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Economics and the European Crisis
Europe’s austerity disaster is not just a matter of reckless policy decisions by arrogant leaders in the EU, although that is ultimately where the buck stops. Many others have been involved in explicitly or implicitly, directly or indirectly, keeping the crisis going. Among them are assorted economists in various positions whose forecasts have reinforced the desires among political leaders: while the politicians want austerity to work, economists have predicted that it would work.
There is just one problem. Austerity does not work. While it has taken economists quite a while to begin to realize this, others have raised questions for some time now. Among them are business leaders: two years ago British corporate executives began expressing concern about the soundness of continuing EU-imposed austerity policies. The seeds of that doubt have grown, so much in fact that a few days ago Britain’s Chancellor of the Exchequer found it necessary to make a plea to business leaders to stay on board with Britain’s own austerity program. The Guardian reports:
George Osborne has asked business leaders to hold their nerve and continue backing the government’s austerity measures after the Bank of England gave the first signal since the financial crash of a sustained economic recovery. The chancellor told the CBI annual dinner on Wednesday night that the business community should ignore critics of his economic policy who advocate a stimulus package to spur growth and reduce unemployment. … His speech followed a series of forecasts from Threadneedle Street showing the UK recovery strengthening and inflation falling over the next three years. Sir Mervyn King said the outlook had improved, with growth likely to reach 0.5% in the second quarter of 2013, after the 0.3% registered in the first three months.
This is a good example of how the desires of politicians conspire with unrefined forecasts by economists. Anyone who reads a “strengthening recovery” into a 0.2 percent of GDP uptick in growth, from 0.3 to 0.5 percent, is either sloppy or desperate. Since the difference between 0.3 and 0.5 percent is little more than a margin-of-error change to GDP growth, I am inclined to conclude that at least some of the involved economists are sloppy.
One reason for this is that there have been forecasts of an improvement at the time of the announcement of every new austerity package in Europe over the past few years. I am planning a larger research paper to expose these errors; in the meantime, it is important to ask why economists think that the current austerity policies will have any other effect than the others that have been implemented since 2009.
More on that in a moment. It is important that we do not let the political leaders off the hook. I am firmly convinced that they are desperately looking for any sign that austerity is working – and that their desperation has reached such levels that they are inviting to a conspiracy of the desperate and the willing. It is interesting, namely, to see all the optimistic forecasts that are surfacing now. Politicians who should know better than most of us that austerity does not work, give a surprising amount of attention to those forecasts.
Their desperation is cynical yet understandable. Almost every political leader in Europe has invested his entire political career in supporting austerity. Now he is witnessing more and more critics lining up with The Liberty Bullhorn, pinning the unfolding social disaster on austerity advocates.
The obvious reaction should be to question austerity. After all, I cannot be the only one to ask how much farther the EU is willing to push its member states. For example, how much more can Greece take before the country explodes?
Europe’s leaders are no doubt aware of how close some parts of the continent are to social unrest. So long as austerity-minded politicians cannot provide people with an economic recovery, they know they are accountable for whatever happens.
As an alternative, they use forecasts of willing economists to convince people that the recovery is just about to happen, no matter how microscopic it might be. The Guardian again:
The modest improvement in output over recent months comes against a backdrop of rising unemployment, the lowest wage rises on record … According to the Office for National Statistics unemployment rose by 15,000 to 2.52m in the three months to the end of March. Wages were 0.8% higher in March than a year ago and only 0.4% better if bonuses are taken into consideration, which is the lowest rise in incomes since records began in 2001.
Again, calling this a “strengthening recovery” is clear signs of desperation. There were times when any growth under two percent set off alarm bells, among economists as well as politicians. Now, numbers a fraction as high are raised to the skies as signs of a “strengthening” recovery. From the Sydney Morning Herald:
The dogged recession across the eurozone has snared key economy France, with the latest EU figures released Wednesday [May 15] showing a full year-and-a-half of contraction as tens of millions languish in unemployment. In Brussels, French President Francois Hollande tipped ‘zero’ growth on the national level, blaming an EU-wide, German-led austerity trap — and hitting out at banks for holding back on lending as he and fellow leaders battle to unlock taxable assets hidden in offshore bank vaults or breathe life into training programmes for Europe’s disillusioned youth.
And his recipe is to take it all out in the form of higher taxes instead. Yep. That will really make things better… The fact of the matter is that France desperately needs a complete reversal of its economic policy, with long-term credibility to go with it. The same holds for the entire euro zone, which according to the Sydney Morning Herald is in deep trouble:
official figures showed a 0.2 per cent contraction between January and March, in the longest recession since the single currency bloc was established in 1999. EU data agency Eurostat said output across the 17 states that share the euro — which are home to 340 million people — fell by 1.0 per cent drop compared to the same quarter last year. France notably slid into recession with a 0.2 per cent quarter-on-quarter contraction, with unemployment already running at a 16-year high.
French president Hollande blamed the bad economic news…
on “the accumulation of austerity politics” and a “lack of liquidity” within the banking sector leading to a euro-wide loss of confidence. Fresh from winning France a two-year period of grace from the Commission to bring its public finances back within previously-understood EU targets, Hollande argued that nascent plans to divert state and private investment towards projects intended to get Europe’s youth working would make a difference.
In other words, more government programs on top of government programs that don’t work. If government was the answer, there would not be a crisis in Europe today.
Instead, as the Sydney Morning Herald reports, Europe is heading for yet more of the same, though some economists seem stubbornly unwilling to accept the permanent nature of the crisis:
Following a string of disappointing survey results in recent weeks, Ben May of London-based Capital Economics warned: “We doubt that the region is about to embark on a sustained recovery any time soon.” The latest official European Commission forecast for 2013 published earlier this month tipped a 0.4-per cent contraction, but May said that was way off course with “something closer to a two-per cent decline” likely. His firm’s pessimism was backed by Howard Archer of fellow London-based specialist analysts, IHS Global Insight. “We expect the eurozone to suffer gross domestic product (GDP) contraction of 0.7 per cent in 2013 with very gradual recovery only starting in the latter months of the year,” said Archer.
What reason does he have for expecting a recovery? This is the standard mistake that mainstream economists and econometricians make: they rely heavily on models that are inherently prone to draw the economy toward long-term full employment equilibrium. When they “inject” a change to economic activity, such as an austerity package, their model automatically makes the assumption that this sudden and uncharacteristic change – called a “shock” – will be absorbed and the economy will move on.
Every new austerity package is treated the same way, both by the econometricians who design the models and by the economists who provide the analytical framework. Their take on the European crisis is therefore a series of individual shocks, not a systemic re-shaping of the entire economy. As a result, they always predict a recovery and return to some long-term stable growth path.
To the best of my knowledge there is not a single macroeconomic model out there that has yet incorporated the systemic effects of austerity. Therefore, the economics profession will continue to make systemic forecasting mistakes – and advise politicians based on those mistakes.
Don’t get me wrong. I am not blaming economists for the errors that politicians end up making. But our profession must begin to recognize its almost chronic inability to deal with economic crises. Our forecasting methods can handle regular recessions but are frustratingly inept at dealing with situations that become inherently unstable, such as the current European disaster.
In fairness, I am not the only economist with an unequivocal criticism of austerity. On March 5, Joseph Stiglitz explained in Economywatch.com:
While Europe’s leaders shy away from the word, the reality is that much of the European Union is in depression. Indeed, it will now take a decade or more to recover from the losses incurred by misguided austerity policies – a process that may eventually force Europe to let the euro die in order to save itself.
Strange conclusion. The euro is not the cause of the crisis. But Stiglitz is probably letting his ideological preferences get in the way of good economic judgment. Otherwise he would do the same analysis has I have and conclude that the crisis is caused by the welfare state.
