Our Fiscal Black Hole Has Competition -- From Europe's Fiscal Black Hole

The United States isn't the only country facing a long-term retirement crisis: The nations of the European Union are staring down a fiscal black hole. Suffering as much from the global downturn as the U.S., European nations are running up spectacular budget deficits of their own. Now Joaquin Almunia, the EU's top economic official, is warning that rising debt will force governments to curtail spending and rethink their pension systems and welfare benefits, reports the Wall Street Journal.

Meanwhile, says the Journal, the International Monetary Fund has declared that European nations must make "a clear and credible commitment to long-run fiscal discipline" or outside investors will start demanding higher interest rates.

Although U.S. budget deficits have outstripped those of European countries in the past two years, we still have some catching up to do when it comes to mortgaging our future. National debt measured as a percentage of Gross Domestic Product approaches 80% in Germany, 120% in Italy and 75% in France -- as gauged by eyeballing a chart in the print version of today's WSJ. (The chart isn't available in the online edition, and I could not locate the IMF statistics that the Journal drew from, so I cannot reproduce it here.) My eyeball reckoning suggests that the U.S. debt burden is about the same as France's and slightly bigger than the United Kingdom's.

This chart from the IMF shows what's happening on a global perspective (public debt as a percentage of GDP):

Here's what worries me. European countries are responding to their looming pension/benefits crisis with modest reforms, but they are tinkering on the margins. A slowing economy is making the situation worse. The European Union, with an economy comparable in size to that of the U.S., is piling up governmental debt as fast as we are. Looking out 10 or 20 years, not only do U.S. deficits threaten to soak up the global pool of investment capital, so do the deficits of EU nations.

It's a big world, and there are lots of savings, much of it coming from developed countries. Maybe there's enough capital to keep feeding the insatiable appetite for U.S. debt. But is there enough capital to feed ever-escalating U.S. and European debt? What happens when the age wave swamps Japan, Korea, China and the other advanced East Asian nations? Can savings from India, Brazil and the petrostates sustain all of the world's wealthiest societies?

I don't know the answer, but I do know it is senseless to look at U.S. fiscal challenges in isolation. As our populations age, our entitlements swell and our national debt mounts, our government will be competing with the governments of other sovereign nations for a finite supply of capital to fund it.

Only a few very Americans have ever heard of Joaquin Almunia. But maybe we ought to heed his advice. I would be very much surprised if the Europeans do.