A short note on Greece today.
There are many victims of Europe’s welfare-state driven crisis. The worst hit are those who have become deeply dependent on the welfare state for their daily survival. Once government started walking away from its promises, they took the hardest beating. And nowhere in Europe has government been more cynical in defaulting on promises than in Greece. We should therefore not be surprised to hear horror stories about the effects of austerity on the Greek people. This one from Enet English, a Greek news website, is just one in a long line of examples:
Greece is very close to ‘tearing down the vaccination barrier’, says Nikitas Kanakis, who heads the Greek section of the international humanitarian aid organisation Médecins du Monde. Thousands of children in Greece have been left unvaccinated because they and their parents have no health insurance, the Greek section of an international humanitarian aid organisation has said.
Greece has a single-payer system of sorts, with focus on employer-based coverage. If you have a job in Greece you are covered by the tax-funded IKA health insurance plan.Those how lose their job can continue coverage under a model that somewhat resembles the American COBRA system, with continued insurance coverage – provided of course that the person continues to pay for their insurance coverage.
If you do not have a job you are covered though through a different system referred to as ESY, or the National Health System of Greece. In theory, this means that poor children get coverage for their health needs through government; in practice, though, the past several years of austerity has damaged every entitlement system in Greece, including the health care system. So far there are no comprehensive studies of the accumulated effects of austerity on the Greek economy, but it is safe to say that no government entitlement system has been left alone. Ostensibly, access to tax-subsidized immunizations is among the austerity victims.
As always, government pretends to maintain the programs it has slashed funding for. This prevents the private sector from stepping in and replacing what government no longer provides. The root problem is not austerity – that is an ancillary problem – but the very existence of the welfare state. Do away with it, restore economic freedom and the Greek people will have a fighting chance to become prosperous again.
Back in February I asked if Europe can stop rising nationalism within its borders. I concluded:
Europe in general is so deeply entrenched in the defense of big government that its leaders have a very weak gut reaction to authoritarianism. This is especially true on the socialist flank, but it applies almost as strongly to nationalism.
Right after World War II the countries of Western Europe started building and expanding welfare states. Originally they followed slightly different paths, with Scandinavia going for the full-blown socialism-light model while Germany and Britain kept their welfare states more in line with what has often been classified as “social conservatism”. Over time, though, the differences between the various welfare states have been blurred and almost vanished. Today, Europe is little more than one big mess of income redistribution, decaying socialized health care, destructive entitlement dependency and widespread hopelessness.
Life under this slowly declining welfare state is not much different than life under the late-stage Communist dictatorships in Eastern Europe. Europeans can still vote for nominally dissenting parties for their legislatures, but the most important pillar of parliamentary democracy – freedom of speech – is slowly withering away. The immediate motive for reining in free speech is to expand tolerance, but in reality the purpose is to thwart debates about the increasingly devastating effects of austerity and attempts at preserving the welfare state.
When 20 percent or more of the young are unemployed in 20 member states, and when entitlement dependency has created large areas in Europe’s big cities, filled with pacified immigrants, crime and religious extremism, it is not far-fetched to see what explosive forces are at work. But instead of breaking a vicious, downward spiral of industrial poverty, despair, crime, social disintegration and surging political radicalism, Europe’s political leaders double down on their path to the economic wasteland. Instead of opening up an honest, informed debate about where Europe is actually heading, they create new, draconian restrictions on freedom of speech.
The reaction from regular Europeans is going to be as predictable as the idiotic commitment of the Eurocracy to an ever expanding, ever more authoritarian “democratic” government. As the political elite of the EU and the member states continue to grow the super-state; as they continue to centralize power to Brussels and put more and more invasive measures in place to rein in the lives of Europe’s already heavily regulated citizens; an ever growing number of those citizens will look for simple-solution delivering political movements.
As the political elite blurs the distinction between democracy and totalitarianism, the ability of democracy to resist totalitarianism will rapidly become weaker. This was my conclusion in February of this year, and I continue to stand by that conclusion.
I have received a few rather snotty comments on this matter. I have only one thing to say to the simple-minded “enlightened” political elitists behind those comments: Never bark at the big dog. The big dog is always right. From the Christian Science Monitor:
Extreme, neo-fascist groups in Spain are preparing for a show of force during this weekend’s nationalist holiday, and Spanish authorities are keeping a close eye on the situation. But experts worry that the real fascist concern in Spain is not from small extremist groups, but rather from growing public displays of fascist sympathies by a small part of the conservative government’s constituency – and even among elected officials.
With the exception of Greece, Spain is the country in Europe that has suffered the worst as a result of the economic crisis. Their overall unemployment rate is nearing Greek levels and their youth unemployment is only a few ticks behind Greece. Middle-class Spaniards have become food scavengers to survive, wages are falling for those who still have jobs, the crisis is still deepening, austerity policies have driven up taxes to a point that inflation in this unemployment-ridden country is actually on the rise, home-owning Spanish families default in droves on their mortgages, and the overall economic, social and political situation is becoming downright explosive.
Is there any wonder that wealthier provinces are considering secession as a last-resort attempt at preserving whatever they can of their prosperity?
The sensible response to this would, of course, be that the national government abandons the current path of trying to save the welfare state in the midst of an ever deeper economic crisis. But that notion is not even on the political radar screen in Europe – let alone in Spain. Instead, the only alternative to the current policies that seem to have any legs is apparently Franco fascism.
Spain was ruled by a fascist dictator for 40 years. There are still millions of Spaniards who remember Franco, just as there are millions upon millions of East Europeans who remember the bad old days of the Soviet era. When parliamentary democracy fails to deliver a prosperous future, people are more inclined to consider alternatives even if those alternatives are loaded with totalitarianism. When unemployment among the young exceeds 50 percent, selective memories of a bygone era become dangerous challengers on the contemporary political scene.