That said, Stiglitz is eloquent in his criticism of austerity:
The loss of output in Italy since the beginning of the crisis is as great as it was in the 1930’s. Greece’s youth unemployment rate now exceeds 60 percent, and Spain’s is above 50 percent. With the destruction of human capital, Europe’s social fabric is tearing, and its future is being thrown into jeopardy. The economy’s doctors say that the patient must stay the course. Political leaders who suggest otherwise are labeled as populists. The reality, though, is that the cure is not working, and there is no hope that it will – that is, without being worse than the disease.
Well said. But what alternative is Stiglitz proposing? Certainly not that the welfare state must go:
The simplistic diagnosis of Europe’s woes – that the crisis countries were living beyond their means – is clearly at least partly wrong. Spain and Ireland had fiscal surpluses and low debt/GDP ratios before the crisis. If Greece were the only problem, Europe could have handled it easily.
I don’t know where Stiglitz gets his data but here are the debt/GDP ratios for Ireland and Spain in 2003-2008:
| 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | |
| Ireland | 29.3% | 28.7% | 27.3% | 25.5% | 26.1% | 44.9% |
| Spain | 44.9% | 44.3% | 43.2% | 41.3% | 39.0% | 44.2% |
In terms of actual euros, the general government debt in Ireland shot up by almost 84 percent from 2003 to 2008. In other words, it was only thanks to strong growth in current-price GDP that the Irish did not see their debt ratio grow faster than it did. They were expanding their government as fast as they could, and certainly more than was healthy for the economy: in 2010 the debt-to-GDP ratio had reached 87 percent, i.e., close to double what it was two short years earlier.
The Spanish situation followed a similar pattern, though with less dramatic numbers than the Irish. The lesson to be learned from this is not that these economies could afford their big governments, but that their big governments survived only because there was enough current-price GDP growth to pay for them. As soon as GDP slacked off, the cost of the welfare state quickly became completely unbearable.
Stiglitz refuses to see this. He goes on to advocate even more government, without a hint of explanation of how the world’s already highest-taxed nations would be able to pay for that:
Europe needs greater fiscal federalism, not just centralized oversight of national budgets. To be sure, Europe may not need the two-to-one ratio of federal to state spending found in the United States; but it clearly needs far more European-level expenditure, unlike the current miniscule EU budget (whittled down further by austerity advocates). … There will also have to be Eurobonds, or an equivalent instrument.
More welfare state spending, more government, more debt, more of the same that brought about the crisis in the first place.
Instead of wanting more of the same and providing politicians with rosy outlooks, practitioners of economics should re-examine the results of their own contributions over the past few years. The ability of hundreds of millions of people to maintain their current standard of living, even support their families, depends on it.
How Much More Can Greece Take?
It has been said that those who cannot remember the past are condemned to repeat it. It has also been said that someone who repeats the same action over and over, expecting different results, is an idiot.
If so, the EU Commission is a bunch of condemned idiots.
Sorry for the colorful opening, but just when the Commission has started talking about backing off austerity, they are forcing Greece to put to work perhaps the most devastating austerity package to date. Without even a hint of remorse over the past, blaming instead the negative results of previous packages on “mistakes” by the Greek government, the Commission charges ahead with demands that Greece cut away 6.5 percent of its GDP in the next austerity round.
I am not even going to attempt to predict the social, economic and political fallout of this complete fiscal madness, though it might be a good idea to remember that in last year’s Greek election the Nazis returned to the European political scene. I will say this, though: the Germans tried a decade of austerity during the Weimar Republic. Greece is now six years down the same path.
Before we get to the report on more Greek austerity, let us first note a new report from Pew Research Center. It presents some seemingly bizarre data, showing that a majority of Europeans still support austerity:
The countries still backing cuts over spending included Italy and Spain, which are both in the grip of prolonged recessions made worse by their efforts to bring down government borrowing. On average, 59% backed further austerity in the survey, against 29% in favor of more spending to stimulate the economy.
You would expect the victims of austerity to demand something better. But in order to do so the Europeans would have to know of an alternative – and it does not exist in their world view. For a good decade now, the public policy debate in Europe has been almost entirely lopsided in favor of austerity. Everyone from leading economists to political leaders to business leaders have been telling the public for years that the alternative to austerity is Hell on Earth.
When people see no alternatives, then after a while they tend to believe that there are indeed no alternatives.
Besides, the very issue of austerity is technical in nature and not likely to stimulate the average Joe to go off looking for alternative views on his own.
One would think that the hardships suffered in, e.g., Greece and Spain would be enough to make the general public back off from austerity. After all, the benefits they have been promised from austerity never seem to materialize. This is a valid point, but at the same time, history is full of examples of man’s ability to accept and endure hardships in the name of some abstract goal. It will probably take an entire generation before Europeans start questioning the changes for the worse that they are now living through.
With this in mind, it is easier to understand why Greece – ground zero of European austerity – is entering yet another cycle of fiscal torture. From Fox Business:
Greece is on track to meet its budget targets this year and next but may have to make further cuts in 2015 and 2016, the European Commission said in a report that will provide the basis for a decision Monday on whether to release more bailout loans for the country. The report sums up the findings of the three institutions overseeing Greece’s bailout–the Commission, the International Monetary Fund and the European Central Bank–which sent a team of auditors to Athens earlier this spring to review the country’s finances.
As I explain in Austerity: Causes, Consequences and Remedies, a country will always see a reduction of its government deficit the year after an austerity package is implemented. Then, as the negative multiplier effects of austerity kick in, the budget improvement is reversed. That is why the European Commission is forecasting more austerity in 2015 and 2016. However, you only need to take a quick look at macroeconomic data from Eurostat to realize that the notion of no budget cuts in 2014 is optimistic.
And now, Fox News delivers the big number:
It is the first time in Greece’s three-year-old aid program that the country is deemed to have met its goals. In past years, a deeper-than-expected recession and government missteps led Greece to miss its targets. The draft notes that the Greek government has followed through on most of the austerity measures it promised for 2013 and 2014–also in sharp contrast with previous assessments of Athens’ efforts to ease its crushing debt load. ”The very large and highly front-loaded package of fiscal consolidation measures for 2013 and 2014–totalling over 6.5% of gross domestic product–agreed in the previous review has been largely implemented,” the report says.
Six and a half percent of GDP.
Let’s leave the technospeak behind for a moment. An austerity package of 6.5 percent of GDP means that government is going to increase what it takes from the private sector by 6.50 euros for every 100 euros that people earn. Not for every 100 euros it currently takes in – it is 6.50 euros for every 100 euros of GDP.
The 6.5 percent number is a net tax increase on the Greek economy. It does not matter what the combination is of spending cuts and tax increases: the Greek government is telling its taxpayers that it is going to raise the price of whatever it provides them by 6.5 percent of all the money that all taxpayers earn.
If all of the austerity comes in the form of spending cuts, and taxes do not go up, then government is saying “we are going to sell you a 2011 car at 2013 prices”; if all of the austerity comes in the form of tax hikes, and spending is not cut, then government is saying “we are going to sell you a 2013 car at 2015 prices”.
Either way, government will increase its net drainage from the economy by 6.5 percent of GDP, and front load the plan so most of it shows up in one year. All this in a country that has already lost 25 percent of its GDP in five short years, all due to austerity.
I would not want to set my foot in Greece over the next year.
Apparently, the EU Commission has an eerie feeling that something bad might come out of this. According to Fox Business they are quick to add fine print to their optimism:
Beyond 2014, the outlook is uncertain and depends “on the strength of the recovery and improvement in taxpayer capability to service their tax obligations,” the commission says. It estimates the country’s budget gap at around 1.8% and 2.2% of GDP in 2015 and 2016 respectively.
