The R Word

German Finance Minister Wolfgang Schaeuble warned this week that failure to address Europe's soaring youth unemployment rates and dropping the continent's welfare model could lead to revolution. This is the first time we have heard a Western political leader use the "R" word in association with the current global economic crisis but my guess is it won't be the last.

The fact that a sober-minded German finance minister should make a claim that until recently (if you believe the mainstream media) has been the preserve of the gun-toting, Bible-swearing, bolt-hole-building survivalists who are ridiculed for their predictions of a forthcoming economic and societal collapse, is pretty incredible.

I don't regard myself as one of those right-wing nut jobs (believe it or not) but I have been predicting for some time that the current global economic situation is going to get a lot worse before it gets better and that it will lead to widespread violence in some of the worst-affected countries. I think the course of events is obvious and if you want a road map, you only need to look at the 1930s.  The Wall Street Crash in 1929 was followed by a deep and prolonged economic downturn that became the Great Depression.  It took 4 - 5 years for the impact of the initial stock market collapse in October 1929 to be felt in economies all around the world.  The parallels to the banking crisis of 2008 followed by the Global Financial Crisis, which continues until today in much of Europe, is obvious.  Governments tried to spend their way out of recession in the 1930s but that only made things worse, particularly in the United States where FDR's huge spending programme ("The New Deal") led to the longest and deepest economic downturn of all.  We all know how it turned out for the world at the end of the 1930s.

The Prime Minister of Spain, Mariano Rajoy, in the same article referenced above, calls for more state aid and liberal lending policies towards small businesses - in other words, more of the excessive state spending and central bank pump-priming that led to the recession in the first place.  It didn't work in 1935 so why does anyone think it will work in 2013?

There is a myth that Europe is pursuing austerity policies.  If austerity means cutting government spending, Europe is doing anything but (as this article shows).  Almost all European governments have been spending more than ever before.  If that was going to work, it would already be doing so.

I agree with Herr Schaeuble that Europe risks revolution if the dire economic situation there is not addressed but I do not agree that more state spending on welfare and more money-printing to fund it are solutions. It is precisely the entitlement culture of the welfare state and the head-in-the-sand faith that more and more government spending will generate economic growth that is the problem.  It is the cause of societal collapse, not the solution.  We have seen evidence of this already in the riots in Greece and Spain - disaffected youths who understandably can't fathom why jobs don't magically appear and welfare payments won't keep flowing.

The West has forgotten what made it so successful economically in the first place - a combination of individual self-reliance, largely free markets and respect for private property, plus another important factor - a monetary system with integrity.  All of these things have been abandoned by Western governments and all of them must be restored if the West is to prosper again.