Category: Uncategorized

Jobless Europe

Recent unemployment data from Eurostat gives yet another grim picture of the European economic landscape. The EU Observer reports:

Over two-dozen regions throughout the Union have an unemployment rate twice the EU average. The data, published on Wednesday (16 April), by the EU’s statistical office Eurostat, says the jobless rate in 27 regions in 2013 was higher than 21.6 percent. Thirteen are found in Spain, 10 in Greece, three in the French Overseas Departments, and one in Italy. Five of the worst affected are found in Spain alone.

There is a strong relationship between unemployment and growth. In fact, over time the only way that the private sector can create jobs is if the economy as a whole is growing. With GDP growth at deplorable levels in the EU, there simply is no way for the economy to solve the unemployment problem.

The EU Observer again:

At 36.3 percent, Spain’s Andalucia tops the overall unemployment regional figures, followed closely by Ceuta, Melilla, Canarias, and Extremadura. Youth employment is worse. Young people are twice as likely to be unemployed, when compared to the average unemployment rate, in more than three quarters of all the EU’s 272 regions. Ceuta tops the list of youth unemployment with a 72.7 percentage, followed by Greece’s Dytiki Makedonia at 70.6 percent and Ipeiros at 67.0 percent.

These regions are nothing short of economic disaster zones. As I explain in the linked growth article above, there is very little economic value being created in the European economy that can translate into new jobs. At best, the unemployment situation is not getting worse – it is the herald of Europe’s new era of economic stagnation.

Back to the EU Observer:

The data also showed that over 47 percent of people without work have been unable to find a new job after a year. … Around 75 percent of the unemployed in Slovakia’s Vychodne Slovensko region are also unable to find a job after a year.

In fairness, as the EU Observer notes there are some islands in this sea of economic depression where conditions are a bit more normal:

At the other end of the spectrum are Germany, Austria and Sweden. At 2.6 percent, Germany’s Oberbayern region had the overall lowest unemployment rate. Both Freiburg in Germany and Salzburg in Austria tied at 2.9 percent. Oberbayern, along with Tubingen, also ranks as having the lowest youth unemployment rate at 4.4 percent with Freiburg coming in at a close second. Long-term jobless rates are the lowest in six Swedish regions, which includes Stockholm.

In January I explained that the German economy is on the downslope, with key GDP components gross exports and private consumption coming to a standstill last year. 

As for Sweden, nationwide unemployment is a hair below eight percent, with youth unemployment at three times that rate. Recently there have been microscopic changes for the better, but that is coming to an abrupt end with the new fiscal policy plan that Treasury secretary Anders Borg announced back in February: tax hikes, tax hikes and tax hikes.

There is one more caveat with the low unemployment numbers in, primarily, Sweden. Government has a large share of the workforce on its payroll.

No, It Was Not A Financial Crisis

We have been told now for a good five years that the Great Recession was a financial crisis. Nobody would deny that early on in the crisis banks in both the United States and Europe made massive losses in, primarily, real estate. But common sense and basic economic theory simply refute the idea that the financial crisis could have hurled Europe, and most of the Western World, into its deepest recession since the 1930s.

In order to have this major influence on the rest of the economy, the financial crisis must have transmitted its downturn to the real sector through easily identifiable transmission mechanisms. There are three of those:

  1. Depositors lose what they have in their bank accounts and, as a result, make serious cuts in their spending;
  2. Banks demand that borrowers pay back large amounts of loans immediately; businesses and households declare bankruptcy because they do not have that cash on hand;
  3. Bank customers are denied new loans.

The first transmission mechanism was not active in this crisis, with the exception of the Cyprus Bank Heist in 2013. Similarly, the second transmission mechanism was very limited in influencing the economy.

The third transmission mechanism is the most compelling one. If banks make major losses on loans during a short period of time, as happened at the opening of the Great Recession, then their response should be to raise their interest rates sharply in order to severely ration credit and keep it out of the hands of anyone except the absolutely most credit-worthy customers.

Put more broadly, banks would fundamentally restructure their credit rating of customers. Theoretically, borrowers who were previously rated as good-credit customers would now be in the fair credit category, and fair-credit customers would be treated as if they had poor credit. In practice a shift from generous credit supply to strict supply rationing is more complicated, but the inevitable outcome is an excess demand for credit.

The rationing of credit is the dominant change on the credit market. In order to work as a transmission mechanism from the financial sector to non-financial industries and to households, the credit pullback has to be the defining change to the credit market. If households reduced their demand for credit on par with, or in excess of, the reduction in credit supply, then any effects of reduced borrowing in the economy would be traced to a cause outside of the financial sector. Plainly, that cause would be independent of the financial crisis.

If there was a decline in credit supply relative credit demand, then the price of credit would rise. The more drastic the change in lending policies, the faster is the rise in interest rates. Given the rapid development of the crisis early on, and given its depth, it is reasonable to expect that if this crisis was indeed caused by the financial sector, the transmission mechanism would reflect the urgency of the crisis opening. This, in turn, would mean sharp increases in interest rates.

Interest rates would rise across the board. Households and non-financial corporations would be the first to pay higher rates. However, government bond rates would go up as well. Traditionally, Treasury bonds issued by developed countries are for the most part considered to have the lowest possible risk attached to them. But so do many businesses, as well as a segment of households. All things equal, therefore, if banks rationed credit to the general public it is reasonable that they would also demand higher interest rates on Treasury bonds. At the very least, there should be no drop in interest rates on Treasury bonds if banks are very cautious about lending even to low-risk customers.

In reality, interest rates did not at all go the way they should have, if the financial crisis was transmitting its crisis to other sectors. To begin with, Treasury bond rates – which again should have gone up or stayed flat – developed differently depending on what country they were issued by. Figure 1.1 displays trends in the ten-year Treasury bond (or its nearest equivalent) for five EU member states:

Avg bank lending rates

Source: European Central Bank

After the Millennium Recession interest rates fall for about four years. The turn upward begins at the height of the growth period between the Millennium and Great Recessions.

This is important: not only do interest rates on corporate loans start rising two years before the current crisis begins, but they also rise gradually, as if the market for corporate credit is gradually turning form a borrower’s market to a lender’s market. The shift is one from a market where supply chases demand to where demand chases supply.

A gradual rise in interest rates over a period of two years is not an indication of sudden panic on the credit market. Furthermore, if banks had suddenly cut off credit at the time when the crisis began, the average corporate-loan rate would have shot up suddenly and significantly just as the crisis began. This did not happen: on the contrary, right as the Great Recession breaks out credit to non-financial businesses is sold at rapidly falling interest rates. From a peak point of 6.98 percent in September 2008 the average rate fell to 3.68 percent in June 2010.

In short, while the European economy was plunging into its deepest recession in 75 years the average interest rate on a bank loan to a non-financial corporation was almost cut in half.