This is B.S., Barbara Streisand. They have made similar predictions in the past, all of which have turned out to be outlandishly optimistic. So long as they believe that austerity somehow will improve the performance for the Greek economy, they will continue to believe that the first-year effect of an austerity program will become permanent.
I would not want to be a Greek politician saddled with implementing this chainsaw massacre of an austerity program. Perhaps some of the elected officials in Athens are on the same page, or why else would they according to Fox Business be so eager to promise that “there will be no more belt-tightening”?
Fox Business does not elaborate on this. Instead they conclude their report with a couple of notable factoids:
The country is in its sixth year of a deep recession made worse by waves of austerity. Unemployment, already over 27%, is expected to continue rising.
So if they acknowledge that the waves of austerity have made the recession worse, then why doesn’t Fox Business ask the EU Commission why this particular austerity package would do the trick?
In case anyone is still in doubt what this new austerity package will do to the Greek economy and to Greek society, please re-read the statement above about unemployment.
The Greek government is sitting on one side of an open powder keg. On the other side the EU Commissioners are sitting, smoking big fat cigars. The Greek government is holding out an ashtray where the Commissioners are supposed to kill their cigars. It’s dark, so it’s hard to see the ashtray.
There’s the future of Greece for you.
Inflation Crushing Argentine Currency
Europe is bogged down in what looks more and more like a permanent state of industrial poverty. I have likened their future to what South America became during the 20th century: a cluster of countries with their good days of prosperity behind them.
This is not entirely a fair comparison, since both Brazil and Chile have made great strides toward rising above the industrial poverty that otherwise holds the continent in a tight grip. But as a general rule, it is entirely reasonable. Just like South America lost its course in the mid-20th century, Europe is going down in the early 21st century.
Europe’s only chance is to totally dismantle their welfare states and start over on free-market terms. I do not see that happening, just as it has not happened in countries like Venezuela and Argentina. (Chile is a different story.) Especially the Argentine example is useful as a general forecast reference for Europe: they have done everything they can to keep their welfare state in place, with the inevitable result that there is not enough tax revenues to pay for all the entitlements.
As a desperate measure to continue the welfare state despite inadequate tax revenues, the Argentine government has turned to money printing. As I reported in September last year, this is causing runaway inflation. For 2012 the inflation rate reached 30 percent, a downright destructive level.
The Argentine government has had plenty of time to see the writing on the wall – the country’s credit rating was downgraded in November last year – but chose not to. Instead, inflation is now destroying their currency and people are hoarding dollars as a last-resort measure to survive. Bloomberg Business reports:
A lot of U.S. dollars are tucked away somewhere in Argentina, most likely in stacks of $100 bills. Seven years ago, the U.S. Treasury, working with the Federal Reserve and the Secret Service, estimated that in the early 1990s Argentines held $20 billion in cash, a number that by 2006 had grown to “perhaps $50 billion or more.” That year there was a total of about $768 billion worth of dollar-denominated cash in the world, which means that someone in Argentina held at least one out of every 15 cash dollars.
This is an interesting number. Anecdotes out of Europe from the first few years of the euro alleged that assorted mafia organizations were dumping the dollar and going for the euro instead. Its highest denomination is 500 compared to the 100 maximum denomination of the dollar. Since the two currencies are largely equally valued, it made a lot more sense for those in more illicit businesses to carry euros. This would have released lost of high-denomination dollar cash, which could then be unloaded in perennially dollarized Argentina.
Back to Bloomberg:
Demand for large dollar cash transfers to Argentina since 2006 … has outstripped demand for dollar cash overall in the world. So it seems safe to say that today Argentines hold probably well more than $50 billion, and well more than one in every 15 dollars. (This is why the government of Cristina Kirchner is so furiously digging at the country’s undeclared wealth. Not to bring home what Argentines hold abroad, but to uncover some of those dollars Argentines have—literally—at home.)
She has two reasons for doing this. First, the dollar holdings are likely the result of financial activities not reported to the tax collectors. With a deficit equal to $14 billion, the Argentine president’s mouth is watered by the prospect of taxing undeclared dollar holdings: if the government could seize 28 percent of those holdings, it would be enough to eliminate the budget deficit
In one year. The following year, of course, the deficit would be back again. And since you can only confiscate the same dollar once, this would be a stupid solution to a stupid problem.
The second reason for President Kirchner to want to seize dollar holdings from Argentine families is that the country’s own currency is plunging almost as fast as Obama’s presidential credibility. By confiscating people’s dollar holdings she could try to force them into increasing demand for the Argentine dollar. Zerohedge has an interesting illustration of how the Argentine currency has lost value vs. the U.S. dollar on the informal currency market: a year ago the formal and the informal exchange rates were within striking distance of one another; today the informal market pays twice as much for a U.S. dollar than the official exchange rate does.
This is a scathing free-market verdict over the Argentine currency, but indirectly also an acknowledgement by rational economic men that their government is on a fast track to destroying their economy. By hoarding dollars they stand a fighting chance to survive when their domestic currency collapses.
It is worth noting that currency collapses tend to happen in countries with big, entitlement-loaded welfare states. We need not look farther than what is happening in Europe, where the European Central Bank has made a promise to print an unlimited amount of euros to pay for the debts of the euro zone’s welfare states. As a result of this, the general opinion among financial investors and analysts has now shifted away from assessing the strength of the euro to forecasting its demise.
There is really only one reason for a central bank to run amok with its printing presses, and that is to finance a government deficit. That deficit, in turn, is almost always the result of a runaway welfare state. Therefore, the safest way to a sound currency and restraint in money supply is to eliminate the welfare state.
Europe needs to learn this. They have already started on the reckless path to excessive money printing. Thus far it has not come to the point where it causes inflation – the extra cash has not yet reached the transmission mechanisms between the monetary and real sectors of the economy. But when it does, Europe will rapidly ratchet down the South American slope.
ECB Guarantee Did Not Save Spain
By now, everyone around the world has probably heard that Spain is de facto in fiscal default – i.e., bankrupt. The IMF, whose report Fiscal Monitor number 1301 presented the numbers showing that Spain is practically in default, does not offer an explicit analysis of the default scenario itself, but it gives a very illuminating background to the proliferating economic tragedy in Europe.
I will do an analysis of the Fiscal Monitor report later; for now, let’s return to Spain and the notable fact that the country has gone into effective bankruptcy despite the commitment by the European Central Bank to buy up every euro’s worth of Spanish treasury bonds. This commitment meant two things:
- owners of Spanish bonds would always be able to sell them, thus putting a mild downward pressure on the interest rate; and
- the Spanish government would be able to finance its own debt in perpetuity – all it would have to do would be to issue more debt, i.e., to ask the ECB to print more money.
This is a slight simplification, as the Spanish government would still have to meet certain fiscal criteria, such as continued austerity. But at the same time, if a central bank issues a guarantee to buy all bonds that its government issues in order to bring down the interest rate on those bonds, you cannot condition your promise on fiscal austerity. As soon as the government must take fiscal steps to maintain the central bank’s purchasing guarantee, the guarantee loses its inherent value. It is no longer worth any more than the bonds it is supposed to guarantee.
In other words, meaningless.
Assuming that the ECB does not make meaningless promises, the Spanish de facto default is all the more remarkable – and comes with serious warnings to everyone with money in Spain: get out or face a Cypriot Bank Heist seizure of your assets.
Here is what Jeremy Warner said in the Daily Telegraph a couple of days ago:
Next year, the [Spanish] deficit is expected to be 6.9 per cent [of GDP], the year after 6.6 per cent, and so on with very little further progress thereafter. Remember, all these projections are made on the basis of everything we know about policy so far, so they take account of the latest package of austerity measures announced by the Spanish Government.
