Europe looks like it is on the verge of imploding.
The financial crisis has claimed two eurozone leaders: George Papandreou, the prime minister of Greece, and Italian Prime Minister, Silvio Berlusconi.
Italy is currently the eighth-largest economy in the world and facing pressure from the bond market. Yields on bonds soared above the 7 percent level, which is considered unsustainable by most economists.
France is worried about a downgrade of its AAA debt rating, and Germany seems confused. The eurozone makes up the biggest economy in the world. If it goes down, expect the world to follow.
Europe can teach us an important lesson. America is now at a threshold; President Barack Obama wants to make America into a large European socialist state, while the Republican Party wants to return to a smaller government with less taxes. Robert Rodriguez, CEO of First Pacific Advisors (FPA), a fantastic long term value investor who predicted the housing crash, stated that 2012 was the most important year in 80 years.
While the Big Government Keynesians could point to Greece as an example of failure of austerity, the case in Italy was entirely different; Italy never implemented austerity. Italy’s debt to GDP has been running at around 100 percent for the past 18 years or so. The debt has risen slightly since the financial crisis, but Italy was never careful about its finances.
Germany, on the other hand, was considered the sick man of Europe only 10 years ago. Germany still had to absorb huge costs of re-uniting with East Germany in 1990. The country reversed course and Germany’s taxes as percentage of revenue decreased, while debt to GDP was reigned in.
It seems that all the European economic models, and not just Greece's, prove that the Big Government model does not work.
Critics might point to strong economies like Denmark and Scandinavian countries, which have large welfare systems. However these models seem to only work in a small homogenous country. It is much easier to pay high taxes when your close friend and neighbor needs welfare, but less so when a random person across the country does.
Americans should look to other big countries which have social welfare states as a lesson of what not to do. Americans should reject any proof from small countries, which have successfully implemented socialist economic systems.
Apparently the Obama administration has not gotten the lesson yet.
President Obama continues to borrow spend and tax. Next year the American voters will be making the most important decision in 80 years. They should look at Europe, and reject the tried and failed model.
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