So far, the radical fascist and Nazi groups in Spain are not within reach of the influence that Golden Dawn has achieved. But that could easily change – and change quickly. Christian Science Monitor again:
An alliance of radical right groups – including violent neo-Nazi ones – have mobilized to travel from around the country to Barcelona to protest Catalonian nationalism on the October 12 ”Día de la Hispanidad,” or “Hispanic Day,” holiday. Authorities said Thursday they plan to prevent violent groups from entering Catalonia. The holiday march is held annually, and is normally small and peaceful. But the nationalist undertones of Hispanic Day – which originally commemorated Christopher Columbus’s discovery of the American continent until was renamed in 1958 by the fascist regime of General Francisco Franco – make it a flashpoint. Five groups – including violent neo-Nazi cells and a political party that the Supreme Court is considering banning – in July formed a common platform called “Spain on the March.”
And you thought the welfare state would build a bulwark against totalitarianism? Precisely the opposite is true. The welfare state is the inevitable pathway to totalitarianism.
The weekend march is not an isolated incident. As Catalonian plans to hold a referendum on independence move forward, the extreme right has re-energized, even if it remains small compared to the resurgent movements in Greece, France, and elsewhere. Last month, a dozen radicals forced their way into a library where Catalonians were commemorating their own national day, injuring several people and tearing down Catalonian symbols. Police arrested them in the aftermath.
And we are not talking some fringe group here:
Police estimate there are about 10,000 members involved in violent extreme right groups. They lost political representation in parliament in 1982, seven years after Franco died. But they didn’t disappear. They melded into the now governing PP. The concern is not so much over the very small group of violent groups, which authorities constantly monitor. These are mostly contained, experts agree. The real problem is in from those within the government’s ruling party that sympathize ideologically – even if they condemn the use of violence.
The “trains-ran-on-time” myth about fascism has never quite died in Europe. And again, today’s democratically elected leaders in Europe are lending a hand to those who have kept that myth alive. The Eurocracy and their errand runners in national parliaments are carving away at parliamentary democracy, little by little. First they shoved austerity down the throats of Greek, Spanish, Italian, Portuguese and French voters; when voters protested, the political elite appointed their own leaders in place of elected ones to govern austerity-ridden countries. And now the same elite is putting barb wire around free speech. The Monitor again:
The political heirs of Franco merged with the PP [now governing Spain], which is ideologically a center-right party. And amid the eurocrisis, they could gain more political clout that could be significantly more dangerous than the violent groups, experts warn. The government has been criticized by the opposition, regional governments, and human rights groups for condoning fascist public support among its own followers – which even if small in number, were unheard of until recently – even if violent groups are suppressed. Such criticism arose again on Thursday, when PP legislators voted down a motion like that in the Catalonian parliament to criminalize public support for fascism, Franco, and the Nazis.
As abhorrent as fascism is, have speech bans elsewhere in Europe killed that ideology? Obviously not. Such speech bans seriously under-estimate the citizenry. The only thing they do is put on full display the arrogance of the political elite, including their bizarre belief that every aspect of society can be politically engineered.
You would think that seven long decades of Soviet Communism would be evidence enough. You would think that by now they had learned to attack the underlying reasons why people turn to radical, totalitarian ideologies. But while the political and cultural elite in Europe is quick to explain away radical Islamism with social and economic factors, they still believe that a simple speech ban can keep people from turning to other versions of oppression.
Evidently, Europe’s biggest deficit is in political adulthood.
But there is more. The story in the Christian Science Monitor gives chilling examples of a Franco resurgence in Spain, of proportions that should send a chill down the spine of every freedom-minded individual on the Iberian peninsula – and elsewhere. Click here and read it all. It is well worth your time.
The latest news on the U.S. fiscal crisis is that President Obama is changing is mind on negotiations with Congressional Republicans. The man who would rather negotiate without preconditions with Iran’s Islamist thug regime than democratically elected American legislators has been pushed to the negotiation table by the looming threat of October 17. That is the date when, according to the Obama administration, the U.S. Treasury runs out of money and will default on its debt. Therefore, in order to avoid having to do the unconstitutional, namely to not make debt payments, Obama chooses to sit down with the only people on the face of the planet that he would never negotiate with.
In theory, if the president had ordered the Treasury not to make debt payments he could have been impeached. We will not know for a long time what has been going on behind the scenes in DC over the past couple of weeks, but it is noteworthy that the president suddenly decided that it was better to show a glimpse of leadership on the federal budget situation. It is an open question what the outcome will be, but at least there are talks and different views are being vetted, allowed to clash and then pave the way to an informed compromise. It may not be the best compromise in terms of fiscal policy, but the very fact that there is a vigorous debate in Washington, DC – and that the sides involved can take such harsh stances that the federal government shuts down for a while – is ultimately a sign that the American constitutional republic is in fact working.
As I explained recently, while the Europeans may be laughing at the American “bickering” and government shutdown, their own fiscal house is far from in good order. While there is a hot political fight over how to get the U.S. debt under control, the Europeans seem to have given up entirely on that front. Consider these numbers from Eurostat, reporting changes in debt-to-GDP ratio from first quarter of 2011 to first quarter of 2013:
Source: Eurostat; seasonally adjusted numbers.
Over the past two years, 23 out of the EU’s 27 member states (not counting rookie member Croatia) have increased their debt-to-GDP ratio. Portugal is worst: in the first quarter of 2011 their government debt was 95.1 percent of the Portuguese GDP; in the first quarter of 2013 it was 127.2 percent of GDP, an increase by 32.1 percentage points in two short years.
For the EU-27 as a whole, debt has increased from 80.2 percent to 85.9 percent. This is partly due to the fact that almost all of Europe’s economies are standing still, but the main reason is of course that the variables that drive spending in Europe’s welfare states are still in place. Much of government spending in a welfare state is on autopilot, driven by eligibility variables in entitlement programs. In Denmark, e.g., conventional wisdom among economists is that the legislature can directly affect about three percent of the annual government budget – the rest is governed primarily by welfare-state entitlement programs.
Needless to say, there is a connection between a GDP that stands still and a welfare state that has to dole out more money through its entitlement systems. But this only reinforces the point that Europe has a big debt problem: if structural spending systems run away with the government budget, you don’t sit around with your arms crossed. You dismantle those spending systems.
If you don’t, you will keep on borrowing. Which, again, is precisely what the welfare states in Europe do. Of the 27 EU states, 25 increased their debt in euros – only Hungary and Greece had a nominally smaller debt in Q1 of ’13 than in Q1 of ’11 – and the decline in the Greek debt was entirely due to the partial default almost two years ago. In terms of growth, their debt is back on an out-of-control path.