Which means that we can expect an increase in the deficit ratio in the future, as forecasters often forget to incorporate the negative effects of austerity on GDP.
The situation looks even worse on a cyclically adjusted basis. What is sometimes called the “structural deficit”, or the bit of government borrowing that doesn’t go away even after the economy returns to growth (if indeed it ever does), actually deteriorates from an expected 4.2 per cent of GDP this year to 5.7 per cent in 2018.
This is important, because it shows that there is a structural change going on in the Spanish economy. People are paying permanently higher taxes and get permanently less back from government for that money. The private sector has been permanently diminished and an entire generation of young Spaniards has been sentenced to a life on welfare.
By 2018, Spain has far and away the worst structural deficit of any advanced economy, including other such well known fiscal basket cases as the UK and the US. So what happens when you carry on borrowing at that sort of rate, year in, year out? Your overall indebtedness rockets, of course, and that’s what’s going to happen to Spain, where general government gross debt is forecast to rise from 84.1 per cent of GDP last year to 110.6 per cent in 2018. No other advanced economy has such a dramatically worsening outlook.
But Greece did, and they ended up losing one quarter of the GDP.
Unfortunately, Jeremy Warner does not see the damage done by austerity:
And the tragedy of it all is that Spain is actually making relatively good progress in addressing the “primary balance”, that’s the deficit before debt servicing costs.
The “progress” consists of increasing taxes and reducing spending in an entirely static fashion. There is no analysis behind the austerity efforts of the long-term effects they will have on the economy. For example, the increase in the value-added tax that was enacted last year reduced the ability of consumers to spend on other items. This reduced private consumption and forced lay-offs in retail and other consumer-oriented industries. The laid off workers went from being taxpayers to being full-time entitlement consumers. As they did they reduced the tax base and cut tax revenues for the government in the future.
This point aside, Warner explains well the bankruptcy side of the issue:
What’s projected to occur is essentially what happens in all bankruptcies. Eventually you have to borrow more just to pay the interest on your existing debt. The fiscal compact requires eurozone countries to reduce their deficits to 3 per cent by the end of this year, though Spain among others was recently granted an extension. But on these numbers, there is no chance ever of achieving this target without further austerity measures … it seems doubtful an economy where unemployment is already above 25 per cent could take any more. … All this leads to the conclusion that a big Spanish debt restructuring is inevitable.
Debt restructuring, of course, being the same as bankruptcy. In a matter of speaking, Greece did a “bankruptcy light” when they unilaterally wrote down their debt. In the case of Spain it would probably mean a much bigger debt writedown than in Greece.
Back to Warner:
Spanish sovereign bond yields have fallen sharply since announcement of the European Central Bank’s “outright monetary transactions” programme. … But in the end, no amount of liquidity can cover up for an underlying problem with solvency. Europe said that Greece was the first and last such restructuring, but then there was Cyprus.
And toward the end Warner issues a fair warning about a repetition of the Cyprus Bank Heist:
Confiscation of deposits looks all too possible. I don’t advise getting your money out lightly. Indeed, such advise is generally thought grossly irresponsible, for it risks inducing a self reinforcing panic. Yet looking at the IMF projections, it’s the only rational thing to do.
Spain is the fourth largest euro-area economy, with ten percent of the euro zone GDP. If we add Greece, Cyprus and an all-but-certain Portuguese de facto bankruptcy, we would now have 14 percent of the euro area economy declared practically insolvent. As Jeremy Warner so well explains, the point where this bankruptcy becomes a fact is one where the macroeconomy in a country is permanently unable to bear the burden of government.
This means that 14 percent of the euro-zone economy will be at a point where it is acutely unable to fund the welfare state.
What conclusions will Europe’s elected officials draw from that? It remains to be seen, though it is not far fetched to assume that no one will be ready, willing or courageous enough to remove the welfare state.
That is too bad, because it means – again – that Europe is stuck in a permanent state of industrial poverty. Hopefully, America’s elected officials will watch, learn and do the right thing.
Printing Money Won’t Save South Africa
My recent articles about the depth of the European crisis paint a depressing picture of life in the Old World. I should perhaps apologize for this, but the problem is that I see no other future for Europe than the one I am painting.
From a global perspective this means that one of the three largest economies in the world is sinking into a permanent state of recession and depressed demand. Superficially, this is not good news for the rest of the world whose trade with Europe will be negatively affected. However, other parts of the world will continue to grow and prosper: once the imploding Obama administration is over the United States will return to its long-term path of Capitalism, free enterprise and growth; China, Japan and South Korea will continue to form a powerful economic hub in East Asia; and once the political turmoil in countries like Thailand and Malaysia is gone, South-East Asia will once again become a growth hub.
It is good to keep this in mind, because there are some corners of the world outside of Europe where things look pretty depressive right now. One of them is South Africa, which is wrestling with both a political crisis and an economic recession. I have written about the political crisis on several occasions – here is one example – and there is no doubt that South Africa needs an entirely new and freedom-oriented government to replace ANC’s arrogant, corrupted and in many ways incompetent apparatchiks.
A political change would hopefully benefit the economy as well. And there is a lot to do on that front, as Ron Derby with the Business Day explains:
Thursday’s economic data showed evidence of a sluggish manufacturing and mining sector, which is going to make the next meeting of the [Central Bank's] policy committee much more interesting. In March, manufacturing production fell 2.5% month on month, compared with a revised decrease of 3.6% the previous month. It was well below market expectations that it would remain flat. After two months of recovery, mining output fell 3.5% year on year.
And the reason is in part the…
European struggles to emerge from a recession
However, there is also a number of domestic factors, such as uncertainty about taxes, problems with corruption etc. On top of that, the ANC government seems to be intervening where it should not and remaining passive where it should be active:
In the absence of government intervention to boost the economy — we are still waiting for infrastructure spend to start — markets and economists have taken a keen interest in just what the central bank will do at its next meeting. And there’s quite a huge difference in opinion.
Before we get to that, let’s remember that interest rates in the United States and Europe are exceptionally low, and they have made no noticeable difference. The U.S. economy is growing moderately, definitely not at any exceptional rates, and that is for the most part due to comparatively low energy prices, comparatively moderate consumer-oriented taxes and, related to that, a fiscal policy that is not nearly as invasive as the austerity madness in Europe.
By contrast, Europe has done virtually everything wrong on the fiscal side, which is completely taking the edge of the European Central Bank’s extremely lax monetary policy.
The obvious conclusion is that the South Africans should not put too much of their confidence in their central bank. Fortunately, some observers are coming to that conclusion. Ron Derby and the Business Day again:
Last week I was of the view that the Reserve Bank may as well cut the repo rate by 50 basis points to boost confidence levels — taking similar action as the European Central Bank, even though our inflationary environments could not be more different. Now I know that a cut wouldn’t necessarily boost South Africa’s growth overnight, because at 5% our borrowing costs are already at multi-decade lows.
The South African inflation rate is persistently above five percent, flirting at times with six percent. It is a bit of a mystery given how poorly the economy is performing, though a topic that would need a longer analysis than this blog can offer.
Back to Ron Derby, who recognizes the bigger problems that South Africa’s economy is facing:
For me, a cut is not a solution to the growth question, but rather a boost to morale. Stanlib chief economist Kevin Lings says the impediments to higher economic growth are largely unrelated to interest rates and, ideally, it is these impediments which should be urgently addressed. I guess the first step along this path is to reach agreement on a plan and at this stage I’ll take any economic plan made by the government, business and unions. That’s going to take some time, but while we wait for the stars to be perfectly aligned, the economy needs an injection of confidence to halt the steady decline.
