Tagged: AUSTERITY
Economics and the European Crisis
Europe’s austerity disaster is not just a matter of reckless policy decisions by arrogant leaders in the EU, although that is ultimately where the buck stops. Many others have been involved in explicitly or implicitly, directly or indirectly, keeping the crisis going. Among them are assorted economists in various positions whose forecasts have reinforced the desires among political leaders: while the politicians want austerity to work, economists have predicted that it would work.
There is just one problem. Austerity does not work. While it has taken economists quite a while to begin to realize this, others have raised questions for some time now. Among them are business leaders: two years ago British corporate executives began expressing concern about the soundness of continuing EU-imposed austerity policies. The seeds of that doubt have grown, so much in fact that a few days ago Britain’s Chancellor of the Exchequer found it necessary to make a plea to business leaders to stay on board with Britain’s own austerity program. The Guardian reports:
George Osborne has asked business leaders to hold their nerve and continue backing the government’s austerity measures after the Bank of England gave the first signal since the financial crash of a sustained economic recovery. The chancellor told the CBI annual dinner on Wednesday night that the business community should ignore critics of his economic policy who advocate a stimulus package to spur growth and reduce unemployment. … His speech followed a series of forecasts from Threadneedle Street showing the UK recovery strengthening and inflation falling over the next three years. Sir Mervyn King said the outlook had improved, with growth likely to reach 0.5% in the second quarter of 2013, after the 0.3% registered in the first three months.
This is a good example of how the desires of politicians conspire with unrefined forecasts by economists. Anyone who reads a “strengthening recovery” into a 0.2 percent of GDP uptick in growth, from 0.3 to 0.5 percent, is either sloppy or desperate. Since the difference between 0.3 and 0.5 percent is little more than a margin-of-error change to GDP growth, I am inclined to conclude that at least some of the involved economists are sloppy.
One reason for this is that there have been forecasts of an improvement at the time of the announcement of every new austerity package in Europe over the past few years. I am planning a larger research paper to expose these errors; in the meantime, it is important to ask why economists think that the current austerity policies will have any other effect than the others that have been implemented since 2009.
More on that in a moment. It is important that we do not let the political leaders off the hook. I am firmly convinced that they are desperately looking for any sign that austerity is working – and that their desperation has reached such levels that they are inviting to a conspiracy of the desperate and the willing. It is interesting, namely, to see all the optimistic forecasts that are surfacing now. Politicians who should know better than most of us that austerity does not work, give a surprising amount of attention to those forecasts.
Their desperation is cynical yet understandable. Almost every political leader in Europe has invested his entire political career in supporting austerity. Now he is witnessing more and more critics lining up with The Liberty Bullhorn, pinning the unfolding social disaster on austerity advocates.
The obvious reaction should be to question austerity. After all, I cannot be the only one to ask how much farther the EU is willing to push its member states. For example, how much more can Greece take before the country explodes?
Europe’s leaders are no doubt aware of how close some parts of the continent are to social unrest. So long as austerity-minded politicians cannot provide people with an economic recovery, they know they are accountable for whatever happens.
As an alternative, they use forecasts of willing economists to convince people that the recovery is just about to happen, no matter how microscopic it might be. The Guardian again:
The modest improvement in output over recent months comes against a backdrop of rising unemployment, the lowest wage rises on record … According to the Office for National Statistics unemployment rose by 15,000 to 2.52m in the three months to the end of March. Wages were 0.8% higher in March than a year ago and only 0.4% better if bonuses are taken into consideration, which is the lowest rise in incomes since records began in 2001.
Again, calling this a “strengthening recovery” is clear signs of desperation. There were times when any growth under two percent set off alarm bells, among economists as well as politicians. Now, numbers a fraction as high are raised to the skies as signs of a “strengthening” recovery. From the Sydney Morning Herald:
The dogged recession across the eurozone has snared key economy France, with the latest EU figures released Wednesday [May 15] showing a full year-and-a-half of contraction as tens of millions languish in unemployment. In Brussels, French President Francois Hollande tipped ‘zero’ growth on the national level, blaming an EU-wide, German-led austerity trap — and hitting out at banks for holding back on lending as he and fellow leaders battle to unlock taxable assets hidden in offshore bank vaults or breathe life into training programmes for Europe’s disillusioned youth.
And his recipe is to take it all out in the form of higher taxes instead. Yep. That will really make things better… The fact of the matter is that France desperately needs a complete reversal of its economic policy, with long-term credibility to go with it. The same holds for the entire euro zone, which according to the Sydney Morning Herald is in deep trouble:
official figures showed a 0.2 per cent contraction between January and March, in the longest recession since the single currency bloc was established in 1999. EU data agency Eurostat said output across the 17 states that share the euro — which are home to 340 million people — fell by 1.0 per cent drop compared to the same quarter last year. France notably slid into recession with a 0.2 per cent quarter-on-quarter contraction, with unemployment already running at a 16-year high.
French president Hollande blamed the bad economic news…
on “the accumulation of austerity politics” and a “lack of liquidity” within the banking sector leading to a euro-wide loss of confidence. Fresh from winning France a two-year period of grace from the Commission to bring its public finances back within previously-understood EU targets, Hollande argued that nascent plans to divert state and private investment towards projects intended to get Europe’s youth working would make a difference.
In other words, more government programs on top of government programs that don’t work. If government was the answer, there would not be a crisis in Europe today.
Instead, as the Sydney Morning Herald reports, Europe is heading for yet more of the same, though some economists seem stubbornly unwilling to accept the permanent nature of the crisis:
Following a string of disappointing survey results in recent weeks, Ben May of London-based Capital Economics warned: “We doubt that the region is about to embark on a sustained recovery any time soon.” The latest official European Commission forecast for 2013 published earlier this month tipped a 0.4-per cent contraction, but May said that was way off course with “something closer to a two-per cent decline” likely. His firm’s pessimism was backed by Howard Archer of fellow London-based specialist analysts, IHS Global Insight. “We expect the eurozone to suffer gross domestic product (GDP) contraction of 0.7 per cent in 2013 with very gradual recovery only starting in the latter months of the year,” said Archer.
What reason does he have for expecting a recovery? This is the standard mistake that mainstream economists and econometricians make: they rely heavily on models that are inherently prone to draw the economy toward long-term full employment equilibrium. When they “inject” a change to economic activity, such as an austerity package, their model automatically makes the assumption that this sudden and uncharacteristic change – called a “shock” – will be absorbed and the economy will move on.
Every new austerity package is treated the same way, both by the econometricians who design the models and by the economists who provide the analytical framework. Their take on the European crisis is therefore a series of individual shocks, not a systemic re-shaping of the entire economy. As a result, they always predict a recovery and return to some long-term stable growth path.
To the best of my knowledge there is not a single macroeconomic model out there that has yet incorporated the systemic effects of austerity. Therefore, the economics profession will continue to make systemic forecasting mistakes – and advise politicians based on those mistakes.
Don’t get me wrong. I am not blaming economists for the errors that politicians end up making. But our profession must begin to recognize its almost chronic inability to deal with economic crises. Our forecasting methods can handle regular recessions but are frustratingly inept at dealing with situations that become inherently unstable, such as the current European disaster.