In total, the 27 EU states have borrowed another 1.1 trillion euros over the past two years. Five countries now have a debt that exceeds 100 percent of their GDP: Greece, Italy, Portugal, Ireland and Belgium. This is compared to two countries, Greece and Italy, two years ago. France is heading in that direction, with a ratio that has increased from 84 percent in 2011 to 92 percent today.
These are all bad numbers. But what is worse is that there is no debate in Europe about how to stop this debt growth. The austerity policies put in place by the EU, the ECB and the IMF have been embraced as fiscal policy gospel by Europe’s political leaders. Since austerity has been in place for four years now in some countries, and since the outcome has been utterly disappointing, it is high time for Europe to reconsider its current path.
For that to happen, though, you need an open and honest debate. America has an open and honest debate. Europe does not.
Guess who will prevail in the end…
Two days ago I reported on France’s rising unemployment and the potential for a large-scale repetition of the Greek crisis. I concluded that so long as the French economy continues to lose up to one percent of its taxpayers to unemployment every year, the government does not stand a chance at balancing its budget. Any attempts at doing so will one way or the other set a downward macroeconomic spiral in motion that, as Greece has demonstrated, can continue to the next Big Bang.
Unlike its southern neighbor Spain, France still has time to save itself from the Greek tragedy. However, their room to take appropriate action is limited by three factors:
1. The mere size of government as it is today heavily stifles private entrepreneurship. Even if the French government did nothing from hereon to try to balance its budget, the French economy would have a long, slow and frail journey to growth, full employment and rising prosperity. This makes it very difficult to defend continuing EU-imposed budget-balancing measures.
2. The socialist ideology of President Hollande, the prime minister and his cabinet prevents the current French government from thinking clearly about alternatives to big-government intervention whenever there is a problem. Since the only sustainable path out of France’s crisis goes through reforms to reduce the size of government, the people that French voters elected to lead the country are ideologically predisposed to reject such a solution. Even if they tried to develop the right kind of solutions it is highly unlikely that they would get very far before their voters, party grassroots and left-leaning media would cry foul and call them ideological hypocrites. Unfortunately, that alone can be a strong deterrent against the right kind of reforms.
3. A rescue plan to have France evade the Greek dungeon would require that most of the rest of the euro-area economy is in reasonably good shape.
Even if lightning struck twice and the French socialists managed to get their act together, the third condition will stand in their way like a concrete road block. Made in Germany. Behold this report from the EU Observer:
In December 2012, leaders from 25 EU countries all signed up to a pact championed by German Chancellor Angela Merkel. The so-called fiscal compact is supposed to discipline countries into spending within their means and reducing their budget deficits and overall debt. In Germany, the “debt brake” will fully come into force in 2019, when the federal state and the regions (laender) are legally bound to stop making new debt.
This is a charade of royal proportions. The EU has had a ban on member-state debt beyond three percent of GDP since 1992, Effectively, the Stability and Growth Pact, which has been in place over two decades now, has made “excessive” debt illegal. As we all know, that has not prevented EU member states from building excessive debt. But that does not prevent the Eurocracy from making what is already illegal, really illegal.
Back to the EU Observer, which reports some worrying signs from inside the German government conglomerate:
Germany is in a much better position when it comes to deficits and debts than its southern neighbours. But still the federal government currently has a debt running at 75 percent of the gross domestic product – above the 60 percent threshold enshrined in EU rules. But in the multi-layered German state, cities fear it will be they who will ultimately foot the bill for Germany’s exemplary balance sheet.
This is crucial:
Ulrich Maly, the mayor of Nuremberg, told journalists in Berlin on Tueday (1 October) that more and more tasks are being moved from federal and regional to the local level, but without any extra funding. … As head of the association representing 3,400 German towns and cities, Maly tabled a series of requests to the upcoming German government, warning of the unfair burden being placed on townhalls in reducing the country’s budget deficit and debt.
Let’s take this in slow motion. The federal government creates a welfare state, then asks states and local governments to participate in the execution of the welfare state’s entitlement programs. To encourage full participation from lower jurisdictions the federal government sends them money. States and local governments get used to the cash and think nothing more of it. Until the day comes when the federal government has made more spending promises than its taxpayers can afford.
All of a sudden the federal government has to make choice:
a) Do they raise taxes? or
b) Do they reduce spending?
The German government tried alternative (a) but tax-paying voters put an end to that. That is in no way surprising, and incumbent prime minister Angela Merkel is trying hard to avoid tax hikes. But choosing alternative (b) is tougher than one might think. Merkel could just slash spending across the board, but if she did she would be accused of wanting to dismantle the German welfare state. That is a battle she does not want to take, probably because she – like most of today’s European “conservatives” – has embraced the welfare state and wants to keep it.
Merkel avoids a battle over the welfare state if she can come across as not cutting any entitlement programs. But since the entitlement programs are the cost drivers for the German government – just as they are for any welfare-state government – she cannot fend off the deficit wolves without somehow reducing the cost of those same entitlements.
Her solution: pass on more obligations to local governments, so the federal government does not have worry about them. But don’t increase spending – have the cities do more with the same or even less money. That way you look like you are protecting the welfare state while also balancing the federal budget.
Does this seem cynical? Understandable. After all, it is cynical. But this is the way politics works when our elected officials set up policy goals that are entirely incompatible, and where the pursuit of one goal, such as the welfare state, hampers the pursuit of another goal, in this case the balanced budget.
This does not stop Merkel’s political opponents from exploiting the apparent inconsistency in her policies. The EU Observer again:
With social expenditure – such as for the integration of disabled people or kindergardens [sic] – taking up over half of cities’ budgets, the question will be “what kind of country do we want,” the Social Democrat said. ”The debt brake will put political choices in the spotlight. It will be a question of what we can still afford if we’re supposed to make no new debt. Do we want inclusion of disabled people – which will cost several billion euros – or do we abandon this human right?”
This would be the perfect point to explain to the German people that not even their economy can carry the welfare state any farther. The addition of new entitlements on the top of already existing ones, while people expect existing entitlements to grow, is a formidably bad idea. It goes to show that to the statist there is no such thing as a government big enough.