We can only wish the South Africans good luck in their pursuit of a better plan. So long as the ANC stays in power it is unlikely that any reforms will take place. They are too focused on pushing a socialist agenda.
Once the ANC is replaced, however, South Africa has great potential. A solution to the inflation mystery together with stability in the tax system and in the protection of property rights can come a long way. Stronger law enforcement in general and an end to corruption can also do a lot.
Beyond that, the country needs a healthy dose of economic freedom. But that is a story for another day.
EU Commissioner Clueless about Crisis
Years of austerity and a bad economy have stirred up quite a bit of hostility in Europe against the EU. Political extremism is steadfastly gaining terrain. This is not surprising to anyone who is a regular reader of The Liberty Bullhorn, but it is news to the Eurocracy. And the resentment toward the EU has now grown to such proportions that it is beginning to seriously worry Europe’s political elite, especially one of the EU Commissioners.
More on that in a moment. First, let’s hear what a pale liberal in the European Parliament has to say about the same topic. From Euractiv:
The European Union should brace for “chaos” after the European elections a year from now if the surprise victories by renegade, anti-EU parties in recent Italian and British elections are any sign of what is to come, European liberal leader Graham Watson said. Watson, leader of the Alliance of Liberals and Democrats for Europe (ALDE), told journalists in Brussels that mounting euroscepticism could break the balance between the European People’s Party (EPP) and the Socialists and Democrats (S&D) in the European Parliament.
That is the least of his problems. His alliance ALDE has been behind the austerity policies that the EU has shoved down the throats of about 100 million Europeans. Those policies have the EU’s trademark all over them, so when people lose their jobs, lose their health care, see their college tuitions skyrocket; when they have to pay a lot more for food because the value-added tax has gone up; when young adults realize that they have no chance of ever attaining the standard of living that their parents have; well, where do Europe’s voters turn? To the liberals whose policies are destroying their lives?
Of course not. They turn to radical socialists as in Portugal, to old-fashioned hyper-statists as in France, to Nazis as in Greece or to complete nut jobs as in Italy. In short, they turn to anyone who gives a voice to ordinary people. The votes that went to Golden Dawn and other extreme parties were votes against a European political elite that no longer listens to those who feed them and give them legitimacy.
Back to Euractiv:
“The logic that has been behind the elephant marriage of the EPP and the S&D has always been the logic that between the two parties, they can guarantee having 62% of the MEPs, which is the co-decision majority,” said Watson. If the two main parties lose ground in the May 2014 elections and they get fewer than the 62% of the MEPs, or they are so close that they cannot guarantee a majority, politicians will face a more fractured European Parliament, leading to “chaos”. “Under those circumstances the two groups might work closer together to ensure that the European Union is governable,” said Watson.
Like this is the biggest of Europe’s problems. Greece is not governable, especially not after the EU’s austerity war on the country’s economy. Portugal is not governable. The Spanish government is walking a thin line without safety net between pleasing the Eurocracy and keeping the provinces from seceding. Italy is even more of a political chaos now than it was during the very turbulent 1970s.
But none of that matters when a Europhile liberal is worried about the future political composition of the only parliament in the free world that has no real legislative power.
Euractiv again:
Beppe Grillo’s surprise showing in the February parliamentary elections in Italy and the anti-EU UK Independence Party’s strong finish in recent British by-elections have eroded the power of the more traditional, Europe-focused political parties. Across Europe, fringe groups have seen a surge of support.
Please note how the UKIP is included as one of these “fringe groups”. This is revealing, as it shows how the EU Commission is becoming seriously worried about what the future might hold for them. One of its most ignorant members is from Sweden:
Earlier this year, the European Commission warned that political extremism was on the rise, spurred by a long economic crisis that has caused record-high unemployment and social exclusion on the continent. Support for far-right parties is growing, said EU Commissioner for Home Affairs Cecilia Malmström, urging European leaders to fight the rise of racist and populist rhetoric that pose a threat to the European project.
I knew her 20 years ago. She is a complete and utter political hack, totally willing to compromise with any value, any moral creed, any principle to climb the Eurocrat ladder. She wanted a top EU job already before Sweden was a formal member, and she has done absolutely everything in her power to get there. She has won one election, and one election only, and she did it based on a long list of promises of what she was going to accomplish as a member of the Swedish parliament. The second she got a chance to get on the track to become a Eurocrat, she walked away from her voters, her promises and her seat in the parliament.
This is the person who passes judgment on who people vote for.
Back to the Euractiv story:
If no strong action is taken, Malmström said, extreme political groups could gain wider support in the next European Parliament elections. “We need more European leaders to express their opposition to rising extremism. We must have the courage to stand up and protect our common European values. We must have all the courage to stand up for what we have agreed upon and protect our values that are now being challenged in many countries in Europe,” Malmström told a news conference on 28 January.
And who should they vote for, Ms. Malmström? Your kind? The kind who speaks out of both sides of their mouth? The kind who talks about “European values” and then forces governments in country after country to destroy the economic future of tens of millions of young people? The kind who thinks austerity is an abstract idea with no consequences in real people’s lives?
There is no doubt that the entire EU project is in deep trouble. But the reason is not that there are extremists marching on the horizon. The reason is that people like Cecilia Malmström have turned the idea of European unity into a political behemoth with career paths for those who are loyal to the bureaucracy and a democratic deficit that makes Russia look like a reliable democracy. The problems for the EU began the day when the EU Commission – including Ms. Malmström – decided to subjugate the Greeks by means of reckless spending cuts, destructive tax hikes and complete and utter disregard for the consequences of those policies for the man on the street.
Extremists like Golden Dawn are the consequence of the crisis, not its cause. And while we are at it, let me make crisp clear that the discussion here about political extremism has nothing to do with Britain’s new party, UKIP. They are by no means extremists. If anything, the UKIP is the ideological and moral disciples of Lady Thatcher: good, old-fashioned classical European conservatism at its best.
It’s been said that freedom is just another word for having nothing left to lose. While I disagree with the notion, I do believe it can explain to some degree why people make radical changes to how they vote in desperate economic times. If the so called democratic parties no longer listen to, let alone work for the best of, voters and taxpayers, then what does the middle-class family in Greece have left to lose if the Nazis take over? If the parties that claim to protect parliamentary democracy force an entire country through the fiscal grinds of austerity and destroy one quarter of that nation’s economy, then why should people expect life to become any worse if they put Hugo Chavez-style communists in power?
Europe’s Crisis Becoming Permanent
Yesterday I explained:
inflation-adjusted GDP growth is forecast to be 0.4 percent this year, though that will probably be adjusted downward in the next few months. EU institutions that publish economic forecasts have a tendency to downgrade their forecasts as the present catches up with the future. At the same time, total general government debt in the 27 EU countries is heading the other way: from 2010 to 2012 those countries added 1.4 trillion euros to their total debt. In terms of growth rates, EU-27 have added debt at frightening rates over the past few years: 2008: 6.1 percent; 2009: 12.8 percent; 2010: 12.3 percent; 2011: 6.7 percent; 2012: 6.7 percent. Due to an almost total absence of GDP growth, the ratio of debt to current-price GDP has grown at stunning rates…
In 2008 the debt-to-GDP ratio for the 27 EU member states was 62.3 percent. In 2012 it was 86.9 percent, rising steadily in open defiance of every conceivable austerity measure.
These numbers tell us clearly and indisputably that the European economy is in just as bad a shape as it was when the crisis broke out. More and more Europeans are beginning to realize this; today the Daily Telegraph reports:
Responding to this prolonged slump, the European Central Bank cut interest rates on Thursday. Having last acted 10 months ago, the ECB lowered its main rate by a quarter point to 0.5pc, while signalling it was prepared to go even further. “We remain ready to act if needed,” said the ECB President, Mario Draghi. The eurozone has now finally joined the Anglo-Saxon economies in arriving at “ultra-low” base rates. The Bank of England slashed its main interest rate to 0.5pc back in March 2009, in the immediate aftermath of the sub-prime crisis, soon after the US Federal Reserve went all the way down to 0-0.25pc at the end of 2008.