Since then it has remained below 4.5 percent.

While many factors affect interest rates on business loans, the basic mechanics of a free market are never to be ignored. A sharp drop in the price of a product indicates either a sharp increase in supply or a sharp drop in demand. Given that this happens at the opening of a deep recession, the only reasonable explanation is a sharp drop in demand for credit.

When non-financial corporations reduce their demand for credit, it is a sign of rising pessimism on their behalf. The pessimism, in turn, is about their ability to pay back the loan over the next couple of years. Since they pay back their loans out of current revenue, this means that a reduction in credit demand is caused by a reduction in demand for the products put out by non-financial corporations.

In other words: first there was a reduction in real-sector economic activity, where consumers spend money and entrepreneurs invest in their businesses – then there was a decline in demand for credit. The crisis had already begun when banks saw demand for credit drop.

This means that:

  1. Credit-supply restrictions did not transmit the financial crisis to the rest of the economy;
  2. Businesses experienced a drop in current and expected future sales and transmitted that pessimism back to the banks;
  3. The financial industry was not the main cause of the Great Recession.

Where, then, did the financial crisis originate? The answer to that question is in my forthcoming book, Industrial Poverty: Yesterday Sweden, Today Europe, Tomorrow America. Due out late August. Stay tuned.

Venezuela in Cuban Death Spiral

For well over a decade now, European and even American socialists have pointed to Venezuela as the new socialist paradise. As now-defunct president Hugo Chavez socialized sector after sector and chased foreign oil companies out of the country, his global admirers went politically ecstatic. Little did they care when oil production plummeted because the experts left the country and the socialists tried to run oil production on dictates from the country’s political leadership; little did Chavez’s global congregation of spoiled iPhone-using socialists care when the Venezuelan economy was hit by rolling black-outs. They cared even less when Chavez introduced destructive price regulations on food, regulations that made it close to impossible for anyone to make a living producing and distributing food in the country.

When sector after sector imploded, European and American worshipers of now-defunct Hugo Chavez raised him even further to the skies.  When the Dark Bells of Beelzebub chimed, calling Chavez to eternal torment, his fanatic followers did a good job ignoring his legacy: destructive unemployment, wiped-out prosperity, food shortages, destroyed property rights, rampant crime, corruption… and inflation. Last November prices were rising at 54 percent per year, an absolutely outrageous inflation rate. (More recent numbers point to 57 percent, but that remains to be verified.)

With prices of just about everything running amok, shortages in supply are inevitable. The higher inflation is, the more serious the shortages will be. Since people can afford fewer and fewer things in life, their fight to feed themselves becomes ever more desperate. This in turn causes chaos at the retail end of the food supply chain. Once a country gets to this point there is not much left of economic freedom for ordinary people. But instead of getting government out of the entire business, socialists respond by doubling down on their government-expansion project. Alas, we found this report in The Guardian a few days ago:

Venezuelans queued on Friday to register for an electronic card system designed to end food shortages that have plagued the country – but which some fear may be the thin end of the rationing wedge. The ID card, introduced this week, will limit Venezuelans to once-a-week shopping and will set off an alarm to halt any transaction if a purchaser breaks the rules. The government wants to prevent individual shoppers from “over-buying” in a country hit by acute shortages of basic items including milk, sugar and toilet paper.

Do we have “acute shortages” of these items here in the United States…? Why not…?

Critics say it is an admission of failure of economic policy in one of the world’s big oil-producing nations. “The government needs to control the hoarders. They have made this worse. But if there weren’t shortages there wouldn’t be hoarders. We are trapped,” says Jose Diaz, a 65-year-old construction worker. By keeping a record of what is purchased and limiting shopping trips, the electronic card is supposed to curb hoarding and prevent speculative shoppers from buying to resell at a profit. But the larger aim is to halt the huge outflow of food to neighbouring Colombia, where it sells for up to 10 times as much. It is estimated that almost 40% of Venezuela’s food is transported illegally across the border.

This is exactly right. Inflation in consumer markets creates a speculative opportunity just like it does on the stock market. If stocks rise fast over a sustained period of time, it is a safe bet that you can make good money buying them “now” and selling them “later”. The exact same thing is now the case in Venezuela’s food markets.

But where does inflation come from? That is a good question, to which we will have to return later. For now, back to The Guardian:

Outside the Bicentenario megastore in Plaza Venezuela, a middle-class neighbourhood in the capital, Caracas, the line stretches for several blocks. Some of the people here have come to register for the new system; others simply want to buy food. Most of them have already been waiting for several hours. They are desperate over what they say is a lifetime spent standing in queues.

Can you say “Soviet Union”?

The card, they hope, will put an end to a perverse cycle they say they cannot bear for much longer. “This card will take the edge, the sense of panic, out of shopping. If we know that we will find rice or milk next time we come we don’t need to stock up and so there will be more to go around,” says Oscar Romero … After queuing for almost three hours, Pascual Sandoval is just three blue plastic chairs away from registering for the “card for secure supply” as it is being called. … fellow queuers share his enthusiasm for the shopping card, but are not as confident that it alone will solve the shortages or the ensuing long lines. For many the root causes run deeper. Critics say the new system will do little to galvanise the productive parts of an economy in which people see no point in producing goods that are then subject to price controls and end up being loss-making.

Spot on. Price controls have disrupted productive activity that worked well before socialism came to town. Government takeovers of large sectors of the economy have further destroyed economic incentives that feed people on a daily basis in Capitalist nations. And last, but not least: by pretending to care for the poor better than any private organization could, government has shoved aside private, charitable activity. Not only has government taken over their “market” with entitlements and other programs sold as compassionate with the poor, but by devaluing the standard of living of regular Venzuelans the government has severely shrunk the incomes out of which people could donate to private charities.

In other words, the Venezuelan government has done in about a decade what European welfare states have taken half a century to accomplish: the destruction of free society by means of government promises. The more promises government makes, the more promises it can’t keep. But since government wiped out the private sector during its promise-making process, there is nobody there to replace government once it collapses.

As for the future of Venezuela, it is well captured by these words from a disillusioned Chavez disciple:

For some, the recent move is nothing short of a Cuban-style rationing card that will sooner or later hamper citizens’ economic freedoms. “I don’t want to be told what I can buy and when I can buy it. That’s what I work for. I am a revolutionary but I didn’t go into this wanting it to become Cuba,” says Mercedes Azuaje as she exits a corner shop with an almost empty bag of groceries.

In short: be careful what you wish for – you might get it. This woman is yet another example of the arrogance of socialists. Before they come to power they always know “a better way” and smile at those who are stupid enough to not understand. Once in power they are too eager to implement their agenda to research its consequences. When things go awry they tell us that “this is not what we intended” and leave the cleaning up to libertarians and conservatives, the only adults in politics.

