Europe’s Accelerating Decline

Europe continues to push itself toward the abyss. Three stories from the CNBC today put a chilling icing on the austerity cake that the EU and the ECB have baked. We start with the first CNBC report which explains that the entire EU is in jeopardy of a credit downgrade, as a direct result of the perpetual recession:

Moody’s Investors Service has changed its outlook on the Aaa rating of the European Union to “negative,” warning it might downgrade the bloc if it decides to cut the ratings on the EU’s four biggest budget backers: Germany, France, the U.K., and the Netherlands. The move will add to pressure on the European Central Bank to provide details of a new debt-buying scheme to help deeply indebted euro zone states at its policy meeting on Thursday.

Actually, it would not help if the ECB printed more money (which is what the debt-buying scheme is all about). That would only push the debt problem away from fiscal policy onto monetary policy. But expanding money supply in an economy that is on the verge of a depression will do absolutely nothing to improve things. On the contrary: since the money is being used by government to spend more, especially on entitlements, there is at least a theoretical risk for a monetarily driven acceleration in the inflation rate.

The Moody’s downgrade story not only underscores the urgency of the crisis, but it also illustrates the contamination effect from the Greek and Spanish debt crises:

Back in July, Moody’s changed its outlook for Germany, the Netherlands, and Luxembourg to “negative” as fallout from Europe’s debt crisis cast a shadow over its top-rated countries. The outlook on France and the U.K. are also “negative.” “The negative outlook on the EU’s long-term ratings reflects the negative outlook on the Aaa ratings of the member states with large contributions to the EU budget: Germany, France, the U.K., and the Netherlands, which together account for around 45 percent of the EU’s budget revenue,” the ratings agency said.

This report will reinforce the divide that cuts right through Europe today. On the one hand, conservatives and euro-skeptics in Germany, Austria and Finland will be even more strongly motivated to either kick Greece out of the euro, or have their own countries secede. On the other hand, socialists in, e.g., France and the Netherlands will ramp up their anti-austerity rhetoric and claim that a return to the spend-and-tax policies that caused the current crisis will in fact end the crisis.

Since the aforementioned conservatives unilaterally want to preserve the welfare states in Europe by means of austerity, it is safe to say that Europe right now is at a fork in the road: take the left fork and loop back and relive the entire crisis again, only at a deeper, more depressed level; take the right fork and continue toward the edge of the cliff.

Neither alternative is economically or socially acceptable. Austerity is a misguided attempt at solving the crisis that spend-and-tax policies created. Spend-and-tax policies double down on the destructive big government that caused the crisis in the first place.

And just to reinforce the urgency of the situation, another CNBC report gives us a street-level view of the havoc that austerity has wreaked so far:

Europe is approaching a crisis as the region’s debt crisis and austerity measures increase the rates of depression, suicide and psychological problems – just as governments cut healthcare spending by up to 50 percent, according to campaigners, policy makers and health organizations. A growing number of global and European health bodies are warning that the introduction and intensification of austerity measures has led to a sharp rise in mental health problems with suicide rates, alcohol abuse and requests for anti-depressants increasing as people struggle with the psychological cost of living through a European-wide recession.

Europe is becoming a social and economic wasteland. Why? Because a bunch of politicians think they can save the welfare state by cutting spending and raising taxes. They are too arrogant to realize that the only way out is to do away with the welfare state entirely.

“No one should be surprised that factors such as unemployment, debt and relationship breakdowns can cause bouts of mental illness and may push people who are already vulnerable to take their own lives,” Richard Colwill, of the British mental health charity Sane, told CNBC. … “This research reflects other work showing similar rises in suicides across Europe.”

Unfortunately, the cause of this crisis – big, fiscally obese government – is still a mystery to most Europeans. As an example, one of the mental health experts cited here still thinks this entire crisis was brought about by the financial sector:

According to Josée Van Remoortel, advisor to the European organization Mental Health Europe (MHE), the financial crisis is affecting “all areas of life,” not just economies, and its impact on mental health is creating a “deep chasm in our society.” “The credit crunch [has] had one unexpected consequence and one that reflects a deep chasm in our society – a sharp rise in mental health problems, largely caused by uncertainty and fear for the future,” he writes in a paper entitled “The Sane Approach.”

There is a risk that this will all be used to further a socialist agenda in the form of a government takeover of banks.