But it also goes to show how illiterate the backers of the welfare state actually are when it comes to basic macroeconomics. They choose to believe whatever they need to believe in order to motivate a sustained, even growing, welfare state.
And just to show how desperate the situation is getting in Germany, the EU Observer introduces us to…
Eva Lohse, a member of Merkel’s Christian Democratic Union and mayor of Ludwigshafen, … [Lohse] warned that the townhall has virtually no money left for infrastructure projects. ”Reducing deficits and debt actually means that somebody else is doing it, not that the task is gone. So whoever does it also needs to have the proper funding for it. We have bridges crumbling down in the middle of our towns – this is unacceptable,” Lohse said.
In effect, there is a glaring lack of understanding of basic macroeconomics on both sides of the ideological aisle in German politics. This lack of insight will delay or entirely rule out appropriate policy solutions. Both the “conservatives” and the social-democrats in Germany will continue to try and preserve the welfare state while balancing the budget in the midst of zero or negative GDP growth. This is a recipe for decline, putting Germany in the same category of struggling welfare states as France, namely one step behind Spain and two steps behind Greece.
Germany still enjoys a lot of economic strength, but with the country’s fiscal policy makers focused on the unworkable combination of the welfare state and a balanced budget that strength can evaporate quickly. Right now, the case for German economic decline is actually stronger than the case for Germany economic recovery. And with German economic decline other euro-zone countries are in grave danger. Greece and Spain won’t get more bailouts, and France and other less-disaster-stricken economies will not have the same strong support anymore from trade with Germany as they have had historically.
Inevitably, our conclusion from this must be that Europe is continuing its slide into the cold, dark dungeon of industrial poverty.
The deep, persistent European economic crisis is continuing. A few days ago I showed how – predictably – the Greek government is increasing its debt at almost the same rate as before the partial debt default in early 2012. Another sign of the relentlessness of the crisis is that it is slowly but inevitably penetrating the French economy. One symptom is a steadfast increase in unemployment. Here are the latest quarterly data from Eurostat (since this is quarterly data we use seasonally adjusted numbers):
The steady uptick in unemployment coincides to some degree with the socialist government’s deep desire to draw every drip of blood they can from France’s already struggling taxpayers. That policy has backfired, but that does not mean the French government is going to turn to more job-creating policies any time soon.
On the contrary, precisely because of the rising unemployment there is tremendous pressure on the government budget. This pressure has led the EU to express major deficit concerns, and after some batting back and forth between Paris and Brussels the French government has now decided to do exactly what the Eurocrats are asking for. The EU Observer reports:
France’s budget plans are “responsible and prudent” Olli Rehn said Wednesday (26 September) in a sign of rapprochement between the EU and the eurozone’s second largest economy. Speaking to reporters in Brussels following talks with French finance minister, Pierre Moscovici, the EU’s economic affairs chief praised what he described as a “huge effort to restore public finances.” However, he warned Paris to keep up plans to reform the country’s labour market and welfare system commenting that the “ambitious reforms over the last year should be maintained.” The meeting comes a day after Moscovici presented plans to save an additional €18 billion from next year’s budget to the National Assembly in Paris.
There is nothing wrong with labor market reforms that reduce the influence of unions and make it easier for employers and employees to sign whatever contracts they want. France has one of the most heavily regulated labor markets in the industrialized world, and any step in the direction of deregulation is going to make a decisive difference for the better.
Strictly theoretically, there is nothing wrong with welfare reforms either. The problem is that the way the EU is pushing those reforms, they would be implemented at a point when the French economy is burdened with 10+ percent unemployment and punitively high taxes. When people are kicked out of welfare rolls, or receive dramatically less support from them, many won’t be able to find a job to replace welfare as income. That is a recipe for social unrest and political turmoil, as is alarmingly evident from the Greek, Spanish and Portuguese austerity experiences.
A far better way forward is to cut taxes proportionately to the reductions in welfare spending, and to cut the taxes in such a way that you maximize job creation. This will create a predictable, macroeconomically sustainable path from big, onerous government to economic freedom.
Sadly yet predictably, we won’t see any of that in the EU, especially not in France. Back to the EU Observer:
Rehn has had an uneasy relationship with French President Francois Hollande’s socialist government. Last month, the commissioner used an interview in the French media to warn Paris that raising taxes would “destroy growth and handicap the creation of jobs.” For his part, Hollande has accused the EU executive of attempting to “dictate” policy. The EU executive has also been frustrated by France’s failure to bring down its budget deficit below the 3 percent threshold laid out in the bloc’s stability and growth pact, giving the country a two year extension to meet the commitment in May.
Again, look at the steady upward trend in seasonally adjusted unemployment figures above. Who in his right mind thinks a government that is losing almost one percent of its taxpayers to unemployment every year would stand any chance at reducing its budget deficit? Then again, the Eurocracy is not populated with independent-minded people. It is staffed to the brim with bureaucratic yes-men.
To make matters even trickier for the French government, its new-found realization that taxes actually hurt the economy has led it to shifting its austerity policies over toward spending cuts. The EU Observer again:
Moscovici conceded that France would run a higher than forecast 4.1 percent this year, falling to 3.6 percent in 2014 and to 3 percent in 2015. Meanwhile, 20 percent of new budget savings in 2014 would come from tax rises with all savings coming from spending cuts in 2015. The government would also reform the pension system and cut labour costs to increase competitiveness, he said.
There are some strict conditions under which austerity biased entirely toward spending cuts could benefit the economy. However, those conditions are hard to meet and without elaborating in detail on them (I will at some point) I can safely say that France is far from meeting them.
Their ability to bring the budget deficit under control will be weakened further as they continue to try to balance their budget in the face of rising unemployment. You don’t need to go far to find evidence of where France is heading – just look at Greece.
As those Europeans who still have a job return after their summer vacation, they find a news feed that increasingly looks like it did before the summer – and last fall, and the spring before that…
In short: the European crisis continues. Today we get an update from deeply troubled Portugal, courtesy of EUBusiness.com:
Portugal’s creditors arrived back in Lisbon Monday to assess the country’s progress under its 78-billion-euro bailout as Brussels signals it will not cede to a request for the country’s fiscal targets to be relaxed. Payments of the next tranche of bailout loans to Lisbon will depend on a successful review by Portugal’s “troika” of lenders — the International Monetary Fund, the European Commission and the European Central Bank — of its progress in implementing economic reforms agreed in exchange for the financial aid.