At these low interest rates, there is so much liquidity floating around in the economy that you could fill every mattress in Europe with ten-euro bills. Let us not forget that the purpose behind austerity is to end government borrowing and thus bring interest rates down. The lower interest rates would then encourage private entrepreneurs to invest more, and thus get the economy moving again. But the central banks have already done the job of cutting interest rates – they have in fact cut them to such levels that if any entrepreneur out there wants to invest, he can practically get free money to fund his project.
So why aren’t they investing? Easy: there is not enough demand for their products. Even a loan at virtually zero interest rate must be paid back, and it is actually not that easy to get hold of “free” money even in times of very low interest rates. After all, there is something call “credit risk” that the bank has to take into account.
Back to the Telegraph:
While eurozone rates were gradually reduced to 1pc in mid-2009, inflation-conscious Germany strongly resisted following the rate-slashing actions of other “leading” central banks. Under pressure from Berlin, the ECB actually raised rates a couple of times in 2011. Since the European economy renewed its nose-dive, though, rates have steadily been cut. With eurozone inflation at 1.2pc, its lowest since February 2010, ECB policy-makers argue they have “room” to cut.
It is ludicrous to believe that increased money supply in the midst of a recession will automatically cause inflation. If that extra liquidity is going to drive prices up, there must be some kind of transmission mechanism between the extra liquidity and the real sector where prices are set.
One such transmission mechanism is entitlements: if government uses newly printed money to pay for welfare checks, housing subsidies and similar cash entitlements, then the newly printed money will indeed fuel inflation. People will be able to go out and spend that new cash without there being any corresponding increase in production. Another transmission mechanism is cheap consumer loans, doled out with little or no regard for credit ratings.
Thus far there are no signs that any transmission mechanism from money to prices is active in the European economy. It is safe to write up the German worries about inflation to armchair theorizing.
A much more important variable to consider is unemployment, which the Telegraph mentions:
In March, the single currency region registered a jobless total of almost 20m people, a record 12.1pc of the working age population. This terrible composite figure hides, of course, a multitude of extremes. While Germany has unemployment of just 5.1pc, in Portugal some 17.5pc of the labour force isn’t working. In Spain and Greece, the figures are 26.7pc and 29.1pc.
Yet someone thought it was a great idea to create one and the same monetary policy for all these countries. And then they added a one-size-fits-all fiscal policy on top of that. Yep. But hey – the economists involved in developing this currency union all have degrees from prestigious schools, so they must have been right. Right…?
The fact of the matter is that the crisis is not over. It is becoming permanent. A major problem for the European economy in general is that it has suppressed private consumption to disturbingly low levels. Private consumption is the driving force of all economic activity – ultimately, all resources we produce will be directly used by consumers, or indirectly used toward their needs. As a result, when private consumption is reduced as share of GDP, it will inevitably pull down GDP growth as well.
Austerity policies are very effective in suppressing private consumption. Perhaps, therefore, it is not surprising that in a country like Spain the private-consumption share of GDP is around 55 percent, compared to approximately 70 percent in the U.S. economy. In the Irish economy the private consumption share is even lower: 45 percent.
The Greek share is high for a crisis country but falling steadily: it started at 72 percent in 2008 but is now 68 percent. This is a notable drop, as these shares are very stable over time. In actual (inflation-adjusted) numbers, the Greek economy has lost 34.5 billion euros worth of consumer spending in four short years. If the average private-sector job costs 50,000 euros to maintain (probably a high number by today’s standards), this means that the Greek economy has lost private consumption spending equal to 690,000 jobs. This accounts for the bulk of the 800,000 Greeks that have lost their jobs since 2008 (when almost 4.6 million Greeks had a job to go to). Even if many of them have been laid off from government jobs, the drastic drop in household spending has made it impossible for them to find a new job in the private sector.
Europe’s crisis started as a sub-prime crisis. Out-of-control government borrowing and credit downgradings of Europe’s most troubled welfare states added a serious escalation to the crisis. Austerity and weak private consumption vouch for a continuation of the crisis. It has been going on for such a long time now that I am convinced Europe will never come back from it. There will be exceptions – Britain among them – but the EU and common currency projects have their best days behind them.
Especially from an economic viewpoint.
Europe Drowning in Debt
The European economy is in bad shape. On May 3 the EU Observer reported:
The eurozone economy will contract by 0.4% in 2013, Economics commissioner Olli Rehn said Friday. Presenting the EU commission’s Spring Economic Forecasts, Rehn said that the bloc would return to growth in 2014 by a slower-than-expected 1.2%. Meanwhile, the average debt levels will hit 96% in 2013.
Looking at the 27 EU member states, things are looking almost as bad: inflation-adjusted GDP growth is forecast to be 0.4 percent this year, though that will probably be adjusted downward in the next few months. EU institutions that publish economic forecasts have a tendency to downgrade their forecasts as the present catches up with the future.
At the same time, total general government debt in the 27 EU countries is heading the other way: from 2010 to 2012 those countries added 1.4 trillion euros to their total debt. In terms of growth rates, EU-27 have added debt at frightening rates over the past few years:
2008: 6.1 percent
2009: 12.8 percent;
2010: 12.3 percent;
2011: 6.7 percent;
2012: 6.7 percent.
Due to an almost total absence of GDP growth, the ratio of debt to current-price GDP has grown at stunning rates:
To reinforce the persistent nature of the economic crisis, the EU Observer also reports:
France has moved centre stage in the crisis, after EU economic affairs commissioner Olli Rehn said that the country would fall into recession in 2013 and needs two more years to bring down its budget deficit. Presenting the Commission’s Spring Economic Forecasts on Friday (3 May), Commissioner Rehn described Paris’s forecasts, based on a mere 0.1 percent growth rate, as “overly optimistic.”
It is hard to see how France has ever been out of the Great Recession. From 2008 through 2012 the French economy averaged 0.06 percent in real GDP growth. During the same period of time its debt-to-GDP ratio went from 68.2 percent to 90.4 percent.
This explains why, as I reported recently, the French government is panicking over the prospect of more austerity. They know it has not worked for their southern neighbors and they are not going to stir up the same kind of political turmoil as those policies did in, e.g., Greece. The socialist French government knows that parties like Front National – often perceived, wrongly so, to be ideologically close to the Greek Nazis, Golden Dawn – as well as radical communists could make significant political gains if the French people were subjected to the same bone-crushing fiscal measures as the Mediterranean EU members have implemented.
The French resistance to more austerity caused the EU Commission recently to declare that the War of Austerity is over. It is not, of course, or else there would be a complete course change throughout southern Europe. Furthermore, the EU Commission would not be continuing to pressure Paris over balancing its budget in the midst of a recession. The EU Observer again:
The eurozone’s second largest economy would run deficits of 3.9 percent in 2013 and 4.2 percent in 2014, he said, calling on Francois Hollande’s government to draw up a “front loaded” package of cuts and labour market reforms to stop “persistent deterioration of French competitiveness.” For its part, Paris maintains that it will reduce its deficit to 2.9 percent in 2014, fractionally below the 3 percent limit in the EU’s Stability and Growth Pact. Hollande in March announced that an additional €20 billion worth of tax rises and €10 billion in spending cuts would be included in his budget plans but said no further cuts would be made.
Because if he tries, the socialist government is going to end up in real trouble. Many of the prime minister’s cabinet members are truly fearful of more austerity, for various reasons.
