Public spending takes centre stage once more.
"A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury" -- anonymous.
Today's politicians are primarily concerned with buying votes and short-term popularity instead of considering the long-term good of the nation. Shortfalls between spending and taxation are met through borrowing because anyone who tries to cut public spending soon finds themselves voted out of office by an electorate that doesn't want the gravy train to stop.
The most obvious recent example is Greece, whose overpaid and highly inefficient public sector has looted the state treasury -- though a secondary contributor to its problems is a culture that tolerates corruption and tax evasion on an industrial scale.
Greece is the proverbial canary in the coal mine. Almost every other European country has a similar problem because their increasingly ageing electorates demand rising living standards, but they want someone else to pay for it. As a result, they have all but condemned Europe to a slow and inevitable decline.
We don't want economic growth
European electorates love to vote for higher public spending but they aren't so keen on raising the taxes to pay for it (if they were there'd be no such thing as a budget deficit). They also approve of laws that restrict economic growth, and thus damage the interests of consumers, by restricting competition in order to protect producers' interests.
While trade unions and industry pressure groups invariably claim to represent the public whenever they complain about economic reform or imported goods and labour, always remember that first and foremost these organisations exist to represent their members' interests. And the one thing that virtually all incumbents loathe is increased competition because this reduces their profits and salaries.
Europe's politicians claim to dislike high unemployment. So why do they pursue policies that are designed to drive up unemployment, particularly among the young? Throughout Europe, the combination of minimum wages and laws that make it exceptionally difficult for employers to shed staff has discouraged firms from hiring people in the first place which also hampers economic growth.
The bond market will save the day. Well, sort of
Eventually, European countries will be forced to cut their levels of public spending because the bond markets will stop lending them any more money. As Herb Stein famously said: "Things that can't go on forever must end."
This has already happened in Italy and Spain where rising bond yields forced economic reforms which ordinarily would not have been politically acceptable to their politicians and electorates. Some countries will, however, resort to the printing press. My guess is that Germany, with its memory of the hyperinflation of the Weimar period, won't go down this path.
Greece shoots itself in the foot
The urge for free goodies from the state causes many people to oppose anything which they perceive as damaging their interests, even if in doing so they inflict further harm. We're seeing a good example of this in Greece as its biggest industry, tourism, which represents roughly 20% of its economy, has seen foreign bookings collapse because of the political chaos, rioting and talk of transport strikes.
The Germans have been voting with their wallets in droves ever since effigies of Germans were burnt in the streets of Athens. While bookings had dropped substantially before the 6 May election, since then one industry leader has reported a further 50% fall. That shouldn't be a surprise to the Greeks because people generally don't go on holiday to a country where they believe that they are not welcome.
Where to invest (or not)
Europe's ageing populations should mean that the demand for healthcare will continue to rise, which should be good news for the pharmaceutical and medical companies such as AstraZeneca (LSE: AZN), GlaxoSmithKline (LSE: GSK), Shire (LSE: SHP) and Smith & Nephew (LSE: SN).
There is a problem in that the pressure on state budgets will probably force health spending to be capped at some stage, and if politicians refuse to do this then the bond markets will impose the necessary financial discipline. I take the view that people will be prepared to spend more of their own money on their own healthcare as and when there are big cuts in state-subsidised healthcare spending.
This is because, unlike in Britain, the European countries already employ a mixture of public and private provision through insurance-based schemes. So their political systems and electorates are far more receptive to private provision than in Britain where many people want a state monopoly over health, even though the NHS has been shown to routinely favour the interests of producers over those of consumers.
Nowadays I largely avoid investing in Europe, except for multinationals that do most of their business outside the eurozone. Europe used to be the future of the world's economy, but its best days are far behind it.
Investing is by no means easy in today's uncertain economy. That's why we've published "Top Sectors Of 2012" -- our guide to three favourable industries. This free report will be dispatched immediately to your inbox.
Further investment opportunities:
> Tony owns shares in AstraZeneca, GlaxoSmithKline and Smith & Nephew. The Motley Fool owns shares in Smith & Nephew.