So long as focus is on austerity and its consequences, medical experts can actually help illuminate the true consequences of the current crisis:

A recent survey of general practitioners (family doctors) in Britain by the Insight Research Group seems to support Van Remoortel’s view. The data showed that out of 300 family doctors surveyed, the majority reported that austerity was damaging their patients’ health. Seventy six percent said their patients were unhealthier due to the economic climate and 77 percent said more patients were seeking treatment for anxiety. The doctors surveyed relayed an increase in the incidence of alcohol abuse, anxiety, depression and requests for abortions due to economic reasons, anecdotal evidence borne out by statistics for anti-depressant requests in the U.K., which have risen 28 percent from 34 million prescriptions in 2007 to 43.4 million in 2011.

And just to illustrate the devastating consequences of having a government-run, single-payer health care system:

However, just as public health deteriorates, national government throughout Europe are deepening spending cuts and cutting mental healthcare by up to 50 percent. The consequences of spending cuts could be long-lasting and pervasive throughout the continent, according to Van Remoortel from Mental Health Europe. … “[Rushed] measures taken by national governments to patch their economies will surely have prolonged effects.” … John Dalli, European Commissioner for Health and Consumer Policy says Europe could be “sleep-walking into a catastrophe” as budget cuts hit healthcare services. Speaking at a meeting at the European Economic and Social Committee in June, Dalli said that Europe was heading towards a “humanitarian crisis” and warned of the risks of “neglecting public health in times of austerity.” “The economic crisis should not turn into a health crisis. Financial hardship cannot jeopardize people’s health and access to healthcare,” he said.

There’s more:

In the U.K., 13.8 percent of the total 102 billion pound annual health budget goes on mental health provision. But after a decade of rising investment, the government is looking to cut 6.6 billion pounds from mental health care provision as part of 20 billion pounds of cuts from its national health service bill. … At a time when mental health services are needed the most by society and economy, the government is jeopardizing the public’s welfare, Richard Colwill from the charity Sane told CNBC.

So now the welfare states in Europe have put themselves between a rock and a hard place: either continue to slash away at their government-provided, government-promised health programs and block out private alternatives with high taxes and regulations; or reverse course, increase spending and continue to suppress the private sector with even higher taxes.

And now for CNBC report number three for the day, which illustrates another side of Europe’s accelerating decline:

It is, Julio Vildosola concedes, a very big bet. After working six years as a senior executive for a multinational payroll-processing company in Barcelona, Spain, Mr. Vildosola is cutting his professional and financial ties with his troubled homeland. He has moved his family to a village near Cambridge, England, where he will take the reins at a small software company, and he has transferred his savings from Spanish banks to British banks. “The macro situation in Spain is getting worse and worse,” Mr. Vildosola, 38, said last week just hours before boarding a plane to London with his wife and two small children. “There is just too much risk. Spain is going to be next after Greece, and I just don’t want to end up holding devalued pesetas.”

And the only solution that the EU, the ECB and the Spanish government can think of is – more of the same measures that are guaranteed to make Spain the next Greece.

Mr. Vildosola is among many who worry that Spain’s economic tailspin could eventually force the country’s withdrawal from the euro and a return to its former currency, the peseta. That dire outcome is still considered a long shot, even if Spain might eventually require a Greek-style bailout.

Nonsense. Spain is already there. Madrid is already getting a Greek-style bailout. It’s just not called that.

But there is no doubt that many of those in a position to do so are taking their money — and in some cases themselves — out of Spain. In July, Spaniards withdrew a record 75 billion euros, or $94 billion, from their banks — an amount equal to 7 percent of the country’s overall economic output — as doubts grew about the durability of Spain’s financial system. The withdrawals accelerated a trend that began in the middle of last year, and came despite a European commitment to pump up to 100 billion euros into the Spanish banking system.

So private savings in Spanish banks are replaced with government-provided liquidity. And the more government reassures people that everything is just fine, the less people trust them and pull more money out.

More disturbing for Spain is that the flight is starting to include members of its educated and entrepreneurial elite who are fed up with the lack of job opportunities in a country where the unemployment rate touches 25 percent. According to official statistics, 30,000 Spaniards registered to work in Britain in the last year, and analysts say that this figure would be many multiples higher if workers without documents were counted. That is a 25 percent increase from a year earlier. “No doubt there is a little bit of panic,” said José García Montalvo, an economist at Pompeu Fabra University in Barcelona. “The wealthy people have already taken their money out. Now it’s the professionals and midrange people who are moving their money to Germany and London. The mood is very, very bad.”

In other words, taxpayers are leaving Spain in droves. The people left are those who live off taxpayers. This can only accelerate Spain’s decline into Greece 2, and given the size of the Spanish economy – and government within the Spanish economy – this “Greekification” of Spain will have much bigger, much more serious consequences for the EU than the “original” Greek crisis has had.

Bottom line: so long as Europe chooses to hold on to its welfare state, either by means of austerity or by means of spend-and-tax policies, the continent is going down.