“Reforms” is a code word for draconian tax hikes and panic-driven spending cuts that are facing fierce legal challenges all the way up to the Portuguese Supreme Court. The higher taxes obviously won’t help the economy one iota – on the contrary, they add extra weight to the private sector and will very likely put the Portuguese GDP growth rate well below Eurostat’s predicted 0.9 percent, on average, for 2013 and 2014.
The efforts to cut spending are obviously failing under legal challenges. This tells us two things: they were ill designed and they were forced through under sheer fiscal panic. Cutting government spending is a very good idea, but it has to be done right. In addition to avoiding legal challenges, the cuts must be structural in kind and designed so that they easily and quickly let private entrepreneurs step in and replace terminated government programs. None of this has happened in Portugal, primarily because the Eurocrats pushing the Portuguese government into destructive austerity are not interested in structurally sound reforms. All they want to do is preserve the welfare state and make it fit a smaller, tighter tax base.
So long as the same motives are behind the same austerity measures, we should not expect any change in the outlook for the Portuguese economy. The big question is what happens next year when the current bailout program ends. It is very unlikely that Portugal has even come close to meeting the budgetary requirements under the current bailout program. As the EU Business article hints at, this may lead to a new bailout program in 2014:
The rescue programme is scheduled to expire in mid-2014. Portugal is struggling to meet its deficit target of 5.5 percent of gross domestic product for this year as government reforms aimed at streamlining the government repeatedly get bogged down by legal challenges. Portugal’s Constitutional Court last month struck down a reform allowing civil servants to be laid off if they fail to requalify for a new job. It was the third time that the court has restricted the scope of a government austerity measure. The ruling has helped push Portugal borrowing costs to levels near which it was forced to seek international aid two years ago. The yield on Portuguese government 10-year bonds stood at 7.4 percent on Monday.
This is the level that caused utter panic in Greece and Spain. And so for good reasons: if Portugal had to refinance its entire government debt at 7.4 percent interest, at the current debt level, then its annual payments on its debt would be equal to 9.1 percent of the country’s GDP!
This is not a road to serfdom. It is worse than that. This level of uncontrollable government paves the way to political chaos, economic instability, social turmoil and very likely the destruction of Portugal as a parliamentary democracy.
That point is closer in time than most people think. EU Business again:
Deputy Prime Minister Paulo Portas last week urged Portugal’s international lenders to ease its 2014 public deficit reduction target from 4.0 percent to 4.5 percent of GDP. The appeal got a cool response from Brussels, with the head of eurozone finance ministers, Dutch Finance Minister Jeroen Dijsselbloem, saying Lisbon should stick to the deficit reduction targets already agreed. … “Someone has to explain to us how we are going to be able to go from a deficit of 5.5 percent in 2013 to a deficit of 4.0 percent in 2014. We have never seen such a strong reduction in the deficit,” said Antonio Saraiva, the head of the Portuguese Industry Confederation, after meeting with Portas on Monday.
Since legal challenges successfully prohibit or reduce the amount of spending cuts, there is a growing risk that the Portuguese government will choose to rely on tax hikes instead. Tax increases earlier this year have already robbed Portugal’s taxpayers of a month’s salary, on average, in part through a rise in income taxes from 24.5 to 28.5 percent. More tax hikes would plunge the country’s economy into a full-blown depression.
Perhaps the current prime minister, Mr. Coelho, is aware of this. This would explain why he tries to push yet more austerity measures on the economy, including, EU Business reports…
an average 10 percent cut in the pensions of most government workers, which have been loudly opposed by unions.
Imagine the federal government slashing Social Security payments by ten percent across the board. That alone would be unthinkable in the United States, yet unless we start getting serious – very serious – about the federal debt, we are heading in that direction.
As for Portugal, the future is very uncertain except for one thing: we can surely expect the country’s tumultuous political climate to remain. Radical leftist parties hold a larger share of the parliamentary seats in Portugal than in most other European countries. Their strong presence in the legislature is a formidable hindrance to any effort at rolling back government, eliminating entitlements and massive tax cuts. As a result, political instability, economic decline and social stress will continue to escalate.
What will this lead to? I have said it before, and I will say it again – the one word that captures Europe’s fatal decline:
As I have explained on numerous occasions, Europe’s crisis is not a regular recession. It is a structural crisis that will change the European economic landscape for the foreseeable future. The children now growing up in Europe will live a life less prosperous than their parents, who are now in their 30s or even 40s, who in turn find themselves having to work harder than their parents to achieve the same standard of living.
With youth unemployment exceeding 20 percent in most EU member states, and GDP basically having ground to a halt, the young in Europe are fighting an uphill battle to just get a start on some kind of self-determined life. This, together with widespread unemployment among adults and no end in sight to the crisis, opens the door to a grim future for the Old World. The only way to avoid this scenario is for Europe’s political leaders to give up on the welfare state and let loose the private sector. Free-market Capitalism, for short.
Sadly, that is probably not going to happen. Instead, more and more voices are calling for the continent to double down in defense of the welfare state. The EU Observer reports, starting with an essentially valid but not exactly meaningful criticism of current austerity policies:
Up to 25 million more people in Europe are at risk of poverty by 2025 if governments continue with austerity policies, international aid agency Oxfam has said. In a study released Thursday (12 September) ahead of an EU finance ministers’ meeting this weekend, Oxfam said there are lessons to be learnt from deep cuts made to social spending in Latin America, South East Asia and Africa in the 1980s and 90s, where it took 20 years to get back to recover.
So long as austerity is focused on preserving government in a tighter economy, it will have disastrous effects on the economy. If instead austerity was motivated by a genuine ambition to roll back, and eventually eliminate, the welfare state, then the situation would be much better for the private sector. A roll-back strategy combines spending cuts with well-designed, targeted tax cuts to give the private sector room to replace what government is cutting back on.
Unfortunately, rolling back government is the last thing Europe’s politicians want to do. Their sole purpose with austerity is to save as much as they can of the welfare state, even if it means destroying the future for generations of Europeans. What Europe needs is free-market reforms, lower taxes, a gradual privatization of the welfare state and constitutional reforms to guarantee that big government never happens again.
