Destined to Fail?
If there’s a single issue you need to know more about — because of its major impact on the future of our economy and our sovereignty — it’s America’s involvement in the $1.3 trillion European bailout fund. For the past year and a half, with the full support of the Obama Administration, the International Monetary Fund (IMF) has been using U.S. tax money to bail out European governments and pay for their failed Socialist policies. That is wrong, and, together, we can stop it.
When thinking about “Bailout Universe,” I am reminded of a quote from one of my heroes, Margaret Thatcher. She once said, “The problem with socialism is that eventually you run out of other people’s money.” That is true. In America, Europe and throughout the world, the bill for decades of Socialist policies — tens of trillions of dollars in government spending and borrowing — is coming due, and, instead of dealing with the crisis by shrinking the size of the welfare state and liberating the free-market economy, most politicians are burying their heads in the sands, desperately seeking new dealers to feed their spending and borrowing addiction. In recent years, one of the biggest dealers has been the IMF, a government-funded global lending agency, that is sitting on a trillion-dollar pot of money — to which, U.S. taxpayers, you are the largest contributor.
The United States contributes $68 billion annually to the IMF general fund and has made an additional $100 billion available to the IMF as a last-ditch line of credit. That credit was spawned by the Obama Administration and approved by a Democratic Congress, over the objection of nearly all House Republicans, in 2009. Almost immediately after the line of credit was authorized, Europe started feeling the pinch of the global debt crisis, and a trio of nations — Greece, Ireland then Portugal — applied to the IMF and the European Union for bailouts, receiving a total of $561 billion. Then, in October of this year, as larger European countries — specifically, Spain and Italy — groaned under ever-larger debt burdens, the EU and IMF approved a $1.3 trillion European bailout fund, of which the IMF is contributing one-third of the funding. With the U.S. providing about 20% of the IMF’s budget, that puts American taxpayers on the hook for about $100 billion (twice the size of the GM bailout) and perhaps billions more.
Destined to Fail
The consensus in Congress and on Wall Street is that while America’s involvement in the European bailouts is costly, it’s also necessary. That is only half-right. The truth is, these endless bailouts are deepening the current economic crisis and putting us in danger of a much larger crisis in the near future.
To see why these bailouts are destined to fail and will inevitably make things worse, consider the situation in Greece — the country at the center of the storm, but which is merely the canary in the coal mine. Greece is a small country of 11 million people whose economy is merely 2% of the European Union. For the past decade, Greece has consistently run large budget deficits, reaching as high as 15% of their GDP in 2009 and accumulating a debt worth 143% of their GDP today. When Greece could no longer borrow money in the private markets last year, the EU and the IMF came to Greece’s aid, orchestrating a series of bailouts whose total costs have now reached over $300 billion (nearly equal to the entire Greek economy and amounting to $28,000 per person).
While one could make the argument that bailing out one small country at such a jaw-dropping cost would be worth it if that truly solved the problem, the problem is that there are many countries with the “Greek disease.” Ireland and Portugal have already received bailouts worth over $100 billion apiece. Who’s next? If math tells us anything, Spain and Italy. Spain is running a deficit around 9% of their GDP because their jobless rate is stuck at 23% — the highest in the Eurozone. Italy’s debt is 115% of their economy. If Italy were to receive a “small” bailout — say, the size of Portugal’s, about half their economy — it would cost over $1 trillion. Who will pay for it? America? Even if we came up with the cash, since America’s debt-to-GDP ratio is close behind Europe’s, when the time comes, who will bail out America?
Of course, we are assured that Greece, Italy and the other European nations are making “tough” spending cuts as a condition for this generous bailout cash. But it’s worth noting that most of these “cuts” are cuts in the Washington, D.C., sense — cuts in the projected growth of government spending or small cuts postponed years into the future that don’t come close to matching the scale of the problem. One example: Italian Prime Minister Silvio Berlusconi was forced to resign in exchange for passage of his “ambitious” austerity program. The centerpiece of his program? Raising the retirement age for men from 65 to 67, by 2026. Even the United States — the home of the third rail of entitlement politics — took it upon itself to adopt this change years ago. Of course, since that change won’t take full effect until over a decade from now, we’re hardly in a position to brag.
There is only one solution to the European debt crisis — just like there’s only one solution to the American debt crisis — and that is cutting government spending and balancing the budget. Just because that’s unpleasant doesn’t mean it’s not true. And, furthermore, the current strategy of spending record amounts of money to postpone the day of reckoning — whether through record deficits, record bailouts or the Federal Reserve’s “quantitative easing” — only exacerbates the uncertainty in the private sector (note the snail-like pace of our economic recovery and the wild swings in our stock market) and makes it more likely that the crash — when it comes — will be even more devastating.
A crisis caused by spending and borrowing will not be solved by more spending and borrowing. And that is why America should not participate in Europe’s $1.3 trillion TARP. America is facing its own fiscal crisis, so helping to bail out Europe not only rewards Europe’s bad behavior, it also makes America’s fiscal situation more perilous. Furthermore, as I told IMF Managing Director Christine Lagarde when I met with her recently, by withdrawing from the Euro-TARP, America would actually be helping our European friends by helping them to enforce the spending and borrowing discipline that both Europe and America need.
To enforce that discipline, I have introduced legislation (HR 2313), that would rescind the $108 billion in extra IMF funding that Congress approved in 2009. As of today, my bill has 83 co-sponsors. Sen. Jim DeMint (R.-S.C.) has introduced his own version of the bill, SR 1276. When he introduced that bill as an amendment to the Economic Development Revitalization Act in June, 43 of 47 Republican senators voted for it, so there is a broad Republican consensus on this issue. Furthermore, we are united against any future request by the administration for additional IMF funding.
From Day One, President Obama and his administration have been on the wrong side of this issue. Last year, the administration helped facilitate the first Greek bailout and the President himself personally called German Chancellor Merkel to pressure her into creating the trillion-dollar EU/IMF bailout fund. In recent weeks, the President and Secretary Geithner, responding to public pressure, have denied that America will need to bolster its funding to the IMF to finance these bailouts. But the IMF has already made commitments that make such an increase — or at least, a request from the IMF for an increase — almost inevitable. And that’s because the administration spent most of the crisis making the case for bigger and bigger bailouts instead of encouraging the EU to get serious about containing and removing the problem. Even now, the administration can’t be honest with the EU about the scope of the problem or the solution to the problem because the root of the problem — government spending and borrowing — is the same one we face here in America, thanks in no small part to the administration itself.
To avoid a debt crisis here at home, we need to start cutting spending and pass a balanced budget amendment. Free trade, tax reform and a strong dollar would also go a long way to revitalizing our economy. While the future of Europe’s economy is ultimately up to the Europeans — and it’s worth noting the EU was set up to be an economic competitor to the United States — we are confident that free-market solutions will work just as well for them as they do for us. During these tough economic times, what we need is a global recommitment to the timeless principles of free minds and free markets. While trillion-dollar bailout band-aids might be able to prop up failed Socialist policies — albeit temporarily — they can not — and will not — be the catalyst for a new era of prosperity.
The specter of European bailouts — and America’s involvement in them through the IMF — is a powerful issue that continues to grow and won’t go away. That’s why passing my bill would send a powerful message to President Obama, the European Union and liberal politicians throughout the world that we cannot take the “too big to fail” philosophy to a global level. The only thing “too big to fail” is America itself.
This story was originally published as the coverstory in the December 19th, 2011 issue of HUMAN EVENTS newspaper.