Promises of tax cutting thrown around like confetti during election campaigns may prove harder to keep once those new governments are established in power. All the members of the euro have to keep their budget deficits within three percent of GDP.
That will be hard to achieve.
In France, Chirac this week abandoned a promise to balance the nation's budget by 2004. The new Portuguese government has already had to scale back tax-cutting plans after being censured by the EU. Expect more conflicts between new right of center governments and the EU and the European Central Bank.
Expect also to hear some very old tunes getting reprised.
The way for Europe's new governments to get out of this jam is to revive old-school Reaganomics. They will have to argue that cutting taxes will revive the economy, push down unemployment, and so solve the deficits -- exactly what Ronald Reagan argued as he pushed through big tax cuts without making cuts in spending in the US during the early 1980s. The Laffer curve is set to make a comeback, this time in continental Europe.
There are some signs that it works. In Spain, which started this process, tax revenue is rising. The government managed to balance the budget for this year, mainly because falling unemployment led to big increases in the tax yield.
But, Reaganomics in Europe is likely to have much the same results as Reaganomics in the US. The American economy started a two-decade long party, but the deficits did not come down for another decade, and then only after an assault on spending.
The same may well be true in the new tax-cutting Europe. The economy will boom, unemployment will start to come down, but the deficits might well be big. The stability pact may not survive, the euro will get battered, and the ECB may be tested to the limit. Yet if the recipe revives the euro-zone economy, as it revived the American economy two decades ago, most voters will probably conclude they have made the right choice.
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