Political revolt against fiscal austerity underscores laws governing energy and money to which European leaders should pay more heed: Neither can be created from nothing.
No one, not even politicians, can create energy. All people can do is make available energy useful.
People can, in a sense, create money. Individuals and corporations can earn profits. And governments can increase the amount of currency in circulation.
In neither case, however, does the money come from nothing. Generating profits expends some combination of land, labor, and capital. Raising money supply, unless compensated by productivity gains, lowers currency value.
Problems arise when governments act as though they can bring energy and money into being as acts of political will.
This has happened in Europe with calamitous results.
Governments have accumulated precarious levels of debt and are raising tax rates that already are high.
At the same time, most European governments have subsidized renewable energy, especially wind and solar power, heavily. In some countries, governments assume the financial burden; in others, governments put the load on energy consumers.
Either way, the subsidies impose economic costs. And the costs arrive as tax rates rise.
Economies have trouble growing under conditions such as these. And when economic growth becomes torpid or nonexistent, tax collections suffer, keeping governments in fiscal jeopardy.
Europe thus finds itself in a double helix of economic and fiscal spirals as populations resist cuts in the lavish state services they’ve come to expect.
In France and Greece this month, voters scuttled leaders who had asked for sacrifice in the interest of state fiscal health. Media reports portrayed the development a revolt against austerity.
Yet what hardship would there be if European countries took to logical conclusion the process many have begun already of curbing state sponsorship of energy that’s politically fashionable but economically unsound?
Having fallen for the delusion that public expenditure creates energy, Europe now faces a choice: Rationalize energy ambitions, or find some way to create money out of nothing.
(Online May 14, 2012; author’s e-mail: [email protected])