You can’t vote for prosperity

Across Europe, people are voting to dump austerity for 'growth'. But you can’t just vote for prosperity, you have to make it, says Merryn Somerset Webb.

Until recently life was pretty good in most of Europe. Europeans have had, as Ed Yardeni of Yardeni Research puts it, "the best governments money can buy". Their leaders "have provided them with all sorts of wonderful social benefits".

Many have been employed by their governments to provide those benefits to others those who can't find jobs they want or those who are retired (rather earlier than people elsewhere). The problem is that the good life is expensive. While income taxes are high in Europe by the standards of everywhere else, they still haven't brought in anywhere near enough to pay the bills (partly because the bills are too high and partly because of widespread tax evasion).

So while Europe's government spending has long ranged from 40%-60% of GDP, revenues have ranged from 30%-50%. As a result of that gap, most countries are now running scary ratios of government debt to GDP. Default aside, there aren't many ways out. The first is slow, painful, and not guaranteed to work it is the half-hearted attempts of governments to introduce a small amount of what some call fiscal austerity and others call fiscal sanity. That's what Europe is currently trying to do. The second is the one Britain is working on talking loudly about mild budgeting while keeping interest rates well below inflation and hoping time will make the debt go away (financial repression'"). It's more likely to work than the first option, but is just as slow and painful.

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No one likes either option. That's why across Europe people are voting to dump austerity for growth', by which they mean something impossible. They want a return to the pre-crisis days of willy-nilly spending and endless safety nets. But the twin problems of the West high unemployment and gross indebtedness can't be magicked away. You can't just vote for prosperity, you have to make it. So if Europe and Britain want real growth to return soon, they have do something radical.

What might that be? Suggestions welcome on my blog as usual. But a good paper from Tullett Prebon's Dr Tim Morgan made the point that before we can reform our system we must recognise the basic problem. The reason modern capitalism doesn't serve us well is not because it doesn't work in principle, but because we have adopted a corrupt crony version of it which rewards insiders over outsiders, regardless of success.

We must stop defending the mess we currently have and promote real capitalism. That means slashing the size of the state; attacking regulation; improving the lot of entrepreneurs and introducing a simplified tax system (perhaps the flat tax George Osborne used to be keen on). If Europe and we don't do these things, we may drift into socialism. Then we will do what Mrs Thatcher always said we would "run out of other people's money".

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.