Tensions Rise in EU Deficit Battle

What is the difference between a turtle and the European economy? The turtle is moving fast forward. There are no lights in the tunnel either, especially when we take into consideration the situation in the big French economy. The socialist government came into power on promises to get the economy going, turn the tide on employment and get the austerity dementors from Brussels off the back of the French people. They have not delivered on a single one of their promises, and even though it takes time for new economic policies to sink in, the French socialist government is closing in on two years in office and should at least be able to produce some credible signs of recovery. But that is not the case. On the contrary, whatever blip on the radar they have been able to produce is succumbing under their tax increases and even more stifling regulatory incursions into the private sector:

GDP Growth French

The rather tepid growth record of the French economy is having a real impact on its government’s relations to Brussels. With the tax base (GDP) barely growing at half a percent per year, it is arithmetically impossible for the government in Paris to close its budget gap. As a result, Euractiv.co, reports:

France is again seeking an extension from the EU on the deadline to reduce its national deficit. European Parliament President Martin Schulz supports the idea but the German government is insisting on adherence to the guidelines of the European Stability Pact. EurActiv Germany reports. In a speech earlier this week, French President François Hollande made it clear he would attempt to renegotiate Brussels’ demands to reduce the French deficit to under 3% of GDP by 2015. The new finance minister, Michel Sapin, also intends to renegotiate the timeline with the European Commission. “The government will have to convince Europe that France’s contribution to competitiveness, to growth, must be taken into account with respect to our commitments,” Holland said on 31 March. But the EU has already given the country two extra years to comply with the Stability Pact’s deficit limit of 3% of GDP.

This is raising tensions over the Stability and Growth Pact, effectively the legal deficit-cap instrument in the EU constitution:

On Thursday (3 April) in Frankfurt, ECB President Mario Draghi again stressed how important it was for eurozone countries to honour their fiscal commitments within the EU. On Friday morning, European Parliament (EP) President Martin Schulz, spoke in favour of meeting French demands. Schulz is the European Socialists’ candidate in the upcoming European elections. Speaking on BFM-TV in France, he said the country must be given more time to comply with the Maastricht criteria. The rules of the Stability and Growth Pact, with its debt limit of 3% must “be reconsidered”, said Schulz. Norbert Barthle is Bundestag spokesman on budgetary policy for Merkel’s Christian Democratic Union (CDU). In his view, another postponement of the deadline should only take place under clear conditions which state that France will really put its budget back on course. The chairman of the Bavarian Christian Social Union (CSU) political group in the EP, Markus Ferber strongly criticised Schulz’s demands to soften the terms of the Stability and Growth Pact: “While the CDU and the CSU have been acting as a fire brigade to extinguish the euro debt-crisis, Martin Schulz is adding new fuel to the growing fire.”

Schulz is the socialist candidate for president of the EU Commission, with a strong statist agenda in his hand. His desire to water down the Stability and Growth Pact has nothing to do with concern for the French economy – it is primarily motivated by a desire to give government the room to grow without any real limits.

Secondarily, Schulz is vehemently against the austerity policies that the EU-ECB-IMF troika has been forcing on some EU states. I share his resistance, but for entirely different reasons. While Schulz sees austerity as an impediment on government growth, I view it – or at least its European iteration – as a macroeconomic poison pill. It is a good idea to stop austerity policies, but the replacement should absolutely not be more government. The French government is way too big, but this is also the case in Europe in general – which is why there is no recovery in sight. On the contrary, stagnation is the new normal. In the last quarter of 2013, industry activity in the EU-28 and euro-18 areas were as follows in key sectors, measured in gross value added (one of three ways of measuring GDP):

  • Manufacturing grew 1.7 percent over the same quarter in 2012; 1.3 percent in the euro area;
  • Construction declined 0.4 percent, the 11th quarter in a row with declining activity in this sector; in the euro area the decline was 1.7 percent, the 22nd negative quarter in a row!
  • Finance and insurance contracted 0.9 percent in EU-28, 1.1 percent in euro-18.

Measured as employment, the numbers do not look better:

  • Manufacturing employment contracted 0.7 percent in the fourth quarter of 2013, the eighth straight quarter with a decline; the decline was 1.2 percent in euro-18;
  • Construction saw employment shrink by 1.4 percent, the 22nd straight negative quarter; the decline was a notable 2.9 percent in euro-18, marking the 23rd quarter in a row with declining construction employment;
  • The financial-insurance industry basically stood still at +0.1 percent (-0.3 percent in euro-18).

(All numbers are from Eurostat.)

Things may turn around when we get the numbers from Q1 of 2014, but I see no substantial reason to expect a sustained recovery. On the contrary, everything points to continued stagnation, in France as well as in Europe. This does not bode well for the future of the continent – perhaps the EuropeanS should get used to scenes like this one:

 

Debt and Growth: A Quick Look

There is an ongoing debate here in the United States about our federal debt. Obviously, we cannot keep raising the debt-to-GDP ratio, and although the federal deficit has shrunk dramatically in the past couple of years, there is a strong likelihood that we will return to growing deficits some time beyond 2018. This obviously means that the debt will accelerate again; what will happen to the debt ratio is a question for future inquiry.

As things look now, the U.S. economy is slowly rising out of the recession at growth rates 2-3 times what the Europeans are seeing. That is somewhat good news when it comes to our debt ratio, a variable that has more than symbolic meaning. Countries with high debt-to-GDP ratios pay more on their debts than countries with low ratios. The reason is simple: a country with a low debt ratio is more likely to have enough of a tax base to both fund its current spending and meet its debt obligations. GDP, obviously, is the broadest possible tax base, so the larger it is relative government debt, the safer it is to buy a country’s Treasury bonds.

The next step in this reasoning would be to ask if the debt ratio itself has any relation to GDP growth itself. In other words, does the burden of government debt on an economy slow down its growth? If the answer is yes, then rising debt creates a vicious circle including higher interest rates, the need for higher taxes and stagnant growth.

Many would say that this vicious circle obviously exists and that no further investigation into the matter is needed. However, those who say so disregard the fact that the United States, with a debt ratio above 100 percent of GDP (we cannot count just the debt “held by the public” because all debt costs money one way or the other) has a faster-growing GDP than the EU does, where the aggregate debt-to-GDP ratio for all 28 member states is 87 percent.

Therefore, as always it is good to take a look at some data. The following figure reports Eurostat data for 27 EU member states (excluding Croatia which became a member just this year) over the period 2000-2013. The data is broken down to quarterly levels and not adjusted seasonally (this vouches for “genuine” observations). The left vertical axis reports debt-to-GDP ratios while the right axis reports inflation-adjusted GDP growth numbers, quarterly over the same quarter the previous year. Since this gives us a very large number of pairs of observations, the data is organized into deciles. Each contains 148 pairs of observations – debt ratio and GDP growth for the same quarter – except for the last decile which contains 149 observations. Each decile reports average numbers for each variable for that decile:

Debt GDP Q 00-13

*) The astute observer will notice that I am only reporting 1,481 observation pairs when 27 countries observed over 14 years, four times per year, should actually produce 1,512 observation pairs. The lower number reported here is due to two factors: only one data series is available for the fourth quarter of 2013, and both series for Malta are missing for the first few quarters.