In fairness, I am not the only economist with an unequivocal criticism of austerity. On March 5, Joseph Stiglitz explained in Economywatch.com:
While Europe’s leaders shy away from the word, the reality is that much of the European Union is in depression. Indeed, it will now take a decade or more to recover from the losses incurred by misguided austerity policies – a process that may eventually force Europe to let the euro die in order to save itself.
Strange conclusion. The euro is not the cause of the crisis. But Stiglitz is probably letting his ideological preferences get in the way of good economic judgment. Otherwise he would do the same analysis has I have and conclude that the crisis is caused by the welfare state.
That said, Stiglitz is eloquent in his criticism of austerity:
The loss of output in Italy since the beginning of the crisis is as great as it was in the 1930’s. Greece’s youth unemployment rate now exceeds 60 percent, and Spain’s is above 50 percent. With the destruction of human capital, Europe’s social fabric is tearing, and its future is being thrown into jeopardy. The economy’s doctors say that the patient must stay the course. Political leaders who suggest otherwise are labeled as populists. The reality, though, is that the cure is not working, and there is no hope that it will – that is, without being worse than the disease.
Well said. But what alternative is Stiglitz proposing? Certainly not that the welfare state must go:
The simplistic diagnosis of Europe’s woes – that the crisis countries were living beyond their means – is clearly at least partly wrong. Spain and Ireland had fiscal surpluses and low debt/GDP ratios before the crisis. If Greece were the only problem, Europe could have handled it easily.
I don’t know where Stiglitz gets his data but here are the debt/GDP ratios for Ireland and Spain in 2003-2008:
| 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | |
| Ireland | 29.3% | 28.7% | 27.3% | 25.5% | 26.1% | 44.9% |
| Spain | 44.9% | 44.3% | 43.2% | 41.3% | 39.0% | 44.2% |
In terms of actual euros, the general government debt in Ireland shot up by almost 84 percent from 2003 to 2008. In other words, it was only thanks to strong growth in current-price GDP that the Irish did not see their debt ratio grow faster than it did. They were expanding their government as fast as they could, and certainly more than was healthy for the economy: in 2010 the debt-to-GDP ratio had reached 87 percent, i.e., close to double what it was two short years earlier.
The Spanish situation followed a similar pattern, though with less dramatic numbers than the Irish. The lesson to be learned from this is not that these economies could afford their big governments, but that their big governments survived only because there was enough current-price GDP growth to pay for them. As soon as GDP slacked off, the cost of the welfare state quickly became completely unbearable.
Stiglitz refuses to see this. He goes on to advocate even more government, without a hint of explanation of how the world’s already highest-taxed nations would be able to pay for that:
Europe needs greater fiscal federalism, not just centralized oversight of national budgets. To be sure, Europe may not need the two-to-one ratio of federal to state spending found in the United States; but it clearly needs far more European-level expenditure, unlike the current miniscule EU budget (whittled down further by austerity advocates). … There will also have to be Eurobonds, or an equivalent instrument.
More welfare state spending, more government, more debt, more of the same that brought about the crisis in the first place.
Instead of wanting more of the same and providing politicians with rosy outlooks, practitioners of economics should re-examine the results of their own contributions over the past few years. The ability of hundreds of millions of people to maintain their current standard of living, even support their families, depends on it.
How Much More Can Greece Take?
It has been said that those who cannot remember the past are condemned to repeat it. It has also been said that someone who repeats the same action over and over, expecting different results, is an idiot.
If so, the EU Commission is a bunch of condemned idiots.
Sorry for the colorful opening, but just when the Commission has started talking about backing off austerity, they are forcing Greece to put to work perhaps the most devastating austerity package to date. Without even a hint of remorse over the past, blaming instead the negative results of previous packages on “mistakes” by the Greek government, the Commission charges ahead with demands that Greece cut away 6.5 percent of its GDP in the next austerity round.
I am not even going to attempt to predict the social, economic and political fallout of this complete fiscal madness, though it might be a good idea to remember that in last year’s Greek election the Nazis returned to the European political scene. I will say this, though: the Germans tried a decade of austerity during the Weimar Republic. Greece is now six years down the same path.
Before we get to the report on more Greek austerity, let us first note a new report from Pew Research Center. It presents some seemingly bizarre data, showing that a majority of Europeans still support austerity:
The countries still backing cuts over spending included Italy and Spain, which are both in the grip of prolonged recessions made worse by their efforts to bring down government borrowing. On average, 59% backed further austerity in the survey, against 29% in favor of more spending to stimulate the economy.
You would expect the victims of austerity to demand something better. But in order to do so the Europeans would have to know of an alternative – and it does not exist in their world view. For a good decade now, the public policy debate in Europe has been almost entirely lopsided in favor of austerity. Everyone from leading economists to political leaders to business leaders have been telling the public for years that the alternative to austerity is Hell on Earth.
When people see no alternatives, then after a while they tend to believe that there are indeed no alternatives.
Besides, the very issue of austerity is technical in nature and not likely to stimulate the average Joe to go off looking for alternative views on his own.
One would think that the hardships suffered in, e.g., Greece and Spain would be enough to make the general public back off from austerity. After all, the benefits they have been promised from austerity never seem to materialize. This is a valid point, but at the same time, history is full of examples of man’s ability to accept and endure hardships in the name of some abstract goal. It will probably take an entire generation before Europeans start questioning the changes for the worse that they are now living through.
With this in mind, it is easier to understand why Greece – ground zero of European austerity – is entering yet another cycle of fiscal torture. From Fox Business:
Greece is on track to meet its budget targets this year and next but may have to make further cuts in 2015 and 2016, the European Commission said in a report that will provide the basis for a decision Monday on whether to release more bailout loans for the country. The report sums up the findings of the three institutions overseeing Greece’s bailout–the Commission, the International Monetary Fund and the European Central Bank–which sent a team of auditors to Athens earlier this spring to review the country’s finances.
As I explain in Austerity: Causes, Consequences and Remedies, a country will always see a reduction of its government deficit the year after an austerity package is implemented. Then, as the negative multiplier effects of austerity kick in, the budget improvement is reversed. That is why the European Commission is forecasting more austerity in 2015 and 2016. However, you only need to take a quick look at macroeconomic data from Eurostat to realize that the notion of no budget cuts in 2014 is optimistic.
And now, Fox News delivers the big number:
It is the first time in Greece’s three-year-old aid program that the country is deemed to have met its goals. In past years, a deeper-than-expected recession and government missteps led Greece to miss its targets. The draft notes that the Greek government has followed through on most of the austerity measures it promised for 2013 and 2014–also in sharp contrast with previous assessments of Athens’ efforts to ease its crushing debt load. ”The very large and highly front-loaded package of fiscal consolidation measures for 2013 and 2014–totalling over 6.5% of gross domestic product–agreed in the previous review has been largely implemented,” the report says.
Six and a half percent of GDP.
Let’s leave the technospeak behind for a moment. An austerity package of 6.5 percent of GDP means that government is going to increase what it takes from the private sector by 6.50 euros for every 100 euros that people earn. Not for every 100 euros it currently takes in – it is 6.50 euros for every 100 euros of GDP.
The 6.5 percent number is a net tax increase on the Greek economy. It does not matter what the combination is of spending cuts and tax increases: the Greek government is telling its taxpayers that it is going to raise the price of whatever it provides them by 6.5 percent of all the money that all taxpayers earn.