Again the voices in favor of such reforms are few and far between while the voices with the opposite message are loud and high-pitched. Euractiv again:
“These policies were a failure: a medicine that sought to cure the disease by killing the patient. They cannot be allowed to happen again. Oxfam calls on the governments of Europe to turn away from austerity measures and instead choose a path of inclusive growth that delivers better outcomes for people, communities, and the environment.” Greece, Ireland, Italy, Portugal, Spain and the UK – countries that have pursued budget cuts most aggressively – are soon reaching the rank of most unequal countries in the world. “The gap between rich and poor in the UK and Spain could become the same as in South Sudan or Paraguay,” said Natalia Alonso, head of Oxfam’s EU office.
This is precisely the wrong way to go. Income differences are irrelevant, and to see why, let’s ask Natalia Alonso where she would prefer to live the life of a poor citizen, the United Kingdom or South Sudan.
Nevertheless, the consequences of this focus on “inequality” is that strong voices are pushing for a restoration not of the prosperity-producing private sector, but the prosperity-consuming welfare state. By throwing in comparisons to deplorably poor, undeveloped countries with questionable property-rights traditions and economies perforated by corruption, statists turn a blind eye to structural and institutional factors that really matter in building free, prosperous societies. The Euractiv article on the Oxfam report is a case in point. Having mentioned South Sudan and Paraguay in passing it moves focus back to Europe:
As an example, mortgage laws in Spain see banks evict 115 families from their homes every working day. Meanwhile, almost one in ten working households in Europe now live in poverty and the trend is worsening, the report notes. Child poverty is also rising and workers who do get paid often do not have enough to support their families. In the UK and Portugal, real wages have fallen by 3.2 percent over 2010-2012. The real value of wages in the UK is now at 2003 levels. Italy, Spain, and Ireland all recorded decreases in real wages over this period. Greece has recorded a fall in real wages of over 10 percent.
Yes, Europe is turning into an economic wasteland, and poverty is returning. As an example, Greek unemployment is still rising, hitting 27.9 percent in July. But to somehow compare that poverty to what the South Sudanese experience is intellectually disingenuous. Europe’s population is sinking into industrial poverty, a new form of poverty, best compared to what people in Eastern Europe experienced under the Soviet era. They had access to most of the basic products you expect in an industrialized society, but at basic quality and with no prospect of ever being able to improve their lives. This is a bad future for Europe, and a waste of an economic heritage from generations of hard-working Europeans, but it is still a life vastly better than the life the poor endure in South Sudan.
That said, the medicine for eliminating both forms of poverty is largely the same. Industrial poverty is the result of the welfare state, and can only be eliminated through the elimination of the welfare state. That means doing away with the destructive consequences of decades of social democracy, returning instead to free-market Capitalism.
By the same token, the only remedy for poverty in an under-developed country like South Sudan is free-market Capitalism.
I have been warning for a long time that Europe is in long-term decline, losing its position alongside North America, Australia and North East Asia as the world’s most prosperous regions. I have warned that Europe is turning into an economic wasteland and explained that nothing is going to change so long as the governments of Europe’s welfare states continue to use austerity to defend their big, redistributive entitlement systems.
This trend of stagnation and decline is not new to the current economic crisis – in some countries it began showing itself as early as the 1980s – but the last five years have put enough nails in Europe’s prosperity coffin to transform the continent into a new South America.
I have been pointing to this serious, structural decline for almost two years now. So far, my warnings have not been heard very widely, but now some people are beginning to see the same pattern. One example is Dan Steinbock, research director at the India, China and America Institute, who just published an opinion piece in the EU Observer. He starts out with a somewhat hopeful observation:
The second quarter GDP figures for the Euro-area economies indicated growth, for the first time in 18 months. Some fund managers and market observers argue that positive new developments could unleash a long-term rally for the continent.
And those fund managers are wrong. Taxes have gone up and government spending has gone down. The private sector has to replace what government is no longer spending money on, with higher-taxed incomes, while still maintaining all its other spending. How is that a recipe for a “long-term rally”?
Steinbock seems to want to agree, at least in part, with the fund managers:
While there are some signs of possible recovery, Europe’s debt crisis has not gone away. … The US economy may soon be ready for a gradual, multi-year exit from QE. Southern Europe certainly is not. And yet, current forecasts portray 2013 as the magical year when everything will turn for the better.
Go back and look at forecasts over the past 3-4 years. Eurostat, OECD and others have consistently been over-optimistic as to where the European economy was heading. The main reason is that they think austerity is good for the economy. So long as they believe that they are going to continue to portray every “next year” as the one where the flowers start blooming again in Europe.
The reason why economists continue to miss the forecasting mark is that they have not done their theoretical homework. They know how to run all kinds of regressions, up and down, sideways, inside out, even in zero gravity, but they treat the economic system as mechanical pieces in hydraulic interaction, not the complex social, cultural and moral system it really is.
In the past year or so, the backlash against austerity in Southern Europe has resulted in policy shifts, which, in turn, have supported greater stability, less severe contractions and an improved sentiment across the region. None of these gains indicate a major turnaround, but alleviation of single-minded austerity measures that have added to European challenges.
Again, he is too optimistic. The Greeks are still pushing more austerity measures, and Portugal is in political turmoil over more austerity. Not to mention France – which Steinbock does:
Despite the shift from the conservative Sarkozy to the socialist François Hollande, the competitiveness of France continues to erode. While Paris is slowly moving toward reforms, it is lingering in contraction and can hope for weak growth in 2014, at best.
May I recommend this article, which I published two days ago.
Back to Steinbock, who continues his somewhat optimistic review before eventually turning pessimistic:
Italy has been ridden by contraction for nine consecutive quarters. Enrico Letta’s government has been strong enough to stay in power, but too weak to achieve major changes. The more flexible approach to austerity across the Eurozone has benefited Italy and may allow Rome’s exit from the excessive deficit procedure (EDP) in 2014. But Italy suffers from structural challenges, which translate to continued decline of industrial production and the end of the Letta government by 2014. After half a decade of recession, Spanish conditions are now bad but not devastating, as the austerity obsession has given way to more realistic policies. … In Portugal, the recession will continue until 2014, which means that unemployment will remain close to 20 percent. In July, the resignation of two ministers led to a new cabinet. Greater flexibility in austerity measures and rising sentiment are softening the contraction impact.