While this is not an actual econometric study (that would take a lot more time than I have on my hand for this blog) the analysis nevertheless reports an interesting correlation. First, when the debt ratio rises above 60 percent, growth slows notably. The 60-percent debt level is often referred to in the public debate over government debt as a threshold governments should not cross. I have sometimes dismissed this level as arbitrarily chosen, and I maintain that any simple focus on this ratio for legislative purposes is indeed arbitrary. In fact, if we look at the other end of the spectrum a debt level below 40 percent appears to have very strong positive effects on growth. If we are going to have legislation about a debt ratio cap, then why not use 40 percent?

That said, the observed correlation calls for deeper investigation. Unlike some simplistic pundits (you know who you are…) I am not going to draw the immediate conclusion that high debt ratios cause low growth. Let us remember that GDP is the denominator of the debt ratio; if the denominator grows slowly for any reason, and government keeps deficit-spending as usual, then the debt ratio is going to rise for purely arithmetical reasons. However, as mentioned earlier, large deficits themselves can very well drag down GDP growth, raising the debt ratio for causal reasons.

More on that later.For now, let’s conclude this little exercise with two questions that I hope to answer soon:

1. Is there a correlation between large debt and big government spending? If so, the low growth in high-debt-ratio countries could have its explanation.

2. What happens if we delay one of the two variables one quarter? This classic, basic statistical method could tell us a lot about the causes and effects between debt and growth. I am going to take a stab at it as soon as time allows.

Needless to say, any future inquiry would have to include the United States. This one does not, simply because the raw data used here did not include U.S. numbers. Now that I have this data in a configured file of my own it is easy to add U.S. data.

 

Europe’s Right Makes Left Turn

Europe’s only way out of its crisis is to phase out the welfare state and gradually replace its entitlement systems with private solutions. This is a time-consuming process that requires relentless political commitment over a number of years, but it can be done, in Europe as well as here in the United States. However, the economically necessary is not always the politically realistic. Sometimes the economically necessary is not even politically desirable.

The latter scenario is the most problematic. When ideological preferences pull in an entirely different direction than the economy needs to go, the political rift between “ought to” and “must” happen makes necessary economic reforms close to impossible. The growth of nationalists, socialists and even fascists in today’s European political landscape is a clear sign of how big that political rift has become, but there is more bad news (if you can take it…). Recently I reported that the next head of the EU Commission – de facto the executive branch of the European Union – is going to be a statist, no matter who wins the May European parliamentary elections.

Today, Euractiv.com offers another example on how Europe’s ideological landscape is drifting to the left. They interview a former Belgian union activist and influential politician who is running for the European Parliament on a ticket for the center-right European People’s Party coalition. By their ideological label you would think they would be fighting hard for less government, lower taxes and more economic freedom. Well, sorry to disappoint you:

Mr. Rolin, you’ve decided to leave the trade union and enter into politics and run for MEP at the next European Parliament elections. What will be your priorities?

My first, second and third priorities will be employment, because that is the most important things right now. We see how the current crises affect us, how they deconstruct the European social system. Unemployment is devastating in social and economic terms but also in terms of democracy. We see it with the rise of Eurosceptic, populist and far-right groups.

“Deconstruct the European social system” is a code phrase for cutting entitlements in the welfare state.

We heard from the panelists at the European Trade Union Summit that austerity does not work. Do you share this opinion?

Entirely. Austerity policy does not work. And we see it. If it did work, it would have been verified, you know, like in mathematics. This has been verified by Greece, we’ve just heard it at the panel. It does not work. It creates more inequality, more unemployment, more misery in the population. Therefore it is high time to change our course. Even though we succeeded in saving the European currency, we need to have a policy focused on investments. I think that the ETUC’s programme aimed at boosting investments is very pertinent.

The first problem with austerity that he brings up is “inequality”. The very concept is alien to any concerted effort at promoting economic and individual freedom. By accepting the term “inequality” we immediately accept the false notion that it is somehow wrong that some people work harder than others and thus earn more money.

It is very telling of just how deeply the welfare state has been accepted in Europe that a parliamentary candidate for the large center-right party coalition regards “inequality” as the biggest problem with austerity. Unemployment comes second and general misery third. Never mind that austerity destroyed one quarter of the Greek economy; never mind that it has recalibrated the welfare state and made it an even heavier burden on the private sector. No, the biggest problem with austerity is that it has caused more “inequality”.

But wait – there is more:

Austerity does not work, you say. but you will nonetheless join the European Peoples’ Party (EPP) group in the European Parliament if you win, and the EPP has been the driver of austerity policies. Your party (Belgium’s Christian Democrat’s Centre démocrate humaniste, CDH) is a member of the EPP at the EU level. Isn’t there a contradiction between your trade unionist’s convictions and your political battle?

I see it as a challenge to bring a social dimension to the EPP, which is absolutely necessary. The CDH’s programme is very clear on that matter. We want to turn our back to austerity and put in place social policies, intelligent economic policies which will make it possible to have a real economic recovery through employment oriented investments, and sustainable employment.

Apparently, now it is part of the center-right path through Europe’s political landscape to believe that government can create “sustainable employment”. This is an outright socialist idea, no matter which way you twist and tweak it. If it was just a matter of “employment” you could let the EPP candidate and his party bosses off the hook with the assumption that they want to have fiscal policies that encourage more growth and more jobs. But the adjective “sustainable” gives an entirely new meaning to any policies for employment. It means, in short, either expanding government payrolls or making it even harder for employers to lay off employees. Both strategies are antithetical to economic freedom, growth and prosperity.

But Mr. Rolin is not just convinced that Europe needs more statism – he is also convinced that without it, the entire European Union is in peril. Euractiv again:

The 2009 EU elections had a record low participation from the voters, do you think this will change this time, that people need more Europe this time?

I am convinced that people need a more social Europe, they need to believe again in the European project. … As for the European Commission’s discourse on social affairs, it seems to me that it is not in phase with the reality. The workers are living a particularly difficult reality because of the crisis. It is therefore high time to go beyond the observation that something needs to be done. We have to be more radical in our policies and make them fit to the citizens’ aspirations. What is at stake is crucial. Either Europe succeeds in answering to European citizens’ aspirations and stop the growing social divide, or the European project will fail.

In other words, the only way for the European Union to survive is that it expands the welfare state at its level, in addition to what the member states are doing.