If all of the austerity comes in the form of spending cuts, and taxes do not go up, then government is saying “we are going to sell you a 2011 car at 2013 prices”; if all of the austerity comes in the form of tax hikes, and spending is not cut, then government is saying “we are going to sell you a 2013 car at 2015 prices”.
Either way, government will increase its net drainage from the economy by 6.5 percent of GDP, and front load the plan so most of it shows up in one year. All this in a country that has already lost 25 percent of its GDP in five short years, all due to austerity.
I would not want to set my foot in Greece over the next year.
Apparently, the EU Commission has an eerie feeling that something bad might come out of this. According to Fox Business they are quick to add fine print to their optimism:
Beyond 2014, the outlook is uncertain and depends “on the strength of the recovery and improvement in taxpayer capability to service their tax obligations,” the commission says. It estimates the country’s budget gap at around 1.8% and 2.2% of GDP in 2015 and 2016 respectively.
This is B.S., Barbara Streisand. They have made similar predictions in the past, all of which have turned out to be outlandishly optimistic. So long as they believe that austerity somehow will improve the performance for the Greek economy, they will continue to believe that the first-year effect of an austerity program will become permanent.
I would not want to be a Greek politician saddled with implementing this chainsaw massacre of an austerity program. Perhaps some of the elected officials in Athens are on the same page, or why else would they according to Fox Business be so eager to promise that “there will be no more belt-tightening”?
Fox Business does not elaborate on this. Instead they conclude their report with a couple of notable factoids:
The country is in its sixth year of a deep recession made worse by waves of austerity. Unemployment, already over 27%, is expected to continue rising.
So if they acknowledge that the waves of austerity have made the recession worse, then why doesn’t Fox Business ask the EU Commission why this particular austerity package would do the trick?
In case anyone is still in doubt what this new austerity package will do to the Greek economy and to Greek society, please re-read the statement above about unemployment.
The Greek government is sitting on one side of an open powder keg. On the other side the EU Commissioners are sitting, smoking big fat cigars. The Greek government is holding out an ashtray where the Commissioners are supposed to kill their cigars. It’s dark, so it’s hard to see the ashtray.
There’s the future of Greece for you.
Europe Drowning in Debt
The European economy is in bad shape. On May 3 the EU Observer reported:
The eurozone economy will contract by 0.4% in 2013, Economics commissioner Olli Rehn said Friday. Presenting the EU commission’s Spring Economic Forecasts, Rehn said that the bloc would return to growth in 2014 by a slower-than-expected 1.2%. Meanwhile, the average debt levels will hit 96% in 2013.
Looking at the 27 EU member states, things are looking almost as bad: inflation-adjusted GDP growth is forecast to be 0.4 percent this year, though that will probably be adjusted downward in the next few months. EU institutions that publish economic forecasts have a tendency to downgrade their forecasts as the present catches up with the future.
At the same time, total general government debt in the 27 EU countries is heading the other way: from 2010 to 2012 those countries added 1.4 trillion euros to their total debt. In terms of growth rates, EU-27 have added debt at frightening rates over the past few years:
2008: 6.1 percent
2009: 12.8 percent;
2010: 12.3 percent;
2011: 6.7 percent;
2012: 6.7 percent.
Due to an almost total absence of GDP growth, the ratio of debt to current-price GDP has grown at stunning rates:
To reinforce the persistent nature of the economic crisis, the EU Observer also reports:
France has moved centre stage in the crisis, after EU economic affairs commissioner Olli Rehn said that the country would fall into recession in 2013 and needs two more years to bring down its budget deficit. Presenting the Commission’s Spring Economic Forecasts on Friday (3 May), Commissioner Rehn described Paris’s forecasts, based on a mere 0.1 percent growth rate, as “overly optimistic.”
It is hard to see how France has ever been out of the Great Recession. From 2008 through 2012 the French economy averaged 0.06 percent in real GDP growth. During the same period of time its debt-to-GDP ratio went from 68.2 percent to 90.4 percent.
This explains why, as I reported recently, the French government is panicking over the prospect of more austerity. They know it has not worked for their southern neighbors and they are not going to stir up the same kind of political turmoil as those policies did in, e.g., Greece. The socialist French government knows that parties like Front National – often perceived, wrongly so, to be ideologically close to the Greek Nazis, Golden Dawn – as well as radical communists could make significant political gains if the French people were subjected to the same bone-crushing fiscal measures as the Mediterranean EU members have implemented.
The French resistance to more austerity caused the EU Commission recently to declare that the War of Austerity is over. It is not, of course, or else there would be a complete course change throughout southern Europe. Furthermore, the EU Commission would not be continuing to pressure Paris over balancing its budget in the midst of a recession. The EU Observer again:
The eurozone’s second largest economy would run deficits of 3.9 percent in 2013 and 4.2 percent in 2014, he said, calling on Francois Hollande’s government to draw up a “front loaded” package of cuts and labour market reforms to stop “persistent deterioration of French competitiveness.” For its part, Paris maintains that it will reduce its deficit to 2.9 percent in 2014, fractionally below the 3 percent limit in the EU’s Stability and Growth Pact. Hollande in March announced that an additional €20 billion worth of tax rises and €10 billion in spending cuts would be included in his budget plans but said no further cuts would be made.
Because if he tries, the socialist government is going to end up in real trouble. Many of the prime minister’s cabinet members are truly fearful of more austerity, for various reasons.
But wait, there’s more:
Crisis-hit Cyprus, which has now finalised a 10 billion bailout, is set to be worst hit by recession with an 8.7 percent fall in output. Meanwhile, the average national debt pile is expected to peak at 96 percent of GDP in 2014, with six countries – Belgium, Ireland, Greece, Italy, Cyprus and Portugal – having debts larger than their annual economic output. Rehn indicated that Spain would also be given an additional two years to bring its deficit down to the 3 percent threshold, while Slovenia would also need more time.
So long as Europe keeps its welfare state, it has no way out. The welfare state is what is driving Europe’s crisis today, and it will continue to do so for as long as the welfare state exists. Nothing is changing for the better. Europe is drowning in its entitlement-driven government debt. The continent is stuck, and the talk about austerity being over is politically motivated hot air.
I stand my my diagnosis: austerity policies exacerbated the financial crisis into a welfare state crisis and turned Europe into an economic wasteland. What used to be a thriving industrialized continent is now facing an endless future of industrial poverty.
Another EU Lie: “End to Austerity”
First you send your tanks in and pound away at schools, hospitals and private businesses. When people are laid off and flock to unemployment offices you direct your bombardment at those instead. When the unemployed and homeless former middle-class citizens go scavenging for food in dumpsters behind McDonald’s, you hammer away at them with yet another round of big-caliber fiscal ammunition. Then you tell everyone that this invasion may be a bit hard on them right now, but at some point, somewhere in the long run, their lives will get better.
When people still defy your fiscal army you keep fighting them until they have lost a quarter of their income and their jobs and their entire country has been transformed from a relatively prosperous European nation to an economic wasteland.
You keep going until your austerity storm troopers have wreaked havoc and destruction on country after country and reached the outskirts of Paris. Then, but only then, do you pause and try to brush off the image of a fiscal imperialist. From the EU Observer:
European Commission chief Jose Manuel Barroso on Monday (22 April) indicated that the EU’s budget-slashing response to the economic crisis has run its course. Speaking in Brussels at a meeting of European think tanks, Barroso commented that “while I think this policy [austerity] is fundamentally right, I think it has reached its limits.”
