4/9/13 – Margaret Thatcher and Europe

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Apr 9, 2013 10:33:35 AM

and tagged Europe, Yesterday's News

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“Margaret Thatcher RIP,” I tweeted yesterday, but in retrospect, that’s probably the least likely outcome. Wherever she ends up, peace is the last thing I would expect. If heaven, she’ll be offering God suggestions for how to run the world better; if hell, she’ll be planning a revolt. Love her or hate her, there’s no doubt that Margaret Thatcher changed Britain and, to a much lesser extent, the world.

I say “to a much lesser extent” because, as the current European situation plays out, it is becoming increasingly apparent that we’re reaching a Thatcherite breakpoint. To paraphrase one of my favorite quotes of hers, the problem with socialism is that eventually you run out of other people’s money. Europe, especially the periphery, is now at that point.

Cyprus is a good illustration of exactly this problem, with the other people—Germany and the northern economies—saying, “Enough, no more money.” The most recent example is the Portuguese court decision of a couple of days ago, which struck down the government’s decision to cut spending. Overall, more than a quarter of the spending cuts were ruled illegal because they discriminated against public employees. To quote Fitch Ratings, “The ruling could be interpreted as saying that all public spending cuts that affect civil servants are unconstitutional . . . This is a greater concern than its immediate impact.”

It certainly is. Regardless of whether the legal interpretation above is found to be correct, the attitude behind it certainly exists in Europe. When I first started this blog, I wrote a post about Europe called Teenagers with Credit Cards, which outlined how upset I got, as a teenager, when the bill came due on my new credit card. It wasn’t the spending I minded, it was the bill. Like my teenage self, the peripheral economies are now getting the bill and the news that the credit card will be cut off—and they don’t like it.

Thatcher was the one who presented the bill to Britain and then cut up the card. Unsurprisingly, to many, she was and remains an evil figure. She pushed the middle-class values of living within one’s means and free enterprise, and came to power with “one deliberate intent: to change Britain from a dependent to a self-reliant society.” For people who were comfortable being dependent, this was a wicked act. Thatcher’s path in Britain was rocky, with massive economic costs in the short term, including inflation, high interest rates, mass bankruptcies, and high unemployment. This led to civil unrest, including massive strikes. In the end, however, she won, and Britain is better as a nation for it.

“A dependent society” is a very good description for many of the welfare states in the European periphery, and peripheral Europe is now at the point where the money has run out and the credit card must be cut up. As with Thatcher, it is a woman, Angela Merkel, who is doing the mom thing and insisting that the credit card be cut up. To quote Thatcher again: “If you want something said, ask a man. If you want something done, ask a woman.” The reaction from the peripheral countries is identical to that of Britain when Thatcher did the same thing. We can certainly expect the same mix of reactions over time if Germany hangs tough—massive economic downturns, which are already in progress, leading to civil unrest.

As Thatcher knew, though, when the money runs out, there really is no alternative. It remains to be seen whether Merkel has the courage to hang tough on behalf of her taxpayers, and whether the politicians in the peripheral countries have the courage to make the necessary changes. I suspect the answer to the first question is yes, but the answer to the second is no—and that doesn’t bode well for the future of the eurozone or the peripheral countries themselves.

Thatcher’s legacy is that she turned Britain away from the path the peripheral economies are now on and in a more successful and sustainable direction. I hope the peripheral countries can find a leader with the same courage and conviction that she brought to Britain.

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