More welfare-state policies is precisely the wrong medicine for Europe. And just to drive home the statist point with particular fervor, Mr. Rolin tells Euractiv how important it is to raise taxes and reduce the scope of free-market policies:

What should be the priorities of the next Commission?

The tax on financial transactions is an indispensable element. It is time to put it in place, because it is economically intelligent; but also because it will bring equity and trust. Then, we need to stop the fiscal, social, environmental competition. We have to realise that we are Europe. Europe cannot be built on intra-European competition policies. We need to put in place cooperation policies. Together we can win. If we fight against each other in Europe, we will all be losers. That is for me the priority of all priorities: fighting against that logic. And the second thing of course is to boost growth throught sustainable investments. And finally, in terms of economic governance: yes, we need to control the state deficits, because the debts will have to be repaid one day but we need to stop confusing consumption debt or investment debt. When I invest in the future, it’s positive.

A tax on financial transactions will move those transactions to Seoul,Sydney or Sao Paulo. And it will happen fast. The financial industry is very fluid compared to other industries. There are other countries and cities in the world that offer likeable climates for the financial industry. If anyone is in doubt, look at what happened when Sweden tried a similar tax on the stock market back in the ’80s. I have lost track of all the people in that trade that I knew who moved to London or Luxembourg with their employers, as a direct result of the tax.

Alas, the tax is not going to produce any noticeable revenue. All it will do is drive high-end jobs out of the EU, and with them a whole lot of upscale spending that in turn will cause job losses in real estate, retail, manufacturing and transportation. Just look at what happened in New York in 2009-2010 (and look what is coming back there now thanks to a slow but sustained economic recovery). If that is the kind of “equality” that this new center-right European politician wants, then by all means, go ahead. We here in America will happily continue to out-compete you with cheap energy, lower taxes and stronger work incentives.

Mr. Rolin’s passage about ending intra-European competition is more frightening than it sounds like. What he is saying is, plainly, that there should not be jurisdictional competition between EU member states for jobs and investments. But that also means an end to policy competition: it means centralized tax and entitlement policies, centralized regulations, etc.

One of the reasons why the U.S. economy is doing comparatively well is that taxes below the federal level have been kept back during the recession. States have made concerted efforts at reining in spending, mostly with positive results. In addition to the Obama administration’s notable fiscal restraint this has eased somewhat the fiscal burden of government on the private sector. (If Obama showed equal restraint on the regulatory side, our economy would be roaring ahead right now.) When states hold back spending they can cancel tax hikes and even cut or eliminate some taxes. Kansas, Oklahoma, North Carolina and Nebraska are four good examples of states pursuing or implementing tax-cutting reforms. States that have pushed taxes higher lose jobs, while states with constant or lower taxes attract employers.

If Europe gives up on jurisdictional competition, it will lose one of its few remaining instruments for growth-and-prosperity promoting policies. Taxes will rise to pay for an expanding EU-level welfare state. Spending will grow in a misguided attempt to eradicate “inequality”.

And the entire continent will travel, Eurostar style, straight into the economic wasteland of perennial stagnation, eradicated opportunities – and industrial poverty.

Fiscal Panic in Argentina

Of all the countries around the world that have tried to embrace the European welfare state, Argentina is perhaps the most tragic example. From the 1920s through the 1950s the Argentine economy was one of the strongest in the world, and there were years when Argentina attracted more immigrants from Europe than the United States did. But what could have become a formidable economic powerhouse caved in to the ideas of the welfare state. As the economy began declining, social and economic stability evaporated and Argentina suffered decades of political turmoil.

The long-term suffering of the Argentine people, and of many other South American countries, is a stark warning to today’s Europeans: their continent could become the same tragedy in the 21st century that South America was in the last century. Unfortunately, the Europeans refuse to hear the warning bells from recent history, so we might just as well pile on yet another story, on top of the ones already published about the crumbling Argentine economy and what brought it down. This one is from Bloomberg.com:

Argentina reduced government subsidies on natural gas and water by an average 20 percent in a bid to narrow the largest fiscal deficit in more than a decade. The government could save as much as 13 billion pesos ($1.6 billion) and will use proceeds to cover utility company costs and finance social spending, Economy Minister Axel Kicillof and Planning Minister Julio De Vido said today at a press conference in Buenos Aires. The cuts won’t apply to industrial users.

And the reason for the big deficit?

President Cristina Fernandez de Kirchner has boosted social spending since taking office in 2007 and left utility rates largely unchanged amid average annual inflation of about 25 percent, straining the finances of power distribution companies and leading to periodic blackouts.

If you live in California (which, thank my tax God, I don’t) you recognize this behavior. Back in the ’90s the state of California wanted to compassionately make sure that everyone could always pay their utility bills. So they regulated the price that utility companies could sell power for to households, but imposed no price regulations on the market where utility companies buy power from power producers. As a fourth-grader could have figured out, if the regulated price in the retail end was too low, on average utility companies would be buying power at a market price that exceeded the retail price they could charge.

The result? Rolling black-outs, no investments to improve either power production or power delivery, and in the end mounting costs for everyone in the back end when the entire power infrastructure needed massive upgrades anyway. (It did not help that California at the time was falling for the global warming delusion and chasing low-cost, fossil-based fuel out of the state.)

Now, Argentina finds itself in the exact same situation. But even more importantly, the Argentine government’s focus on entitlement spending is a stark parallel to Europe. Utility price regulation, which varies from country to country in Europe, is just another form of welfare-state intervention into the private sector. When coupled with the general plethora of entitlement programs that normally comes with welfare states, the subsidy becomes just another entitlement.

As Argentina demonstrates, this has consequences when government runs into fiscal trouble. Just like every welfare state the Argentine version combines spending determined by political preferences with revenues determined by a private sector, i.e., struggling entrepreneurs and tax-burdened consumers. Entitlement spending has a strong tendency to outgrow its revenues – in fact, I am working on an article for an academic journal defining a law that shows that welfare-state entitlement programs inevitably outspend their revenue – but politicians favoring the welfare state never realize that this is actually happening. Inevitably, therefore, they run into deficit problems, but since the politicians do not see this coming they are caught by surprise and react with fiscal panic.

There are three ways that fiscally panicking politicians can respond:

1. Buy time. This means, borrowing as much as they can. When they cannot borrow any more money by flooding the world with their Treasury bonds, they print money and have the central bank buy the Treasury bonds instead. If this happens in an economy with a stable financial system and a limited system of cash entitlements, the money printing will not cause high inflation. If on the other hand cash entitlements are comparatively important for daily consumer spending, then printing money to fund them opens a dangerous transmission mechanism for the money supply to cause high inflation.

2. Raise taxes. No longer a viable option, other than marginally. There is a fair amount of research that shows that voters in both Europe and North America grew tired of constantly rising taxes already back in the 1970s. Since then, an increasing share of the growth in government spending has been deficit-funded. The same is true in Argentina.

