Hypocritical EU Grows Its Own Spending

After yesterday’s stagflation warning for the United States, we are throwing ourselves right back into the European turmoil. Today we can report that the EU is putting its economic policy hypocrisy on full display. On the one hand the Eurocrats and their elected supporters in the European Parliament want countries like Greece and Spain to cut government spending, and do it harshly, regardless of the consequences; on the one hand they wring their hands over the possibility of even a tiny reduction in the EU budget.

In an article on the EU budget, the EU Observer notes that…

…one in two member states are either in recession or in economic stagnation with unemployment up in most, said employment Commissioner Laszlo Andor. His comments came on the heels of massive protests against austerity cuts throughout the week in Greece, Portugal, and Spain. The European Parliament hopes to turn around the bleak unemployment figures but says the member states’ proposed cuts in the EU 2013 budget contradict the June ‘growth compact’ agreement.  MEPs are expected to reject the budget cuts and instead back the commission’s proposals in a Thursday vote in parliament’s budget committee.

So on the one hand the EU is forcing big cuts in government spending in several member states, claiming that it will somehow help those economies back to growth and full employment; on the other hand the EU is lamenting that spending cuts at the EU level are bad for the economy.

It will be interesting to see how this hypocrisy plays into the turbulence in Greece.  As the news site Ekathimerini reports, the EU, together with the ECB and the IMF – referred to as “the troika” – are pushing Athens very hard to execute more austerity-driven spending cuts:

Government officials resumed tough talks with troika officials on Monday as a draft budget for next year, outlining 7.8 billion euros in spending cuts and savings, was submitted to Parliament. Troika chiefs emerged wordless from a two-hour meeting with Finance Minister Yannis Stournaras, who simply noted the officials had sought clarifications on a 13.5-billion-euro austerity package proposed by the coalition government. A subsequent meeting between Prime Minister Antonis Samaras and troika chiefs finished in just 35 minutes, prompting speculation that the negotiations had stalled, reports that sources close to Samaras rebuffed. … The fact that several sticking points remain in talks with the troika, including over the proposed suspension of 15,000 civil servants which the two junior partners in the coalition vehemently oppose, suggests that a deal within the next few days is unlikely, putting the whole process back.

So while the EU budget will continue to grow, the EU is forcing Greece into a slew of harsh spending cuts:

Kathimerini understands that the troika has queried the enforceability of some 2 billion euros in proposed measures — chiefly cuts to the health, defense and local authority funding. The cuts in the draft budget for 2013 include 3.8 billion euros to pensions, 1.1 billion to civil servants’ salaries, around 800 million to social welfare benefits and 1.2 billion euros to state spending on health, defense and local authority spending.

These cuts come on top of three years of spending cuts and tax increases. Another story from Ekathimerini explains what these cuts are doing to Greek society:

Fifteen people that were arrested in Athens’s central Aghios Panteleimonas district late on Sunday during clashes between self-styled anarchists and supporters of Greece’s neofascist Chrysi Avgi (Golden Dawn) party on Monday faced felony charges. Some of the defendants, believed to be self-styled anarchists, were also charged with disturbing the peace, causing bodily harm to a police officer, and causing grave bodily injuries to other persons. According to police, a group of about 50 anarchists rode through the neighborhood on motorbikes late on Sunday in a protest against the presence of Golden Dawn in the area, which triggered the clashes. Fifteen people were injured in the clashes — two of them were taken to the KAT trauma hospital in Maroussi. Police said that local residents also clashed with the anarchists and that one of them brandished a gun during the scuffles but did not use it. Police said the anarchists were intercepted by members of the motorcycle-riding Delta team, who have also testified as witnesses. The suspects, aged between 18 and 30 years old, had their faces covered and were wearing helmets at the time of arrest, police said.

Greece is, of course, not the only country plagued by austerity and social turmoil. As the Wall Street Journal reports, things are pretty darn bad in Spain as well:

The Spanish government said the effort to clean up an ailing banking system will widen its budget gap and increase its debt load. The admission comes as concerns mount over the country’s solvency, sending its borrowing costs soaring and pushing the government of Prime Minister Mariano Rajoy closer to requesting European Union aid to help it finance itself.  The euro zone’s fourth-largest economy is grappling with the collapse of a decadelong housing boom that sent tax revenue plummeting, cratered domestic demand and saddled banks with billion of euros of bad debts.

Nonsense. The real estate collapse did not cause the budget deficit. The Spanish government has been spending hard for a very long time, and its economy has been plagued by very high unemployment rates for a good two decades. But it is very easy to blame private investors who find a way to make money under the pressure of a high-tax, entitlement-spending welfare state, because that way you don’t have to admit that the crisis was caused by that same welfare state.

The Wall Street Journal again:

In its 2013 budget plan presented to Parliament on Saturday, the government said that the bank aid will inflate its budget deficit to around 7.4% of gross domestic product this year, which is above the deficit target of 6.3% of GDP for 2012 it has committed to with the European Union. Spain said that if the effect of measures to help banks are excluded, it would meet its EU commitment.

Let’s note right now that the EU Constitution actually bans deficits above three percent of GDP. In other words, even if the banking sector was solvent, the Spanish government would be running a deficit more than twice the size of what the EU permits. That part of the deficit, which is 85 percent of the total deficit, is directly caused by the welfare state.

Meanwhile, the Spanish government again raised its estimate of last year’s budget deficit to 9.44% of GDP from the previously reported 8.96% of GDP, to take into account measures to help its banks. It is the second time the government restated the 2011 budget deficit.

These are made because earlier forecasts and estimates have understated the negative effects of the austerity policies on GDP. A common mistake among non-Keynesian economists.

The budget revisions come as Mr. Rajoy faces mounting social and political backlash against his austerity and economic-reform measures. On Saturday, thousands of demonstrators descended on the national Parliament in Madrid for the third time in the past week to protest against spending cuts and tax increases. … Spain’s austerity budget for 2013 includes tax increases and spending cuts worth €13 billion by the central government. Including previously announced measures and cuts to be implemented by regional and municipal governments, Spain aims to slash its budget deficit by €37 billion next year. Even so, many analysts believe a deep economic recession will make it difficult for Spain to meet its EU commitments to reduce the deficit to 4.5% of GDP in 2013 and to 2.8% in 2014.

Which means we can expect more austerity, more declines in GDP, more unemployment – and more social turmoil.

How long can this vicious, downward spiral continue before someone stands up and says “there has got to be another way”?