But wait, there’s more:
Crisis-hit Cyprus, which has now finalised a 10 billion bailout, is set to be worst hit by recession with an 8.7 percent fall in output. Meanwhile, the average national debt pile is expected to peak at 96 percent of GDP in 2014, with six countries – Belgium, Ireland, Greece, Italy, Cyprus and Portugal – having debts larger than their annual economic output. Rehn indicated that Spain would also be given an additional two years to bring its deficit down to the 3 percent threshold, while Slovenia would also need more time.
So long as Europe keeps its welfare state, it has no way out. The welfare state is what is driving Europe’s crisis today, and it will continue to do so for as long as the welfare state exists. Nothing is changing for the better. Europe is drowning in its entitlement-driven government debt. The continent is stuck, and the talk about austerity being over is politically motivated hot air.
I stand my my diagnosis: austerity policies exacerbated the financial crisis into a welfare state crisis and turned Europe into an economic wasteland. What used to be a thriving industrialized continent is now facing an endless future of industrial poverty.
Escalating Political Violence in Sweden
A chilling wave of political violence is sweeping across Sweden. None of this makes it in to European or American mainstream media. This is a shame because the situation in Sweden is destabilizing rapidly. Here are some examples of what is going on right now.
On March 29 Dispatch International reported (with the website’s own rugged translation from Swedish):
It is 1 PM on Saturday 23 March, still a full hour yet until the Swedish Defence League (SDL) is to hold its support rally for a democratic and secular society with free expression. The leftist political partyVänsterpartiet stands perched at the statue of Swedish king Karl X, encouraging those assembled to give the demonstrators from nearby Möllevångstorget a warm welcome. They have barely unfolded their banner with the slogan ”No Breivik soldiers in our streets” before all hell breaks loose in Stortorget. As if on cue, one firecracker after another goes off, and the city squared is drowned in red/green Bengal flames, while the counter-demonstrators attack the riot fence, and with a deafening sound carry it 20-30 meters backwards. It is like being in a war zone, where one becomes worried about surviving it. Although hundreds of police officers are in the streets in order to ensure safety during the SDL rally, they seem taken by surprise. They have permitted the counter-demonstrators to walk up to the outer riot fence, and seem not to have imagined that the counter-demonstrators would turn violent a full hour before the object of their hate, the SDL, was to appear.
The SDL members allegedly had to be transported out of the area under heavy police protection. It was only a matter of good luck that the rioters did not use anything more powerful than large, noisy and smoke-generating fireworks. That said, such devices can be dangerous as they are, and it is impossible to understand that the Swedish police tolerate their use in public, especially in situations like this one.
Barely a month later, Dispatch International reporter Ingrid Carlqvist – one of Sweden’s most experienced investigative journalists and co-founder of Dispatch International – had a terrifying experience while trying to cover a political event in the southern university city of Lund:
For more than 30 years, I have been a tough reporter who never hesitated to go on an assignment, no matter what was. I take journalism very seriously and know that when the media no longer write about what goes on in society, no longer scrutinize those in power, then democracy is on the skids. This past Monday I encountered the end of my courage. Right in front of several police officers and ordinary citizens, I was hounded away from the gravel area in front of AF-Borgen in the Swedish city of Lund. Furious, masked and hateful “anti-racists” threatened me, pushed me around and forced me to leave the place. As photographer Roger Sahlström saw what was happening and caught one of the craziest attackers by his neck, two police officers finally reacted and came to our corner of the gravel area. But as soon as Roger let go of the demonstrator, they left again – leaving us to our fate. With a whole gang of spitting and extremely hateful gangsters in front of us, we were forced to give up. For the first time in my life, I left an assignment before it was complete. … The hatred, in particular the white hot unreasonable hatred, is what scares me. What kind of people are these? Where do they come from? What has happened to these young people who claim to be good ”anti-racists”, but behave as at any time they would throw themselves at me and tear me to shreds? Without hesitating. In spite of the presence of the police 20-30 meters away. But they do not see me. Or do they not care?
On May 1 the nationalist Party of the Swedes, with roots in Nazi movements, marched through the city of Jönköping. They were confronted by very aggressive activists, who made several serious attempts at penetrating police lines. Just like at the event in Malmö in March the activists threw fireworks and other objects at the participants in the march. The activists also set to cars on fire, one of which belonged to a high-ranking official of the Party of the Swedes. The following video gives a glimpse of what went on (go here for the original news report in Swedish). At about 0:35-0:40 two minor fireworks explosions can be heard, and at 0:52 a larger piece of fireworks can be seen burning on a side street. None of the fireworks reached the march, thanks only to aggressive barricading by riot police. However, in other news reports the police admit that their abilities to keep the activists from attaching the marchers were stretched to the limit:
Scenes like the ones in this video are now so common in Sweden that they don’t make national headlines unless a number of people are hospitalized as a result of the violence.
The violent events in the streets only scratch the surface of the political violence currently plaguing Swedish politics. Recently a former member of parliament for the Swedish Democrats, Mr. Erik Almqvist, decided to leave Sweden for fear of his own safety. Reports the Swedish website Avpixlat:
Former member of parliament for the Swedish Democrats, Erik Almqvist, announces that he is moving to Hungary. A main reason is that Almqvist is the subject of serious threats from hateful, violent leftist movements but is no longer eligible for personal protection from the parliamentary security service that he had while he was a member of parliament.
Mr. Almqvist’s party, the Swedish Democrats, is a patriotic party of the same brand as UKIP in Britain or FPÖ in Austria. It has nothing in common with the Nazi-rooted Party of the Swedes, except a skepticism toward immigration. However, while the Party of the Swedes are calling for ethnic cleansing in Sweden, the Swedish Democrats want to preserve Swedish culture and have a sensible level of immigration, tuned to what the country’s cultural, social and economic stability can absorb.
Ever since the Swedish Democrats made national headlines in 2006 by capturing many seats on city and county councils, their leading officials have been targeted by serious, politically driven and often very violent attacks. Officials of the Swedish Democrats have been assaulted in the public and at events organized by the party. National chairman Jimmie Åkesson admits to sleeping with a baseball bat next to his bed – despite the fact that he and many other party officials have bodyguards provided for them by the parliamentary security detail.
Many Swedish Democrat officials have also been attacked in their homes, including window smashing and arson attacks. One example is Mr. Ulf Prytz, precinct captain of the Swedish Democrats in the city of Ängelholm. On March 1 he was attacked in his own home. He was badly beaten, but recovers from the incident without permanent physical harm. However, in the weeks both before and after the assault Mr. Prytz has been the subject of various forms of threats and harassment. On May 1, two months after the assault in his home, Mr. Prytz once again finds himself on the receiving end of vicious violence, clearly related to his political activities:
A cabin belonging to Swedish Democrat official Ulf Prytz burned to the ground on Wednesday – one in a series of incidents directed against the Ängelholm politician this year. ‘It is terrifying and I am considering quitting politics altogether’ Ulf Prytz said the day after the fire. … There have been a lot of incidents, worse than what happened [on May 1]. Twelve difference incidents.
Due to the ongoing police investigation Mr. Prytz does not want to elaborate. We will, however, return to his case and other examples of political violence in Sweden. The situation is spinning out of control and it is no longer entirely certain that the country will be able to hold an entirely impartial national election in September next year. For the first time since parliamentary democracy came to Sweden there is a distinct possibility that political violence will compromise the integrity of the election.
Only Keynes Can Save Europe
Recently I have reported on the changing tone among Europe’s political leaders when it comes to austerity. The change came after the French government basically declared that it would not be able to unite around the same kind of job-destroying policies that the EU so viciously had forced upon France’s southern neighbors. But rather than admitting that their austerity policies have been a disaster for Europe, the Eurocrats simply shifted foot, declaring plainly that austerity had done its job.