3. Cut spending. Since most politicians in our modern welfare states want to preserve the welfare state one way or the other, they do not want to eliminate entitlement programs. But when tax revenues do not grow as fast as they would want it to they are forced to downsize the welfare state to fit within a tighter revenue framework. This means chipping away at entitlements that people have gotten used to and based on which they plan their family finances.

For common-sense minded economists and politicians this means a good opportunity to prudently reform away the welfare state. “Just cutting spending, damn it” is not the way forward, but a structurally sound phase-out model can do wonders.

Leftists, on the other hand, go even deeper into panic. Bloomberg.com again:

Argentina, which has subsidized utilities since 2003, wants to cut aid from about 5 percent of gross domestic product to 2 percent of GDP and make higher income earners pay more for their utilities, Cabinet Chief Jorge Capitanich said March 12. “In 2003 the need for subsidies was clear,” Kicillof said in reference to the period after the nation’s $95 billion default and economic crisis. “Argentina isn’t ending subsidies, just redistributing them.” For Argentine households, the increase in their gas bill may rise as much as 161 percent for the biggest consumers and 306 percent for water bills, according to a presentation distributed by the Planning Ministry.

“The Planning Ministry”… Why not just adopt the Soviet acronym GOSPLAN and get it over with? Humor aside, though, it is worth noting that the families who are now hit with enormous price increases still have to pay the same amount of taxes as before.

The way out, again, is not to restore the subsidies. The way out is to end the entitlement programs and return purchasing power to the private sector so that those who have grown dependent on government can actually support themselves. This, of course, won’t happen in Argentina. What will happen there instead is that consumers now will respond by cutting spending elsewhere, thus reducing economic activity in general. This has repercussions for the tax base, which again will take government by surprise. And the entire process is repeated, with the difference that it starts from an already lower level of economic activity.

Europe is not in as bad a shape as Argentina is. But if they continue down the current path of using spending cuts and tax increases to save the welfare state in tough times, they will perpetuate their own crisis – and thereby perpetuate the need for spending cuts and tax increases.

The end station? An economic wasteland where children grow up to be poorer than their parents. That is, in effect, where Argentina is today, and has been for a long time. Sweden has been there for a good two decades and other European countries are beginning to see that same economic wasteland on the horizon.

The Relentless Growth of Debt

The Great Recession has been a rockier ride for the economies of the Western world than any other economic crisis since the Great Depression. We are still not out of it, and there is no way of telling when Europe will recover – if ever. While the U.S. economy continues its moderate recovery, there are still no credible signs of a turnaround in Europe, where there is almost no GDP growth and very slow growth in consumer spending.

It is entirely understandable that the Europeans have not yet seen the light in the tunnel. Their focus during the recession has been to bring down government budget deficits, prioritizing a balanced budget over any other economic goal. But underneath the efforts to balance the budget there is another, less visible but nevertheless unrelenting agenda: to save the European welfare state.

The EU has propagated for, and imposed, austerity policies upon member states not because a balanced budget is inherently good, but because it makes the welfare state look fiscally unsustainable. During the 1980s, when Lady Thatcher led Britain back to the 20th century, Europe’s conservatives used budget deficits as an argument against big, redistributing entitlement programs. They had a point: government debt as share of GDP has been growing all over the Western world for almost half a century now. The following tables illustrate this. They report data from CESIFO, a German research institute, with the numbers illustrating a relationship between government debt as share of GDP in two different years. For example, in the first table, the number reported for Japan is 6.04 under the column title “1970 to 1990″. This means that the Japanese government’s debt in 1990, as share of GDP, was 6.04 times higher than it was in 1970. In other words, if the Japanese government’s debt in 1970 was ten percent of GDP, it would be 60.4 percent of GDP in 1990.

Consequently, any report of a number larger than 1.00 means that the debt ratio in that country has increased:

Debt ratios

Country selection is based entirely on data availability; not all countries have reported comparable data for the periods in question. However, for each period, the selection shows the same consistent trend of growing government debt. In the first period, from 1970 to 1990, debt grew in eleven of 13 countries. In the second period, 1975-1995, debt grew in 14 out of 16 countries. In period three, 1980-2000, 14 out of 17 countries experienced debt growth. Finally, in the fourth period debt grew in 22 out of 28 countries.

The unrelenting growth in debt is closely associated with the welfare state. A good example: the Danish record-breaking growth in debt between 1975 and 1995 originates in an out-of-control expansion of entitlement programs in the 1970s and early ’80s. In the late ’80s Denmark went through a very painful period of austerity, with massive tax increases that in some ways crippled private consumption. Debt growth stopped, though, and in the early ’90s focus shifted toward tax cuts. As a result, the Danish debt ratio declined from 1995 through 2005.

Does the Danish example show that the welfare state is compatible with economic growth and prosperity? No, it does not. More on that in a later article. For now, enjoy the debt ratios and consider what they tell us about our generation’s sense of entitlement, especially vs. future generations.

Dark Shadow Rising over Europe

This past weekend the French went to the ballot boxes in local elections. Recent pan-European polling has indicated that the socialists could become the largest group in the European Parliament, and that may very well happen. But if Sunday’s French local elections are any indication of what French voters think, perhaps the socialists in general should not get their hopes up too much. They were dealt a very serious blow by the electorate – and to make the defeat even more humiliating, the winners were of another, competing authoritarian brand:

The far-Right Front National (FN) was on course on Sunday night to make historic gains in France’s first nationwide elections since François Hollande became president. In what Marine Le Pen, the FN leader, described as a “breakthrough” and the “end of bipolarisation” of French politics, her party came out ahead in a string of French towns in the first round of municipal elections. The FN won an outright majority in the northern town of Henin-Beaumont and was first-placed in the eastern town of Forbach and the southern towns of Avignon, Perpignan and Béziers.

At the same time, the Telegraph reports, the socialist party…

was heading for heavy losses as voters appeared to punish his dithering and lack of results two years into his five-year mandate. These could trigger a re-shuffle of his cabinet, potentially seeing Ségolène Royal, his former partner and mother of four children, take up a ministerial post. … Almost 45 million French took to the ballot box to elect more than 36,000 mayors for the next six years in what was being seen as a test for the Socialist president, whose approval ratings have sunk below 20 per cent. While municipal elections are fought above all on local issues, disaffection with the main parties clearly bolstered the score of the anti-immigration, anti-EU Front National in the two-round contest.

The nationalists are the only political movement in Europe that can compete with the socialists in terms of authoritarianism. They are a less homogeneous crowd compared to the socialists, in part because Europe – at least right now – does not have that many strong outright communist parties. A notable exception is Syriza which essentially wants to turn Greece into a European version of Venezuela. However, the main reason for this is not that voters in Europe in general have turned their backs on collectivism – it is more a matter of socialists having pushed their ideological goals farther into the murky badlands of government expansionism. In some countries, like Italy, Portugal and Sweden, it is difficult to separate socialists from communists.