Of course. When austerity robbed the Greeks of 25 percent of their GDP, they got what they deserved. When Spain is risking regional secession and political and economic disintegration, and when Portugal is simmering at the point of civil unrest, that is all right and good in Barroso’s playbook.
In reality, what really concerns Barroso is the presence of public opinion in the way of his fiscal tanks. The EU Observer again:
In a reference to rising public discontent at the severity of spending cuts and tax rises, he noted that “a policy to be successful not only has to be properly designed, it has to have a minimum of political and social support.” ”We have to have tailor-made solutions for each country, we cannot apply a one size fits all programme to the European countries,” he added.
What exactly does this mean? Different combinations of tax hikes and spending cuts depending on what country you are in? More tax hikes in Portugal and more spending cuts in France? Do note that Barroso still believes in austerity – his only reason for not charging ahead to conquer France is that the French prime minister’s cabinet is not united in the desire to greet the invading austerity army at the border.
In the words of the EU Observer:
Barroso’s remarks are a further sign that Brussels is ready to give the likes of France, Spain and Italy more time to force through unpopular economic reforms to reduce their budget deficits. For his part, speaking at the same event, EU Council President Herman Van Rompuy conceded the economic crisis is “lasting too long. He added that “patience is understandably wearing thin and a renewed sense of urgency is setting in.” He underlined the need to “move faster on the reforms with the biggest immediate growth impact.”
The problem with Barroso and van Rompuy is that they have absolutely no idea of what really gets an economy going, nor do they have an interest in learning about it. Their only goal is in expanding their own power, and they have discovered that austerity is a formidable tool that can conveniently be applied to further that goal. Right now they are hesitant because France is a big chunk of real estate to bite off, and French politicians are a bit less inclined to bow their heads to the new fiscal masters than they were in Athens, Rome, Madrid and Lisbon.
As the EU Observer notes, the critics of the EU’s fiscal invaders have just been given more ammunition to use in the defense of their national fiscal sovereignty, as the EU Commission’s own economic forecasts…
make grim reading, especially for countries on the Mediterranean rim, which have been among the worst hit by the eurozone’s economic crisis. … Portugal and Spain saw their deficits swell to 6.4 percent and 10.6 percent of GDP, respectively, while Greece’ deficit rose to 10 percent. The ongoing recession also forced up average EU government debt levels to 90.6 percent, well above the 60 percent threshold set out in the EU’s Stability and Growth Pact.
In other words, the countries that have been subjected to austerity the longest, are the ones with the biggest deficit and GDP growth problems. Austerity is sold as a recipe for smaller deficits and stronger economic growth, yet the outcome is the exact opposite.
I have only one thing to say to my many European readers: don’t let yourselves be fooled by what Barroso says about austerity reaching its limits. He has stopped his barrage for now because you are paying attention. Once you let your guard down and look the other way, his fiscal stukas will be taking aim at your country again before you know what hit you.
Emerging Panic over Stagnant Europe
Austerity is spreading its ever darker shadow over Europe. It has now grown to such proportions that it is beginning to really scare members of Europe’s political elite. Among the deeply concerned are members of the French prime minister’s cabinet. This is big news that few seems to notice. One who does, though, is Ambrose Evans-Pritchard, sharp-eyed editor with The Telegraph:
French president Francois Hollande is facing an anti-austerity revolt from his own ministers as he pushes through a fresh round of tax rises and austerity to meet EU deficit targets. Three cabinet members have launched a joint push for a drastic policy change, warning that [spending] cuts have become self-defeating and are driving the country into a recessionary spiral.
And these are no small words coming out of the French cabinet:
“Its high time we opened a debate on these policies, which are leading the EU towards a debacle. If budget measures are killing growth, it is dangerous and absurd,” said industry minister Arnaud Montebourg. “What is the point of fiscal consolidation if the economy goes to the dogs. Budget discipline is one thing, cutting to death is another,” he said.
See I told you so. But where have the French been over the past five years when Greece has been sinking into the dungeon of austerity, mass unemployment, poverty, economic despair and political extremism? What did the French do to help Spain avoid bone-crushing austerity that has turned middle-class Spaniards into food scavengers? Did a single leading French socialist lift as much as an eyebrow when Portugal was almost torn apart by social unrest following EU-imposed austerity?
Evans-Pritchard does not bring up this European context, but his analysis of the French socialist austerity revolt is nevertheless worth listening to:
Mr Hollande will on Wednesday unveil another round of belt-tightening worth €12bn, even though Paris is already carrying out the harshest fiscal squeeze since the Second World War and France may already be in a triple-dip recession. The cuts are hard to reconcile with Mr Hollande’s campaign pledge last year to end austerity. They have set off furious criticism across the French Left. “Austerity is no longer tenable in Europe today with millions of unemployed,” said social economy minister Benoît Hamon.
So Mr. Hollande has shifted foot. His original plan was to “end austerity” by having government spend more, not less, while still raising taxes through the roof. That alternative does about as much damage down the road as austerity, especially if at the same time you are trying to balance the government budget.
And at the end of the day, the balanced budget is all that matters. It is the pillar upon which Germany has built its unrelenting campaign against “undisciplined” euro-zone members. The doctrine of the balanced budget was one of the cornerstones of the EU constitution – originally turned into constitutional mandate in Article 104c of the Maastricht Treaty of 1992 – and has since been elevated to religious doctrine. No one in Europe questions the economic logic in, so to speak, putting the balanced budget before the horse.
Not even the French who break ranks with the austerity-touting consensus. However, they actually don’t have to, because the nature of the austerity measures is such that it really does not deviate much from the standard European doctrine of maxing out the size of government:
Almost all the austerity measures will come from tax rises, pension fees and a “green’ levy, rather than spending cuts. The state sector will climb to a record 56.9pc of GDP this year as the economic contraction eats into the private sector. Public spending has reached Scandinavian levels … Critics say the French tax squeeze is not even helping to curb borrowing. France is at growing risk of a debt trap as the slump itself erodes tax revenues. Public debt will jump to 94pc of GDP next year, a drastic upward revision from 90.5pc.
Spending cuts would have made no real difference. Look at Greece, Portugal, Spain and Cyprus. The problem is the over-arching focus on balancing the budget in a recession.
Evidently, as Evans-Pritchard reports, the bad shape of the European economy, after years of unrelenting spending cuts and tax increases, is so bad that the political elite is beginning to panic:
A report prepared for EMU finance ministers over the weekend by the Breugel forum in Brussels said the eurozone’s crisis strategy is a failure, a nexus of confused policies that cut against each other. Fiscal overkill is stopping the banks returning to health, while foot-dragging on the EU bank union is perpetuating the credit crunch in the Club Med bloc. Sky-high unemployment is eroding job skills and “undermining Europe’s long-term growth potential”. Low growth is making it “much tougher for hard-hit economies in southern Europe to recover competititveness and regain control of their public finances”.