Given the death of jobs and destruction of prosperity from the Aegean Sea to the Iberian peninsula, this is more than a little arrogant. It is political elitism coupled with a disdain for the lives of regular citizens.
It is, in one word, Eurotarianism.
If the EU Commission really cared about the citizens whose taxes are paying for their lavish lifestyle, they would pay a lot more attention to mundane things like, oh, the GDP growth rate of the euro zone. As technical and yawn-inspiring as that figure might be, it is still one of the best indicators of whether or not austerity is working. (Let’s not forget that Greece, Italy, Spain and Portugal are still enforcing austerity policies, despite the new words hot-airing out of the mouth of some Eurocrats.)
A good place for them to start learning about reality would be a recent article in Euractiv about the sluggish – to say the least – European economy:
The eurozone economy shows little sign of recovering before the year-end despite an easing of financial market conditions, European Central Bank Mario Draghi said … after interest rates were left at a record low. The ECB held its main rate at 0.75%, deferring any cut in borrowing costs … .
The common belief among parishioners of the Austrian school of economics is that so long as a government balances its budget a so called natural interest rate will emerge that will encourage entrepreneurs to invest and expand their production capacity. Regardless of the budgets of EU’s member states, if it was true that a low interest rate encourages investments, then a rate of 0.75 percent should have entrepreneurs all over Europe flocking to the banks.
Do you see that happening?
Neither does Euractiv, which reports that the ECB is also ready to keep interest rates down through its bond buying program:
The central bank has said it is ready to buy bonds of debt-strained governments such as Spain and Italy once they sign up to a European bailout programme with strict conditions, under a programme dubbed Outright Monetary Transactions (OMTs). So far no request has been made, but the announcement alone has calmed markets.
And is thereby keeping interest rates down. How surprising. The ECB has explicitly said that “we will use our money printers to churn out whatever trillions of euros it takes to buy every single treasury bond from Spain, Italy, Greece and Whateveristan, from now until Sweden freezes over”. When owners of even the junkiest of euro-denominated treasury bonds know that they can always get their money back, no matter how bad things get, then of course they will rest easier.
The problem is of course that at some point they will have had to print so much euros that owners of bonds outside the euro zone will want to secure the exchange rate of the currency. That becomes increasingly difficult if the ECB is going to flood the world with euros just to save its member states from the financial junk yard.
No one can say for sure when that point will come. Doomsday preachers have cast a spell on the U.S. dollar for years, yet it still stands relatively strong. That does not mean the doomsdayers are wrong – all it means is that we simply do not have enough examples of collapsing currencies to predict where either the Federal Reserve or the ECB will have printed too much money for their own good.
But long before we find that out, we will find out that the low interest rates the come with excessive money supply are not going to get the wheels turning in the economy. There is a very simple reason for that, which we will get to in a second. First, back to Euractiv:
Gloomy data this week indicated the eurozone economy will shrink in the fourth quarter, which the ECB could eventually respond to by cutting rates. Recent survey evidence gave no sign of improvement towards the end of the year and the risks surrounding the euro area remain on the downside, Draghi said. He signalled the ECB would downgrade its GDP forecasts next month, describing “a picture of weaker economies”, and said inflation would remain above the ECB’s target for the rest of the year, before falling below two percent during in 2013.
It is interesting that inflation is above two percent in an economy – the euro zone – that is at a complete standstill when it comes to GDP. While we will have to wait for the micro data behind the inflation number to know exactly where it comes from, my bet is that it is caused by tax increases and terminated government subsidies in austerity-ridden countries. The private sector is always quick to pass on such explicit and implicit tax hikes, even in tough economic times.
Pricing in modern economies is typically done on a mark-up basis where producers and seller review prices about two times per year. (If your microeconomics professor told you anything else, then I’m sorry for the rude awakening…) This means that if we have austerity measures being put into place this spring with a direct effect on consumer prices, we will see repercussions in inflation data for the rest of the year.
That said, inflation above two percent and interest rates at rock-bottom levels is actually – according to standard economic theory – a good recipe for investments. You see consumer prices on a slow upbound trajectory, which tells you that if you lock in your costs today you have good reasons to expect profit margins in the future. At the same time, with very low interest rates you have good reasons to believe that you will lock in those low costs.
So why aren’t they investing?? Patience, my young padawan. Uncle Keynes will give you the answer in just a moment.
Euractiv again:
Before making any decision to cut rates further, the ECB will focus on making sure that its looser policy reaches companies and households across the eurozone, a mechanism that has been broken by the bloc’s debt crisis. The new bond purchase plan is the ECB’s designated tool but it can only be activated once a eurozone government requests help from the bloc’s rescue fund and accepts policy conditions and strict international supervision.
Which is technospeak for “more austerity”. Despite the hot air from Barroso, nothing has changed in the conditions that the ECB attaches to its bail-out program for debt-mired member states. Governments in already-suffering countries know that if they try to push more tax hikes and spending cuts on their citizens they will have an armed revolution on their hands – or be booted out of office in the next election and replaced by Nazis or “Bolivarian” communists. They obviously don’t want this to happen.
The problem for the ECB is that their bond-buying pledge has now calmed the markets, but the member states have not accepted the terms of the program. This means that in effect, the program is worthless. In order to avoid losing credibility the ECB is going to have to relax the conditions attached to the program, not now but in a year or two. The reason is that the countries in Europe’s dungeon of debt will not recover from their current crisis.
Why won’t they recover? Because their fiscal policies are still geared entirely toward balancing the budget in the midst of zero or negative growth and very high unemployment. With too few taxpayers and too many entitlement consumers indebted governments continue to run deficits – and therefore continue to try to close those gaps with the same policies that brought about the depression in the first place.
In order for those economies to start growing again the hopelessly indebted governments must give the private sector room to spend money. So long as consumers are pushed to the end of their finances by high taxes and unemployment they won’t spend. If they don’t spend there won’t be any demand for consumer products, services, houses, cars, food, clothes, haircuts, vacation travel services, books, plumbers, painters, carpenters, restaurants, recreational services like spas and gyms…
Which brings us back to why entrepreneurs are not taking advantage of virtually free money. They have no reason to believe that they will get their money back in the form of sales revenue.
People have cut their spending today, which according to the pastors of the Church of Mises and Menger means that they will increase spending by the exact same amount at 1:20PM on Monday. Keynes, however, had a more sober analysis. Here is how he opened Chapter 16 of his General Theory of Employment, Interest and Money:
An act of individual saving means — so to speak — a decision not to have dinner to-day. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence or a year hence or to consume any specified thing at any specified date. Thus it depresses the business of preparing to-day’s dinner without stimulating the business of making ready for some future act of consumption. It is not a substitution of future consumption-demand for present consumption-demand,— it is a net diminution of such demand. Moreover, the expectation of future consumption is so largely based on current experience of present consumption that a reduction in the latter is likely to depress the former, with the result that the act of saving will not merely depress the price of consumption-goods and leave the marginal efficiency of existing capital unaffected, but may actually tend to depress the latter also. In this event it may reduce present investment-demand as well as present consumption-demand.
Only Keynes can save Europe. It would take an enormous load of work, though, to allow his theory of effective demand to actually go to work in the European economy. While economically possible, I seriously doubt that there is enough political will power to allow that to happen. It would mean that those who have gained enormous political power both in the Eurocracy in general and among the austerity merchants, will have to take more than a few steps back.
I frankly don’t think this is politically possible. I am fairly certain that Europe has gone so far down the path of austerity and big government that it won’t ever come back again. But this message from Uncle Keynes could serve as an excellent reminder for American lawmakers to get their own house in order – the right way.
The Keynesian way.