Alas, while the socialists are pretty well united around goals such as an even bigger welfare state, even more income redistribution and even more government interference with private businesses (and in some cases the nationalization of banks), the nationalists span a broader spectrum of views and visions. The “mild” version of the welfare state is represented by the Swedish Democrats and the Danish People’s Party in Scandinavia, the Pim Fortuyn List in the Netherlands and the Austrian People’s Party. A bit farther away are Vlaams Belang in Belgium, a separatist, nationalist party that basically wants to split Belgium in half and form an independent Flemish republic. Hungary’s ruling nationalists also belong in this category, as does Front National in France.

So far, the nationalists are essentially modern versions of reborn social-democrat parties from the 1920s and ’30s. Vigorously nationalist as those parties were, they drew a firm demarcation line between themselves and working-class imperialist communist parties of that time. The nationalism of the social-democrat movements were skillfully toned down and eventually removed after World War II and the atrocities committed by the National Socialists in Germany, leaving a vacuum that became even more glaring as Europe – in the middle of its long-term unemployment crisis – opened their doors to large scores of non-European, non-Christian immigrants.

Nationalists began alleging, in some instances correctly, that immigrants came and took jobs from Europe’s own young. They also alleged, even more correctly, that large segments of the immigrant population ended up living well off the welfare state. While the correct conclusion would have been to abolish the welfare state and respect each individual’s right to migrate if he can support himself, the nationalist conclusion was to reduce or even stop entirely any new immigration from outside the EU.

In some cases this sentiment has escalated to yet another level. Golden Dawn in Greece represents its most aggressive iteration, but the National Democrat Party in Germany are not far behind. In Sweden, the Party of the Swedes is capitalizing on rising but misguided frustration over high unemployment – especially among the young – and large immigration. Having their roots in now-defunct the National Socialist Front, the Party of the Swedes is not ashamed of calling for a fascist Sweden.

Some claim that this the outermost extreme of Europe’s new nationalist movement is out to build a unified, European fascist state. I would not be surprised if they are correct, but so far I have not found fully credible sources for this claim. Nevertheless, such an ambition goes well with traditional fascist ideology and would explain their keen interest in gaining a strong foothold in the EU parliament.

The big tragedy in all this is not that one of two collectivist, authoritarian flanks are competing for political power in Europe. The big tragedy is that less-collectivist segments of the European political spectrum are slowly imploding. Christian Democrats, Conservatives and Liberals have all been passionately pro-EU for decades, and now that the EU has basically turned into a power-grabbing behemoth voters quickly associate the power grab and the destruction of large parts of the European economy with the most EU-friendly parties. When they are now pushed to the edge of their own economic existence, and when they feel that their national governments are basically powerless vs. the EU, millions of voters turn to radical parties to find a “quick fix”.

Does this mean Europe’s fascism has been reborn? Eric Draitser over at the Boiling Frogs Blog seems to think so. He draws parallels between the nationalist movement in Ukraine and Syriza in Greece. I do not completely agree with him – I do not yet see a fully coherent fascist movement across Europe – but his article is well worth a read. I do agree that there is a dark shadow rising over Europe; the big question is just how big and ominous that shadow will become. And there is absolutely no doubt that it is growing, as shown in part by the very strong performance of Front National in France this past weekend.

Next Chief Eurocrat A Big Statist

Historically, elections to the European Parliament have not attracted much attention, neither from the media nor from voters. I know out of personal experience – 19 years ago I actually ran for the European Parliament for a small Swedish party that was critical of the EU and wanted some common-sense reforms to the welfare state. We did not get that many votes… But it gave me my first insights into EU-level politics, insights that I have built on over the years.

Since I moved to the United States 12 years ago I have gained yet another perspective on the EU. For each new angle I view the EU from, I see yet more reasons to be critical of it. My most profound criticism has to do with the striking differences between the United States and the EU: those who claim that the EU is evolving into a “United States of Europe” are profoundly wrong. The EU is built as a traditional European nation state, which primarily means no clear distinction between the three branches of government and a big democratic deficit in terms of accountability of elected officials.

Without fundamental reforms in these two dimensions – horizontally by splitting the three branches and vertically by giving voters real opportunities to hold their elected officials accountable – it is very dangerous to expand the EU. As has been demonstrated repeatedly during the Great Recession, the EU is fully capable of being a destructive governmental entity already as it is today; with even more powers transferred to the Brussels Eurocracy, Europe is in some pretty deep trouble.

One way to find out just who bad things can get is to listen to the two men who are frontrunners for the job as chairman of the EU Commission. Some call it the “presidency” of the EU – but that would be to lend more democratic credence to the job than it deserves. Nevertheless, the chair of the EU Commission is a powerful position when it comes to determining what area of the European people’s lives the EU is going to barge into next. Therefore, let us take a listen to the debate between the two frontrunners, “conservative” Jean Claude Juncker and fanatically socialist Martin Schhulz. The debate was organized by Der Spiegel, the tragically anti-American German news magazine. Right off the bat, the debate actually gets into the issue of the EU’s glaring democratic deficit:

SPIEGEL: What would you do better as European Commission president than Jean-Claude Juncker?

Schulz: I would no longer seek political solutions solely through the EU’s institutional structures. I would open the Commission to the greatest degree possible. Brussels needs to stop interfering in every trifling detail. Whatever can be decided at the communal, regional or national level should be decided there. I am a man of parliament, a man of the people. Juncker is a representative of the executive.

Juncker: Nonsense. I am not a person who is only versed in the executive. I have always engaged extensively with the European Parliament and sought joint solutions on many issues. At the same time, it is in no way a disadvantage to understand the sensitivities and interests of the nation states on the European Council. I’m better at that than Martin Schulz.

Schulz, the socialist, has the backing of the socialist political momentum at the European national levels. After half a decade of crippling austerity policies, many Europeans truly feel the pain of welfare-state cutbacks. Since at the same time their taxes have gone up, they have been given no chance to move forward with their lives less dependent on government. Unfortunately, due to the complete incompetence of anything right of center in European politics, voters take the austerity policies behind the welfare-state cutbacks as a right-wing attack on the welfare state. This, together with the fact that austerity originates in Brussels and that the EU has strong-armed national governments into compliance, have driven scores of voters into the arms of the socialists.

Schulz the socialist knows what notes to play to capitalize on this surge. He knows that by portraying the Eurocrat establishment as out of touch with regular voters, he can come across as the man of the people. Whether or not he genuinely is that man, remains to be seen.