Let’s not get ahead of ourselves here. The prime fiscal policy directive in Europe, and especially in Spain, Portugal, Italy, France and Greece, is still to balance that pesky government budget. This means that all other policy goals, such as growth in GDP, reduced unemployment or increased private consumption, are ranked below that goal. Every policy measure is evaluated first and foremost on its potential for bringing down the deficit, and only secondarily on whether or not it can help the economy grow.
Whatever leniency Steinbock is detecting in terms of austerity is more political trickery than signs of a real change in fiscal policy. This means that the economies in Southern Europe will still be under great pressure.
Steinbock then turns to Greece, which, he says…
will be in recession well over the mid-2010s, despite additional funding by Brussels. Unemployment is over 26 percent. Political turmoil is likely to increase toward 2013/2014. A government collapse could pave way to the radical left coalition Syriza, as the leading political party.
Probably. But don’t disregard the possibility that Golden Dawn will team up with the Greek military and force an equally radical political change onto the country.
And now for the more pessimistic, bigger view of the Lost Continent:
[The] Eurozone is suffering a lost decade, which could have been avoided with more sensible policies. During the past half a decade, prosperity levels, as measured by per capita incomes, have stagnated or fallen across Southern Europe. In this way, they have amplified the historical trend line. … By the end of the 2010s, a new hierarchy will prevail in Southern Europe. In France, per capita income is likely to be slightly behind that of Germany. In turn, income per capita in Italy (80% of French GDP per capita) and Spain (70%) will fall behind. Before the global recession, prosperity levels in Greece and Spain were not that different. However, the past half a decade has been devastating in Greece. By the end of the 2010s, Greek per capita income will be close to that in Portugal. In these two countries, prosperity will be barely half of that in France.
This is a bit vague, as Steinbock does not explicitly define the term “prosperity”. It appears to be per-capita GDP, in which case it makes a great deal of sense to compare countries. However, even more important than the relative growth in GDP is the performance of each country: the Greek loss of 25 percent of its GDP in a matter of a few years is completely devastating and unheard of in the Post-World War II industrialized world. It is examples like Greece that can teach us something about what we should and should not try to do to fix an economic crisis.
Steinbock’s main point, again, is that economists are overly optimistic in forecasting Europe’s future. This is a point worth repeating, and the consequences of erroneous forecasts definitely deserve a mention:
At Brussels, the current forecasts – including projections of per capita income, debt, unemployment – are predicated on the idea that 2013 is the year of the great turnaround, when debt will start to decline, recovery will broaden, per capita incomes will climb and high unemployment rates are expected to decrease by some 20 percent by 2018. These gains are anticipated, even despite the impact of aging populations on productivity and growth, and thus on prosperity. In reality, Southern Europe is coping with long-term erosion, which has been compounded by excessive reliance on austerity, at the expense of fiscal support, pro-growth policies and structural reforms. There is no easy way out anymore.
That is entirely correct. The solution lies in those “structural reforms”, the most important of which means dismantling the welfare state – it is the only way out of the prosperity shadow-realm where Europe now finds itself.
The latest economic data out of Greece spell more trouble for the country. The Greek news site Ekathimerini reports:
Greece’s economy shrank by 4.6 percent of gross domestic product in the second quarter of 2013, the Hellenic Statistical Authority (ELSTAT) said on Monday. This was the 20th consecutive quarter of negative growth for Greece. The economy had contracted by 5.6 percent in the first quarter.
Technically this means that economic activity grew in the second quarter. But all that is needed for an upswing is increased tourism during the summer season. There is nothing wrong with that, especially in a country like Greece where tourism is a big industry. But it is very difficult for a country to pull itself out of a deep recession – or on this case a depression – by relying on foreign visitors. There has to be domestic economic activity as well; as a sign of how unlikely that is to happen, the Greek statistics agency ELSTAT reports that construction has fallen by 50 percent – in one year.
More likely, the depression of the Greek economy will continue. A major reason is that the government is still using austerity measures to try to close the budget gap. As always, the immediate result of new austerity is indeed an improved budget balance, which Ekathimerini reports that Greece is enjoying right now:
Earlier, there was more encouraging news for the government on the fiscal front. Alternate Finance Minister Christos Staikouras said Greece’s central government achieved a primary budget surplus of 2.6 billion euros, or 1.4 percent of GDP, in the first seven months of 2013 against a target for a primary deficit of 3.1 billion euros, The reading for January to July excludes interest payments and the budgets of local government and social security funds.
In other words, it is a statistically convenient figure to present. It is a safe bet that the social security funds are running big deficits. If they are, there is yet more trouble coming down the pike for Greek taxpayers.
As a hint of that, enjoy this little story from Euractiv:
German opposition parties accused Chancellor Angela Merkel yesterday (11 August) of lying before elections next month about the risks of a new bailout for Greece, after a magazine reported the Bundesbank expects it will need more European aid in early 2014. Der Spiegel quoted an internal document prepared by the German central bank as saying that Europe “will certainly agree a new aid programme for Greece” by early next year at the latest.
How about that! Another truck load of taxpayers’ money dipped into the black hole known as the Greek welfare state.
This means two things. First, Bundesbank already has the architecture in place for another effort to plug the hole in the Titanic with chewing gum. Secondly, knowing as they do what is happening behind the scenes in the Greek economy, the Bundesbank is convinced that the trend from the last few years will continue on a steady downward trajectory. Any attempt by some media to spin today’s GDP and budget numbers in a positive direction will fall flat to the ground.
We have never before witnessed a modern, industrialized economy in macroeconomic free-fall like the situation Greece is in today. This makes it very difficult to predict when this process will end, and how. But we do know one thing: so long as Brussels forces the Greek government to continue with destructive austerity policies, there will always be enough fuel for yet another round of GDP contraction.
After years and years of bone-crushing austerity; after having lost 25 percent of its GDP; with six out of ten young and three out of ten of all workers unemployed; you’d think Greece would be out of its crisis, right? That is, if austerity was the right kind of medicine for their crisis.