This is a good, first look at Europe’s deep structural problems. Austerity is not a structurally oriented policy, but it interacts with a lot of structural features of the European economy that, taken together, conspire to trap the economy in perpetual stagnation. One of those structural features is the system of excessively rigid labor laws. By interfering with the need of businesses to make flexible adjustments of their work force, Europe’s hire-and-fire laws significantly raise the cost of doing business, especially for smaller firms.
As a result, Europe’s work force is not working up to its potential. Tens of millions of workers get stuck in jobs that do not produce optimally, and tens of millions of others get stuck in unemployment. One symptom of this is low labor productivity, which the Breugel Forum notes in its report about Europe’s labor productivity:
Since 2007, the EU15 has taken a productivity holiday, while productivity has increased rapidly in the US (Figure 3). In terms of total factor productivity, both the EU15 and EU12 lag behind Japan. Even economically stronger countries, such as Germany, lag behind the US, and the evolution in the United Kingdom does not differ markedly from that of continental economies. Some hard-hit countries, such as Ireland, Spain and Latvia, have apparently recorded outstanding labour productivity performances since 2007, but most of these gains have been due to compositional changes, such as the shrinkage of low-productivity construction and low value-added services, and the total factor productivity developments in these countries were weak.
By making it excessively costly for businesses to downsize in tough times, Europe’s governments cause a phenomenon called “labor hoarding”, the effects of which the Breugel Forum report explain well:
Labour hoarding can partly explain the initial response to the shock of the recession. Employment contracted by five percent between 2007 and 2010 in the US, while in several European countries the employment shock was of limited magnitude. Public policies, such as Kurzarbeit, a scheme financed by the German government to support part-time work and keep workers employed, were one factor behind this response. Firms also hoarded labour, expecting a rebound and thereby limiting the initial rise in unemployment. Five years on, however, the productivity setback has become permanent, contributing to lower potential output. This cannot be regarded as a cyclical phenomenon anymore. In the short run, weak productivity performance can be related to insufficient demand through the so-called productivity cycle. But the weak cyclical position of the economy cannot explain sustained poor productivity.
It is good that some Europeans with access to the “big stage” are beginning to look deeper into what is really happening to the deeply troubled European economy. However, so long as they do not realize that the welfare state is the root cause of the problems, they will not be able to prescribe a medicine that could actually cure the patient.
The lack of insight into Europe’s ailment will drive the continent straight into the economic wasteland. As tepid as the American recovery is, it offers an infinitely better platform for the future than what the Old World could ever come up with.
Greek Tragedy Plays Out in Portugal
Europe’s austerity battle continues. The latest skirmish took place in Portugal’s Supreme Court, which, according to Reuters…
on Friday rejected four out of nine contested austerity measures in this year’s budget in a ruling that deals a blow to government finances but is unlikely to derail reforms two years after the country’s bailout. The measures rejected by the court should deprive the country of at least 900 million euros ($1.17 billion) in net revenues and savings, according to preliminary estimates by economists.
Obviously, “net revenues” means tax increases and “savings” means spending cuts. The curious part of this is how a supreme court of a country can find it within its jurisdiction to pass judgment on individual spending items in a government budget, as well as individual taxes. That, however, is a topic for a separate story. This one from Reuters is primarily concentrated on the policy battle over austerity, and the amazing thing about this story is that it is completely void of context. Greek context, that is:
Debt-ridden Portugal agreed to a 78 billion euro bailout in 2011 from the European Union and International Monetary Fund. The entire package of austerity measures introduced by the 2013 budget is worth about 5 billion euros and includes the largest tax hikes in living memory, which were mostly upheld.
Back in January I explained the draconian nature of those tax hikes. What is unfolding now in Portugal is essentially the sequel to Greece.
However, as Reuters reports, not everyone seems to understand this:
“It’s a lesser evil. … Putting it into perspective, a good manager and leader should not have difficulty finding room in a budget to accommodate this cut,” said Joao Cantiga Esteves, economist at the Lisbon Technical University. “We are talking about an impact of only 1.2 to 1.3 percent of Portugal’s total spending,” he added.
That’s what they said in Greece, too. But 1.3 percent three years in a row accumulates to more than four percent of GDP, with compound interest in the form of negative multiplier effects. Apparently, Mr. Esteves has not kept up to speed with either the events in Greece or the IMF’s new research on the accelerated negative effects of austerity (he might also want to read my paper on austerity to get the rationale behind the IMF’s findings). Government spending cuts cause a faster multiplier reaction than government spending increases. This is a major piece of the puzzle in explaining why austerity has been such a nightmare for Europe’s debt-ridden economies.
It is notable how this perspective is entirely absent in the reporting on Portugal. Reuters is no exception:
The government … has to cut the budget deficit to 5.5 percent of GDP this year from 6.4 percent in 2012, when it missed the goal but was still lauded by its EU and IMF lenders for its austerity efforts. Analysts consider the outcome manageable and say the government should be able to cover the shortfall with additional spending cuts it has been working on at the request of lenders. Analysts say the lenders could also give Portugal more leeway in terms of budget targets. Earlier in the day, Bank of America Merrill Lynch analysts wrote in a research note that even a negative ruling was likely to be “in line with our muddling through outlook,” expecting Lisbon to resume negotiations with its lenders as a result.
The analysts at Merrill Lynch, the university professors interviewed, and the journalists reporting, all take an attitude of business as usual. It is as though the Greek disaster, with one quarter of GDP being wiped out in four short years, has nothing to do with austerity.
Perhaps the parties involved are turning a blind eye to Greece because they don’t want to see the repercussions for the cost of the government debt. Zerohedge notes this:
…the government warning that the court’s decision would put into question the country’s ability to fulfill its €78 billion international bailout program … would send bondholders of Portuguese sovereign debt scrambling for the exits as suddenly the country may find itself in the ECB’s “dunce” corner, with Draghi preparing to pull a “Berlusconi” on a government which can’t even whip its judicial branch in line.
Then comes this comment:
However, of more immediate concern is how will the government now plug a hole of up to €1.3 billion in its €5.3 billion 2013 budget. A solution has, luckily, presented itself: bypass the unconstitutional provisions by paying government workers not in cash, but in government bills!
This is a startling statement, but Zerohedge has a source, namely none other than the Wall Street Journal (subscription required):
The Portuguese government is considering a plan to pay public workers and pensioners one month of their salary in treasury bills rather than cash after a high court ruled out wage cuts, a person familiar with the situation said Sunday. “This is one of the ideas being considered,” the person said. By paying one month of salary in T-bills to public workers and pensioners, the government would save an estimated €1.1 billion in expenses, narrowing the budget gap significantly.
In all honesty, is this really what the defense of the welfare state has come down to – paying employees in IOUs? Is the Portuguese government so desperate that it is ready to resort to this kind of accounting trickeries??
The California state government has from time to time resorted to “paying” some bills with IOUs, which has caused little more than grumbling among those whom the state owed money. I doubt that the same would be the case in Portugal – especially if they are going to pay their government employees with promises instead of cash. This could contribute to a further destabilization of the country’s economy and, even more so, political landscape.
All, again, caused by austerity in an attempt to defend an indefensible welfare state.
The Decline of European Democracy
German magazine Der Spiegel has an interesting story about the current state of the European left. The story has broader implications than the magazine appears to realize – it is, in a sense, a prelude to an analysis of how Europe’s parliamentary democracy is in a state of degeneration. Decades ago, European elections were battles between ideologies; today, they are mere popularity contests between administrators of the welfare state.