At the same time, riding on a wave of anti-EU sentiments is risky. The end result could be that the institutions that even leading socialists cherish, could be in jeopardy:

SPIEGEL: Europe is in a state of crisis. Turnout for the last election for the European Parliament was less than 50 percent. Why should people give you their votes?

Schulz: Election turnout will increase. The competition between Juncker and myself will help to ensure that. With the European Parliament in the past, voters had to cast ballots for an anonymous institution. Now, for the first time, it involves people. Personalization is the icing on the cake of democracy.

Juncker: It is true that Europe is currently in need of clarification and that EU detractors on both the left and the right are on the advance. People have to vote in order to prevent their breakthrough. It is great that Schulz and I are being supported as the main candidates for the largest parties in parliament in both the northern and southern part of the Continent. That is symbolic of European unity.

The most fundamentalist among Europe’s socialists, such as Greek Syriza or their Portuguese or Scandinavian peers, are staunchly against the EU – unless, of course, they can govern it and use it as a vehicle towards the advancement of socialism. This is the perspective in which to view what Schulz the Socialist says about increasing support for the EU.

This opens rather frightening perspectives on what the socialists could do with the EU if they got hold of its key power positions.

Speaking of democratic deficit, here is an interesting exchange on the design of what comes closest to being the executive branch of the EU:

SPIEGEL: In your opinion, should each EU member state be allowed to have a commissioner?

Schulz: This discussion is a thing of the past because EU leaders, including Mr. Juncker, decided on that in 2013, despite the fact that things had actually been envisioned differently. There are 28 commissioners and we have to live with that now. There are some European capitals that have even more ministers in their governments.

Juncker: I believe a smaller Commission would be more efficient, but I also understand the member states’ sensitivities. If you were, for example, to tell Ireland that it would no longer have a commissioner, then support for Europe would slip dramatically there.

SPIEGEL: So efficiency is being sacrificed for the sake of national sensitivities?

Juncker: It is not a question of sacrifice. We respect the interests of the individual member states, even if there are fewer people living in Ireland than in Germany. Nevertheless, I will continue to push for a more efficient Commission. We need reforms.

In  order to move the EU in a more democratic direction, voters must have the right to elect directly their executive-branch officials. Today the commissioners are appointed by the member state governments. It is as though the President of the United States was replaced with a board of 50 people, each one appointed by a state’s legislature or governor.

If there is ever going to be a chance to move the EU toward more democracy, there would have to be direct elections of an executive office. The question is if the national governments are willing to give up their control over who to appoint; being a Commissioner is a very, very well-paying job and so long as the national government controls the appointment, people who are craving the power and the money can sleaze their way through internal back-room deals and get the job.

And now for the toughest issue on the agenda:

SPIEGEL: The euro crisis showed that the coordination of budget and economic policies needs to be made a chief priority. Would the kind of European finance minister proposed by Germany’s Wolfgang Schäuble be the answer?

Juncker: At one point we intended to create the post of a European foreign minister. Everyone supported the idea, but when it came to committing, some governments were suddenly of the opinion that there are already enough foreign ministers. In the same way that the European foreign minister became the high representative for foreign affairs, after the election I would also like to see Schäuble’s idea of a full-time Euro Group president in the long term.

Schulz: I think Schäuble’s idea is good, but so far, a European finance minister is little more than a title. We don’t need a European Finance Ministry to assert fair taxation. There are large companies that make profits but pay no taxes. And when speculators make losses, taxpayers are forced to cover them. The consequence of this has been a dramatic loss of trust by the citizens. As president of the Commission, I would introduce a simple principle: The country where the profit is made is the country where the tax is paid.

Two revealing points made. Juncker says that he wants a full-time euro-group president. That is in effect the institution of a Treasury secretary for the euro zone. It sets the stage for euro-denominated bonds and other instruments of fiscal centralization for the euro zone. For practical reasons it would not work with countries that are not part of the euro zone, so this is as close as you will get to creating that coveted, centralized fiscal institution of a Treasury secretary.

On the ground, the consequences would be profound. Centralized fiscal policy for the entire EU, with 40-50 percent of the economy being run through government, means centralized austerity, centralized dictates on the design and generosity of entitlement programs… and centralized tax policy. That can only lead to bigger government.

The second point is made by Schulz who says that he wants to do away with the opportunity for businesses to base their operations in low-tax jurisdictions. This would basically eliminate large portions of the tax competition that currently takes place between states and other jurisdictions within the EU. The only winners are high-tax jurisdictions.

Notably, both Juncker’s idea of a Treasury secretary and Schulz’s desire to end tax competition will drive up taxes in the EU. Not a good outlook for an economy where GDP is barely crawling ahead.

Despite their overarching agreement that the EU needs higher taxes, the two gentlemen get into a bit of a squabble over details:

Schulz: I do not expect that the former prime minister and long-time finance minister of Luxembourg will subscribe to my tax policy beliefs. Luxembourg is an important financial center, but that cannot mean that we should have to continue making concessions.

Juncker: I have never given any more support to Luxembourg as a financial center than the German chancellors have to their automobile industry. However, I do agree that we need rules against tax dumping just as we do against social dumping. Europe needs to have a minimum basis of workers’ rights.

Schulz: But the Greek bailout wasn’t very social. As president of the Euro Group, you had significant influence on it, Mr. Juncker. If you travel to Southern Europe, you will notice that the people consider the EU to have been extremely unfair on this issue. On the initiative of the Social Democrats, the European Parliament voted by a broad majority last week to criticize the work of the troika in the crisis countries.

Juncker: I warned from the beginning of the Greek crisis about the kind of dramatic social consequences excessive austerity policies would have. It wasn’t just conservative governments that disagreed. When I fought against a lowering of Greece’s minimum wage in the Euro Group, it was ironically a few Social Democratic finance ministers who opposed me. That considered, I am very pleased about the fact that my nomination as the leading candidate for the European People’s Party has been supported not only by a Northern European party, Germany’s Christian Democratic Union, but also by a Southern European one, Greece’s Nea Dimokratia.

Well, if Mr. Juncker was so vehemently against the austerity policies, why was he unable to stop them?

A rhetorical question, for sure. But add together what these two gentlemen have said, and we get a very interesting scenario for Europe’s future. Regardless of who becomes the next chair of the EU Commission, it is going to be someone who wants to continue to centralize economic power, with in one case someone who wants to give the impression that he is doing the opposite. When the next recession hits, the two candidates would differ only in details how they would execute the next round of austerity policies to save the welfare state.

Kind of the fiscal-policy version of the difference between Communist and Nazi democracy: Communists execute dissidents with a bullet to the left temple while Nazis execute dissidents with a bullet to the right temple.

The bottom line, jokes about Communists and Nazis aside, is that very little is going to change in Europe after the May elections. Whatever changes will happen will favor more government and thus be at the expense of the private sector.

Caution: Economic Wasteland Ahead. Exit Now for The Route Back to Prosperity.