A quick note today on the systemic design errors in Europe’s fiscal and monetary policies.
The new narrative in Brussels is that the common currency of the euro zone needs more support from GDP growth in order to remain a strong, credible player in the global economy. The implication is that the recent drop in support for the euro is due to the deep recession. If this is indeed what the Eurocrats really believe, then they have woken up very late to smell the coffee: they themselves are responsible for turning a regular economic recession into a depression-style crisis. Without the austerity madness that Brussels has added to the mix the economic downturn that began in 2008 would have been over by 2011.
But we will never see a full mea culpa from the Eurocracy. All they can muster is to turn down the austerity volume a little bit. British Daily Express reports:
Some EU member states were urged to ease the pace of their spending cuts in a fresh attempt at boosting the struggling single currency. Spain, Portugal, Poland, Slovenia and the Netherlands were all given more time to complete their austerity drives by the European Commission. Strong fears about the continuing recession in France were also raised. The French government was given an extra two years to bring down its budget deficit.
GDP growth is a necessary condition for the elimination of a budget deficit. Austerity stifles growth, because it increases the net cost of government to the private sector. Businesses and families have less money to spend which means they will do whatever they can to reduce their economic activity. The goal is to survive until times get better and they can start improving their lives again.
The problem is that with austerity, times never get better. That long run over which things are supposed to get better never comes to an end. There are numerous examples in Europe of countries that have seen GDP growth disappear because of austerity, but there is no example of a country where austerity has done its intended work and growth has returned.
Therefore, if this is what the leaders of the European Union and the European Central Bank are looking for in order to strengthen the euro, they won’t find it and they won’t strengthen the euro. On the contrary, there is an inherent inconsistency between the euro and the EU constitution that is supposed to support it. One feature of the constitution is the so called Stability and Growth Pact, a series of fiscal-policy rules that impose tight restrictions on the budgets of all EU member states. The Pact is the legislative vehicle that the EU Commission rides on when it imposes austerity policies on member states, policies that are supposed to support and strengthen the euro. But the euro is not strengthened by austerity – it is weakened.
Europe’s economy won’t get better so long as they keep the euro, but a recovery is also prevented by the Stability and Growth Pact. The Pact, in turn, enforces anti-growth fiscal policies that have already cost the European economy tens of millions of jobs.
If this looks like a gigantic systemic error, that is because it is a gigantic systemic error. I am working on an article to elaborate on it, which I hope to have finished in a couple of weeks. Stay tuned.