More on that in a moment. First, let’s see what Der Spiegel has to say about the left. Using French President Hollande and German social-democrat leader Steinbruck as examples, the magazine makes the case that Europe’s left is having a hard time making itself relevant on the European political stage:
One year ago, the mood among Germany’s Social Democrats (SPD) was one of elated optimism. In May 2012, Socialist Party candidate François Hollande won the country’s presidential elections, opening up the possibility that a right-to-left changing of the guard might be possible in Germany too. Just weeks after his victory, Hollande invited the SPD leadership to Paris to allow them to bask in his popularity.
That popularity was short-lived…
On Friday, SPD chancellor candidate Peer Steinbrück is once again in Paris. But even as the general election campaign in Germany ahead of the vote this fall has begun to heat up, the mood on the Franco-German left has cooled. With Hollande’s public opinion poll scores plummeting, his country’s economy in trouble and his government mired in scandal, he looks to have very little sparkle left to lend to his cross-border political ally.
Here is one lesson to be learned: don’t promise to confiscate high-earning people’s money. But the other lesson runs much deeper and has much farther-reaching implications. When center-right governments in EU member states try to comply with the austerity measures imposed on them by the EU, they have to take the blame for the inevitably destructive results. Voters then turn to the left to find someone who will repair what austerity has broken. But due to the nature of the underlying problem – the inevitably unsustainable welfare state – the left cannot offer what voters expect. All they can do is put a different kind of band aid on big government’s bleeding wounds.
In terms of fiscal policy, this means that voters have the choice between the center-right approach to austerity, meaning government spending cuts combined with higher taxes, and the leftist approach, meaning government spending increases and much higher taxes.
Neither approach is good for the economy, which voters in, e.g., France are beginning to realize. Inevitably, this leaves voters disillusioned, which is what the European left is slowly beginning to feel.
Der Spiegel again:
Steinbrück’s campaign too seems to have reached an impasse. A new poll in Germany indicates that, were Germans able to vote directly for candidates (rather than for political parties), only one in four would cast their ballot for Steinbrück, against 60 percent for Chancellor Angela Merkel. Furthermore, only 32 percent approve of the job he is doing, his lowest such score since he entered federal politics in 2005, according to a survey released on Thursday evening by German public broadcaster ARD. Taken together, the travails facing the two politicians [Hollande and Steinbruck] amounts to a fading of hopes, particularly among euro-zone member states struggling under the ongoing euro crisis, that Hollande’s election would mark a resurgence of the European left — and an end to Merkel’s austerity-first approach to the common currency’s woes.
Right on the nail. The left has nothing to offer as an alternative. They want to preserve the welfare state even more than their center-right competitors, which means that they have to be even more destructive in their policies to defend it. In the end, voters see no difference between the two alternatives.
Case in point: it was the social democrat party in Sweden that in the ’90s implemented the most destructive austerity plan since the Weimar Republic. They cut away nine percent of GDP over three years, effectively injecting annual doses of a fiscal venom that until the current Greek crisis started was unsurpassed in terms of macroeconomic lethality.
Since then it is virtually impossible to distinguish between the center-right coalition currently governing Sweden and the social-democrat led leftist coalition. Voters looking for a break from austerity turn their backs on whoever is “the alternative”. For the most part that has been a center-right government in Europe over the past few years; when voters look at “the alternative” and see nothing but a bleak copy of what they are already stuck with, they see no reason to change team.
Der Spiegel elaborates on this point:
Steinbrück … said that a successful Hollande is in Germany’s interest so that the Franco-German partnership can once again take up its traditional role as the motor of Europe. But even the SPD has become concerned about identifying itself too closely with Hollande. … Steinbrück and his party are beginning to see Hollande more as a risk than a potential boon in the run up to the German vote. … Hollande himself appears to have had little luck in proving himself as an effective crisis manager. His administration has been unable to meet deficit reduction targets, many analysts believe that France could become the next euro-crisis hotspot and unemployment in the country has risen close to record levels in recent months.
The root cause of the left’s problem is actually not in their own domain. It has to do with the fact that Europe’s conservatives have abandoned the principles of limited government and individual and economic freedom. Instead they have adopted the welfare state and decided to save it at any cost.
It is worth noting that Germany’s conservative chancellor Angela Merkel is one of the leaders of the pan-European austerity crusade. Her goal is to save the welfare state. Her policy strategy is different in form from what the left wants, but at the end of the day the result is the same. It really would not have been better or worse for Greece to have raised taxes enough to both close the budget deficit and increase government spending.
The left created the welfare state. Despite such political giants as Margaret Thatcher, they won the ideological battle over it. The welfare state is still standing, and Europe’s conservatives have embraced it. Whether they did it for tactical purposes – in some welfare states half of the population can’t make it through the month without tax-paid entitlements – or because they have given up on conservatism is really not that relevant. What matters is that parliamentary democracy has gone through a process of degeneration. Thanks to the conservative capitulation at the altar of the welfare state, the choices in European elections have been decimated to selecting those for power whose policies to defend the welfare state will be least painful for the public.
Since the center-right seems to be better at that, the left is the victim of its own political victory.
More Evidence Austerity Kills People
The welfare state is the most dangerous socio-economic invention in the history of mankind. Unlike openly totalitarian ideologies it presents itself as deceitfully benevolent; unlike religious sects, its appearance is rational; and unlike war, its destruction is quiet and concealed under layers of bureaucratic, government budget practices.
The destructive forces of the welfare state will inevitably destroy every country that is seduced by its benevolent smile. In my book Remaking America: Welcome to the Dark Side of the Welfare State, I explained at length how Sweden is succumbing to the unavoidable fiscal tyranny that the welfare state brings about.
This fiscal tyranny is brought about when the taxes that pay for the welfare state have eroded the private-sector tax base to a point where neither new nor higher taxes can pay for the welfare state anymore. At this point, legislators who have invested their political careers in the welfare state will try to save it by means of austerity. This, in turn, opens a dangerous, very destructive path that every country with a welfare state will inevitably have to enter.
We can look at Sweden in the ’90s, or Greece today, to see what the end station of that path looks like.
Among the most devastating features of austerity is that it recreates the need for itself. When government cuts spending and raises taxes, it increases its net drainage from the economy: it takes more yet gives less back. As a result the pressure on the private sector increases, which accelerates the shrinking of the tax base – out of which government is supposed to fund the welfare state.
This is a technical argument, which I have outlined analytically in this paper. But the technical analysis has its counterpart in the lives that are being destroyed by austerity. The destruction is financial, psychological – and sometimes literal. In a powerful article in The Lancet, eight researchers analyze the consequences of the austerity policies in Europe over the past few years. Before we get to the actual article, let us listen to Der Spiegel and their presentation of it:
As the euro crisis wears on, the tough austerity measures implemented in ailing member states are resulting in serious health issues, a study revealed on Wednesday. Mental illness, suicide rates and epidemics are on the rise, while access to care has dwindled.
These are countries with socialized health care systems, where government is a single payer and often also a single provider. When their budget goes into deficit and politicians try to balance it by means of austerity, the result is less health care to all. But government still promises everything to everyone.
