Gwyn Morgan is a Canadian business leader and a director of two global corporations.
The latest Spanish banking crisis saw European leaders scrambling to stop the euro from being washed into history's reservoir of flawed economic concepts. As I have argued before, a 17-country currency union without common fiscal governance is akin to 17 members of an extended family having equal access to a joint bank account. While some members work hard and contribute their savings, others borrow against the joint account to pay for irresponsible lifestyles.
Now, a decade after adopting the euro as their common currency, euro zone leaders are trying to correct that fatal flaw by getting all members to sign a pledge promising to suddenly become prudent and responsible. Getting all the players on board is proving difficult enough, but what are the chances that they will actually mend their ways?
It would require fundamental structural changes in Europe, such as getting rid of labour laws that make businesses wary of hiring workers because laying off staff or terminating employees for poor performance is a costly bureaucratic nightmare. It would also mean downsizing bloated government bureaucracies, reducing excessive public-sector compensation and reforming social programs.
But rather than focusing on measures to stop the fiscal hemorrhaging, euro zone leaders have been fixated on trying to persuade financial markets to lend even more money, digging their vast debt hole even deeper.
The euro zone wants more support from the International Monetary Fund, which, in turn, is pressuring its members to contribute cash. Prime Minister Stephen Harper has rejected the IMF's demands, noting that "Europe is one of the wealthiest parts of the planet."
It would be difficult to explain to Canadians that while this country reduces spending, reforms Employment Insurance and moves the pensionable age to 67 from 65, it would send cash to support countries such as France, whose new Socialist president is promising to end fiscal austerity and push the pensionable age back to 60, from 62.
It isn't difficult to grasp the concept that you can't solve a debt problem with more debt.
Yet, amazingly, even after massive government cash injections have failed miserably, the Keynesian myth lives on that stimulus spending is the way to spur economic growth. Why are politicians, the news media and much of the electorate demonstrating the definition of insanity, often attributed to Albert Einstein: "Doing the same thing over and over again and expecting different results"?
This tragic debt abyss, which has destroyed the hopes of millions of unemployed young Europeans, would not have happened if political leaders had paid heed to the wisdom of Austrian economist Friedrich Hayek.
His 1944 book, The Road to Serfdom, took the polar opposite view from Keynes' interventionist theories. The book created a huge sensation as it challenged the "government knows best" mentality that had developed out of the requirements of fighting the Second World War.
Mr. Hayek believed that freeing the private sector from the bureaucracy and interference of government was the key to economic prosperity. He rejected the socialistic model wherein governments organize economic activities according to a blueprint that "directs the resources of society to conform to the planners particular view," in favour of creating conditions where "individuals are free to use their knowledge and initiative" to build wealth-creating enterprises.
Those trillions of euros in government spending not only failed to stimulate economic recovery, but actually built the debt mountain that now prevents that recovery. Runaway deficit spending has thrown roadblocks in the way of private-sector investment, the only engine of growth that has ever lifted countries out of recession. Worries about a possible financial Armageddon have driven down consumer demand. And investor pessimism means there is less capital available for innovative startups that spawn tomorrow's business champions.
This is the tragic legacy euro zone leaders are passing on to the next generation, just as Mr. Hayek could have predicted seven decades ago.
© The Globe and Mail