Why Europe's Austerity Regime Won't Change

Europe needs more economic growth--but that costs money nobody's willing to spend.

European flags in front of the European Commission building in Brussels, Belgium.

The economists and politicians who argue that Europe (and the United States) need more emphasis on growth and less on punishing cutbacks are probably right. But that doesn't mean anything is going to change.

[Photo Gallery: Greeks Protest Austerity Measures]

The recent election of socialist Francois Hollande as France's new president has generated speculation that a kinder, gentler reform program will emerge to bounce Europe out of its economic doldrums. Hollande campaigned for office by vowing to renegotiate a recent pact that set tight budget rules for all eurozone countries, and he'll soon meet with German Chancellor Angela Merkel to insist on a new deal that does more to stimulate spending and create jobs.

The other pressure point is Greece, where newly powerful leftist politicians have rejected some of the stiff tax hikes and sharp spending cuts other European nations insist upon as a condition of providing Greece bailout money. There's an increasingly real threat that Greece, its citizens reeling from pension cuts, tax hikes, and other austerity measures, could leave the eurozone over the matter, creating a messy default scenario that unnerves financial markets.

The temporary hope for softer pro-growth reforms has created a kind of lull in the European drama, while everybody waits to see what magical plan might emerge from Bonn or Paris or Brussels. But no convincing new plan is likely to materialize, for one basic reason: Growth costs money, and nobody is willing to pay.

[See why markets will survive if Greece implodes.]

Americans ought to understand this, because new pro-growth policies in Europe would require the same kind of stimulus spending that has fallen out of favor here. There's a further complication: The countries that most need stimulus spending—Greece, Portugal, Spain, and Italy—would need to get it from richer northern European nations like Germany that aren't in a giving mood. "Saying you want less austerity simply means you want Santa Claus, because you need funding and the markets will not fund you," Citigroup chief economist Willem Buiter said at the recent Milken Institute global conference in Los Angeles. "It's daydreaming."

Before Europe wakes from that daydream, however, there must be some political posturing, with Merkel doing her best to give Hollande and the Greek insurgents a hearing. There may be a few small policy changes, such as better job-placement efforts for the unemployed and language training to give some workers a shot at moving to other countries with better job prospects.

[See 6 reasons America will rebound.]

But big programs, like tax cuts to trigger investment or new infrastructure spending, may be even harder to implement in Europe than in the United States. The basic problem is that Europe's rescues are coming to be viewed as a zero-sum game that requires wealth transfers from rich countries to poor ones.

That's not exactly correct, since measures that rescue troubled nations and keep them in the eurozone will ultimately benefit the rich nations like Germany that sell them stuff. But this subtle argument has become a hard sell to northern European taxpayers who would foot most of the bill, directly or indirectly, just as it would be tough to convince New Yorkers that it's in their interest to bail out Alabama or Arkansas.

So after many more meetings and a few claims of compromise, a fatigued Europe will most likely revert to the rich countries nagging the poor ones about their irresponsible finances. Unless Santa shows up with a big sack of money, and Christmas arrives early in Greece.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.