Der Spiegel again:
The rigid austerity measures brought on by the euro crisis are having catastrophic effects on the health of people in stricken countries, health experts reported on Wednesday. Not only have the fiscal austerity policies failed to improve the economic situation in these countries…
See, I told you so. What bothers me the most about this is that there are still ill-educated Austrian-theory economists who endorse this kind of destructive austerity, claiming that some time in the future it will somehow bring about prosperity for all. It never does, and no one except the Austrian armchair theoreticians should be surprised.
Back to Der Spiegel:
…but they have also put a serious strain on their health care systems, according to an analysis of European health by medical journal The Lancet. Major cuts to public spending and health services have brought on drastic deterioration in the overall health of residents, the journal reported, citing the outbreak of epidemics and a spike in suicides. In addition to crippling public health care budgets, the deep austerity measures implemented since the economic crisis began in 2008 have increased unemployment and lowered incomes, causing depression and prompting sick people to wait longer before seeking help or medication, the study found.
Says The Lancet (free subscription needed):
Greece, Spain, and Portugal adopted strict fiscal austerity; their economies continue to recede and strain on their health-care systems is growing. Suicides and outbreaks of infectious diseases are becoming more common in these countries, and budget cuts have restricted access to health care. By contrast, Iceland rejected austerity through a popular vote, and the financial crisis seems to have had few or no discernible effects on health. Although there are many potentially confounding differences between countries, our analysis suggests that, although recessions pose risks to health, the interaction of fi scal austerity with economic shocks and weak social protection is what ultimately seems to escalate health and social crises in Europe. Policy decisions about how to respond to economic crises have pronounced and unintended eff ects on public health, yet public health voices have remained largely silent during the economic crisis.
In all honesty, what can they do? Demand that health care be excluded from austerity measures? Who should take bigger beating instead? Whose taxes should go up even more?
A more interesting passage in the article reports on what exact measures EU member states have taken as part of austerity:
Initially no major changes were made to the scope (ie, statutory benefits package and services provided to the population that are covered by the state) or the breadth (ie, the population covered by the state) of health coverage, although some reductions were made (usually minor). Thus, in a few countries, some services were removed from the benefits package (eg, in-vitro fertilisation and physiotherapy in the Netherlands). In some countries, benefits for low-income groups were expanded (eg, Moldova). However, some countries—specifically, the Czech Republic, Denmark, Estonia, Finland, France, Greece, Ireland, Italy, Latvia, the Netherlands, Portugal, Romania, and Slovenia—decreased the extent of coverage by instituting or increasing user charges for some health services in response to the crisis.
These are, again, single-payer health care systems run by benevolent governments whose only goal is to make everyone well. Right?
Of course not. Under austerity, the purpose of every entitlement program changes from providing an entitlement to reducing its cost. A single-payer health care system is no longer operating under the auspices of providing all sorts of health care to everyone. Its MO is instead changed into reducing its costs – even at the expense of patients’ health, even lives:
Rises in user charges are a particular cause of concern, because they increase the financial burden on households and probably reduce the use of high-value and low-value care equally, especially by people with low incomes and high users of health care, even when user charges are low. Introduction or increases of user charges in primary or ambulatory specialist care might worsen health outcomes and lead to increased use of free but resource-intensive services— eg emergency care. Thus, cost savings and enhanced efficiency are scarce.
No one should be surprised. If you increase the price of a product (in this case taxes or user charges) people can afford less of it. That is why health professionals are so fond of higher tobacco taxes.
The incidence of mental disorders has increased in Greece and Spain,60,61 and self-reported general health and access to health-care services have worsened in Greece.60 The number of suicides in people younger than 65 years has grown in the EU since 2007, reversing a steady decrease in many countries.
The Lancet also offers a good country-by-country summary. Overall, it is a chilling read (though hardly surprising if you know the history of austerity policies in Europe in the past quarter-century) that is well worth the time.
Back now to Der Spiegel and their somewhat pointed summary of the Lancet article:
The countries most affected by this have been Portugal, Spain and Greece, the latter of which saw outbreaks of both malaria and HIV after programs for mosquito spraying and needle exchanges for intravenous drug users were axed. There were also outbreaks of West Nile virus and dengue fever. “Austerity measures haven’t solved the economic problems and they have also created big health problems,” Martin McKee, a professor of European Public Health at the London School of Hygiene and Tropical Medicine, who led the research, told news agency AP. … In Greece, the Ministry of Health reported a 40 percent jump in suicides between January and May 2011, compared to the same period the year before. While budget cuts have restricted health care access with increased costs for patients in these three nations, Greece has also seen shortages in medication, hospital staff and supplies, according to the study, commissioned in part by the European Observatory on Health Systems and Policies, a partner of the World Health Organization.
And some Austrian economists think that the Greek government has not done enough budget cutting.
The study authors also accuse European officials of failing to address these issues, writing that “public health experts have remained largely silent during this crisis.” “There is a clear problem of denial of the health effects of the crisis, even though they are very apparent,” lead researcher McKee told Reuters, comparing their response to the “obfuscation” of the tobacco industry.
There is a very clear, obvious reason for this silence. Most health officials in Europe are completely absorbed by the mythology of the benevolent single-payer system. In their world view private insurance companies are evil, while government is always good. Now that austerity has come to town, this world view is suddenly turned upside down. Government is doing irreparable harm to the lives of millions and millions of people, a fact that just does not compute with Europe’s big-government do-gooders.
Europe has gone too far down the road of austerity to ever recover from this crisis. It is doomed to become an economic wasteland with an entire continent living in industrial poverty. Fortunately, America still has a choice, but time is running out.
Young Europeans A Lost Generation
After four years of austerity, with drastic government spending cuts and higher taxes, the euro zone countries should have been on a path back to prosperity by now.
That is, if austerity had been the right medicine.
It was not, though, and there is ample evidence to prove that, both empirically and analytically. Today we can add even more evidence to the pile: in the lastest study of unemployment, Eurostat reports that the euro-zone countries that have taken the hardest austerity beating exhibit the highest unemployment numbers. This is logical to anyone properly trained in economics, and it appeals to common sense. However, Europe’s political elite is apparently as baffled as your average Austrian economist. Euractiv reports:
Employment and Social Affairs Commissioner László Andor called new unemployment rates released by Eurostat yesterday (2 April) “unacceptable” and “a tragedy for Europe”. The eurozone has hit the 12% mark for job-seekers, compared to 7.7% in the USA.
The main reason why the United States does not have a higher unemployment rate is that we have yet to subject ourselves to fiscal torture, a.k.a., austerity. That said, unless Congress does something before the end of this year we are going to face a significant increase in taxes as Obamacare goes into full effect. That will undoubtedly cost us the fledgling recovery we are in now.
Back to Euractiv, which reports that the 12-percent level of unemployment in the euro zone is up from 10.9 percent a year ago:
In total, the number of job-seekers in February jumped to 19,071 million, almost two million more that the previous year. For the EU 27, the total number of unemployed stood at 26,338 million, more that two million more that in 2012. … “Such unacceptably high levels of unemployment are a tragedy for Europe and a signal of how serious a crisis some eurozone countries are now in. The EU and its member states have to mobilize all available instruments to create jobs and return to sustainable growth,” said Employment and Social Affairs Commissioner László Andor, as quoted by spokesperson Chantal Hugues.