That is a pretty big “if”, and it grows bigger for every year. As I have reported repeatedly, austerity is not the right medicine for the European crisis in general, and certainly not the right remedy for Greece. It has now been five years since the crisis broke out, and nowhere in Europe has a government been more devoted to spending cuts and tax hikes than in Greece (with the exception, perhaps, of Sweden in the ’90s). Alas, as the English-speaking Greek news site Ekathimerini reports, the result is a still-uncontrollable budget deficit:
Greece will not be able to return to bond markets next year to help plug an estimated 11-billion-euro financing gap that will start to open up, market sources said this week, contrary to earlier suggestions from the government and its European partners.
Greece has not been able to sell its treasury bonds on the open market for a long time. Its bonds were tossed on the financial junk yard more than a year ago when the country de facto – though not formally – went into bankruptcy. The EU-IMF-ECB troika rescued the Greek government with cash loans and demanded a continuation of austerity. They believed that such measures would reassure the bond market enough to let Greece return as a credible borrower.
The problem is that Greece has not accomplished any of the objectives sought by means of austerity:
- GDP growth forecast, adjusted for inflation, for 2013 and 3014 is -1.2 percent and -0.4 percent, respectively;
- Private consumption is expected to decline by the same numbers;
- From 2009 to 2012, government revenue increased as share of GDP from 38 to 45 percent of GDP, yet during the same time government spending has remained at 54-55 percent of GDP;
- In 2012 the Greek budget deficit was at ten percent of GDP for the third year in a row.
The fact that Greece has not seen a decline in government spending as share of GDP is sometimes taken as an indicator that they have not made any serious efforts at cutting spending. But they have, as data for government consumption shows. Here are the changes in percent, adjusted for inflation, in government consumption from 2010, including forecasts for 2013 and 2014:
There are two reasons why, despite these numbers, government spending does not fall as a share of GDP. The first is plain macroeconomics: even though government spending is the most inefficient way to get anything done in our economy, it is an indisputable fact that government-funded hospitals, schools and other services do produce some services. When we cut those services we also cut the number of people on payroll, the purchases of inputs (think medical instruments for hospitals and food for school cafeterias) and spending on other, related items. These cuts are felt, especially by local economies, where small businesses lose some demand and thus have to shrink their activities.
The second and more important reason is that the other part of government spending, namely financial transactions (welfare, unemployment benefits and similar income-security items), actually increases when the economy is in a decline phase. As people lose their jobs they go from being paid for work to being paid not to work. People who are paid for work, whether private or public employees, spend money in their local communities, pay taxes on their consumption and property, etc. Unemployed people spend a lot less (unless unemployment benefits cover 100 percent of your previous income which I don’t think is the case anywhere in the free world) and typically pay no income taxes on the benefits they receive.
In other words, as unemployment goes up government has to spend more money through its cash entitlement programs. This is one big reason why the Greek government is unable to close its budget deficit. It is also a major reason why there is again, as Ekathimerini reports, rising desperation in Europe over the black hole also known as the Greek government budget:
With pressure mounting on eurozone officials to find a solution to the 4.4-billion-euro shortfall the International Monetary Fund projects will kick in from August 2014, and widen by a further 6.5 billion euros in 2015, more debt relief now seems all but inevitable for Athens. “The troika will not likely be able to avoid new bailout discussions before the end of 2014 in order to plug the gaps, and is very likely to decide on an extension,” said Barclays in a research note. “We do not see how Greece could possibly return to the markets next year, even if recent developments have been very positive.”
Again: the troika has failed in achieving any of the objectives behind its relentless austerity policies.
As if to highlight the desperation mounting over the Greek economy:
European Union officials – who believe the size of the gap next year is somewhat smaller at 3.8 billion euros – see the issuance of short-term bonds as an option to make up the shortfall, alongside utilizing unused funds earmarked for the country’s bank recapitalizations and/or new loans. Bankers, however, say the country will struggle to convince investors to buy its bonds, especially given that further restructurings are not out of the question.
By “restructuring” they mean debt write-downs. Or, in plain English: the borrower unilaterally declares that today he owes his creditors less than he did yesterday.
But the threat of a new debt write-down is not the only problem in the way of utilizing the bank recapitalization funds. Many Greek banks are not in a shape to absorb the loss of recapitalization funds, and the reason has to do with the country’s terrible real-estate market. Behold another article at Ekathimerini:
Government and opposition MPs have reacted to suggestions that the coalition is considering lifting the restrictions on the repossession and auctioning of people’s main residence if they are not able to keep up mortgage repayments. Repossessions have been suspended in Greece since 2008. It is thought that the sale of some 200,000 homes has been prevented so far.
That is 200,000 homes that banks have invested money in – money that they in turn borrowed from someone. While the banks have to pay their loans back, mortgage defaulters are not paying them, and when the banks are prevented from selling the defaulters’ houses they lose big money. The banks, which lost enormous amounts on the government debt write-down, are slowly but steadily bleeding to death. Without recapitalization and without access to its assets on the real estate market they will inevitably go the way Titanic did.
As Ekathimerini explains, there seems to be little understanding of the exceptional consequences of a full-scale bank collapse in Greece:
Deputy Development Minister Thanasis Skordas suggested on Thursday that there could be a partial lifting on the ban from next year … New Democracy MP Sofia Voultepsi said there was no way she would discuss the auctioning of reposed [sic] homes. [Social Democrat party] PASOK deputy Paris Koukoulopous said Parliament would never accept such a measure. Opposition parties also raised concerns about the possibility of such a measure being introduced.
Long story short, the situation in Greece is as bad as it has ever been during the current economic crisis. The EU has failed to provide adequate help, the Greek governmetn is on i ts last straw of popular credibility and the banking sector is destined for collapse.
So long as Greece remains in the EU and the euro zone its government will be forced to continue to depress the economy with the same kind of measures that have turned the country into an economic wasteland. So long it continues with its austerity policies, the Greek government is undermining the last few pillars of support among the Greek people for the parliamentary system of government. Last year four in ten voters supported more or less totalitarian parties, which opens a frightening perspective on what may very well happen if the country does not very soon regain its fiscal and monetary freedom.