Faraway, So Close: How the Euro Crisis Affects Australia, which was released this week.