This is typical hot air coming from a representative of the bureaucracy that has forced country after country into the dungeons of austerity. Greece has lost a quarter of its GDP in four years under the EU’s boots of an unforgiving combination of spending cuts and tax increases. Portugal has been brought to the brink of social unrest by similar policies, and some provinces in Spain are moving toward secession – again a result of reckless fiscal policies.
Now the same commission that authorized – not to say ordered – the jobs-destroying policies is demanding – and presumably soon ordering – more jobs to be created.
Very tasteful.
On one topic, though, the commissioner’s empty words do have a bit of substance. Euractiv again:
“Young people need more support to acquire the right skills to increase their chances of getting a job and finding vacancies that exist. This is why the Youth guarantee, agreed by EU ministers on 28 of February, must be put in place urgently,” Hugues added.
While a “youth guarantee” won’t create any jobs, the concern for the young is at least a sign that there is some sort of contact with reality in the Eurotarian hallways. Perhaps the good commissioner and his colleagues have seen enough of the surge in activity by the Nazis in Greece to realize what is about to happen in Europe?
The concern for the consequences of high youth unemployment is also reflected in an article in The EU Observer:
Unemployment among the under-25s is particularly high. More than one in two young people are without work in Greece (58.4%) and Spain (55.7%). In Portugal, it is 38.2 percent and in Italy 37.8 percent.
Europe is turning into an economic wasteland, right before our eyes. Years of increasingly invasive regulations and taxes, combined with a work-discouraging welfare state, laid the groundwork for economic stagnation. Then, as the Great Recession came sweeping across the world, deficits opened up in the government budgets of Europe’s over-bloated welfare states. In response, ill-informed and arrogant members of Europe’s authoritarian political elite – the Eurotarians for short – began demanding destructive austerity policies in return for deficit-funding grants and other forms of short-sighted support.
The price for this colossal economic mismanagement of an entire continent is now being paid by the young. The EU Observer again:
The high unemployment rates, particularly among the youth, have led politicians to increasingly speak of a “lost generation” with little prospect of finding work. “We are in a double dip recession. Unemployment is up, up and up. When is growth going to come?,” Bernadette Segol, the head of the European Trade Union Confederation asked recently.
A glimmer of hope, though:
She suggested the persistent focus on austerity measures is leading to “doubts” about the benefits of belonging to the European Union. The eurozone’s growth prospects also compare badly with other regions. While the 17-nation currency area economy is expected to contract by a further 0.3 percent this year, the US economy is expected to grow 1.7 percent in 2013. China’s GDP is growing at about 8 percent a year.
I would not take the Chinese number very seriously. There is still a lot of political inflation in growth numbers coming out of that country. The ruling communist party demands regional leaders to “produce” certain levels of growth year after year. If the regions don’t deliver, their leaders are punished. Therefore, in order to keep their jobs and remain in good standing with the rulers in Beijing, many regions simply report the growth rates that the commycrats want.
That said, the Chinese economy would only have to grow at two percent per year to do better than the European economy – in itself a fact that speaks volumes to the complete and utter disaster that is unfolding in the Old World.
And worst of it all is that it is entirely politically generated. A Godzilla-size government filled with over-paid, politically arrogant bureaucrats listened to Austrian economists who suggested that austerity was the way forward. From the deliberate destruction of economic activity would, the Austrians said, rise a phoenix of prosperity and jobs.
Of course, that would all happen in the long run.
Europe’s young are waiting to learn just how long that run is going to be.
Austerity: Defending the Indefensible
The fight over austerity in Europe goes on. Today the EU Observer reports on yet another desperate attempt by Eurocrats to defend the indefensible:
EU leaders meeting in Brussels on Thursday (14 March) agreed to a more growth-friendly interpretation of deficit rules, but Germany and others insisted that austerity measures will work if given more time.
How much more time? This is the usual argument from economists of the Austrian school. In the long run, they say, austerity will bring the economy back to full employment. The one question they never answer is: how long is that run? To the best of my knowledge, only one economist with an Austrian slant in his scholarship has ever tried to seriously estimate the long run: in his book Unemployment and Macroeconomics, Assar Lindbeck claims that the restoration of full employment according to Say’s law – the core of the Austrian long-run argument – is 100 years.
I wonder how many believers in Austrian economics are willing to run for office on a pro-austerity platform and try to convince people to swallow the bitter pill because in as little as one century, there will be full employment and prosperity will be back to where it was before the current economic crisis.
Perhaps this is the realization that is setting in among some Eurocrats, which is why they are softening their stance – at least superficially. Perhaps. But I fear this is more wishful thinking than anything else.
Back to the EU Observer:
The softened wording – coming three years into the economic crisis, and amid rising unemployment and deepening recession in the eurozone – is being seen as a victory for France and Italy. Speaking after the meeting, French President Francois Hollande indicated that member states were going to be give [sic] more leeway to pursue investment in growth policies. … The summit conclusions note that existing “possibilities” within the rules governing the euro to balance public investment with fiscal discipline “can be exploited.”
This means either of two things:
1. The Eurocrats and the French and Italian leaders still have absolutely no clue as to why there is zero growth in austerity-ridden EU member states.
If this is the case, then Europe is still doomed. The “softer” stance is merely a smoke screen to ease the political pressure on national leaders, who are the ones facing the flak from voters, entitlement consumers and taxpayers. Austerity will continue.
2. The Eurocrats are beginning to realize that austerity is in fact the problem, but they have invested so much political prestige in it that they cannot back down.
In this case, we might actually see an erosion of austerity policies over this year. All that Europe need to catch its breath is austerity cease-fire, but that won’t help the continent get back to growth again. For that, Europe needs a completely different fiscal strategy, one that is built on a structural roll-back of the welfare state, combining targeted tax cuts with deregulations and targeted cuts in government spending.
If there is indeed an austerity cease-fire in the works, behind the political scenes of the EU, then it is in all likelihood going to be replaced with a French-style expansion of government spending combined with higher taxes. That is, namely, the only fiscal policy alternative that is being presented to Europe’s voters.
It is difficult to judge with any reasonable level of confidence which of these two interpretations is correct. According to the EU Observer, however, the first interpretation seems to be the accurate one:
Paris and Rome have been the most vocal about the need to balance austerity with growth and solidarity measures. But while the wording represents an acknowledgement that budget-cutting should not be the EU’s sole focus, austerity is to remain the cornerstone of the approach to the crisis. For his part, European Commission president Jose Manuel Barroso noted before the summit that more time is needed to for the benefits of austerity measures to be felt. German Chancellor Angela Merkel struck the same note. “It is clear that we are in an interim phase,” she said. Referring to data presented by the European Commission during the meeting on competitiveness, Merkel noted that while it showed some “progress” had been made, it also showed that more “time and determination” is needed. When asked about the recent Italian election, where the majority of voters cast their ballots for anti-austerity parties, Merkel said that former Italian leader Mario Monti, who introduced a swathe of cuts, had too short a time in office for the changes to have a positive effect.
The fact of the matter is that there is no economic model out there that can provide you with a time table for when austerity is going to do what. Critics of austerity would obviously not develop such a schedule, while its proponents – almost entirely in the Austrian camp – are against quantitative measures in the first place. Therefore, nothing of what Chancellor Merkel says is rooted in reality. It is purely an attempt at defending the indefensible.
