Tagged: EUROPE

Europe’s Flawed Monetary Policy

Today’s blog will be a short one, just a reminder of some vital statistics relating to the liquidity trap – an important topic now that Sweden, a non-euro member state of the EU, has joined the euro-zone in the trap.

The practical meaning of the trap is a situation where GDP is stalled – in other words the economy is stuck in a recession – and there is so much liquidity available in the economy that adding another euro (or krona) will not make any difference at all. Monetary policy is useless. That is where the euro zone is now, something that ECB leader Mario Draghi is well aware of, as he recently sent out a desperate call for help from Europe’s political leaders. He knows that monetary policy has reached the end of the road and that the only remaining options are within the realm of fiscal policy.

Despite this, Draghi continues to pump out M1 money supply into the euro zone like the recovery actually depended on it. Consider Figure 1:

Fig. 1: Quarterly growth rates. Sources: ECB and Eurostat

LB Euro growth

The blue line, depicting growth in euro-zone M1 money supply, deserves an explanation. The two growth peaks, one at the end of 2005 and one in late 2009, are largely related to the expansion of the euro zone, which went from 12 to 16 member states between 2006 and 2009. (Since then Estonia and Latvia have also joined.) If we adjust for the enlargement, money supply is fairly well in tune with GDP growth – until we get to 2012. That is when the ECB started making promises to buy any and all treasury bonds from “troubled” euro-zone countries, as well as to participate in the massive austerity programs that the EU and the IMF convinced the worst-off member states to adopt.

On top of that, the ECB decided this summer to take its interest rate to zero, and to punish banks – charge a negative interest rate – for depositing cash in overnight accounts with the ECB. This has flooded the euro zone with liquidity; if the theory behind this policy were right, we would see a major upturn in business investments and notable workforce expansion. However, we don’t see that; at best, year-over-year quarterly GDP growth rates show an economy barely struggling to stay afloat.

The inevitable – and from both a Keynesian and an Austrian viewpoint rather obvious – conclusion is that the theory behind the liquidity expansion is flawed. In fact, the ECB is playing with fire: sooner or later the massive supply of liquidity will go look for profitable investment opportunities. So long as the real sector of the economy remains essentially stagnant that search for profit will rapidly climb the speculative hills in the real estate and stock markets.

Again: welcome to life in the liquidity trap.

Europe’s Mounting Recession Worries

As awareness rises that Europe’s economy is going nowhere but down again, anxiety among the political leadership is beginning to catch up. The latest addition to the ranks of the worried is the president of the European Central Bank, Mario Draghi. At a summit with all the euro member states on October 24 he gave a speech that echoed of the panic from 2012:

European Central Bank chief Mario Draghi on Friday (24 October) gave a stark warning to eurozone leaders about the risk of a “relapse into recession” unless they agree on a “concrete timetable” of reforms and spur investments. “The eurozone is at a critical stage, the recovery has lost its momentum, confidence is declining, unemployment is high. Commitments were made but often words were not followed by deeds,” Draghi told the 18 leaders of eurozone countries who gathered for a special meeting at the end of a regular EU summit in Brussels.

He turned his presentation into a good, old show-and-tell by providing his audience with a slide show. The slides show the following:

  • Quarter-on-quarter GDP growth for the euro zone is in an almost perfect state of stagnation since at least early 2012;
  • Unemployment has fallen slightly in the last year, but that decline is in no way different from the decline in 2012; after that decline unemployment shot up significantly;
  • Per-employee compensation growth is the lowest in ten years;
  • Inflation is trending steadily downward, and will flip into economy-wide deflation within six months;
  • While real GDP has remained stagnant since 2008 – with a growth index a hair below 100 – private investment has dropped to an index of 85 with no signs of growth;
  • Government-sector investment has dropped even further, below growth index 80, and continues to decline.

Toward the end of Draghi’s show-and-tell session he inevitably points to euro-zone government debt and deficit ratios. Then, equally inevitably, he turned to the empty toolbox for macroeconomic solutions to the zone’s macroeconomic problems:

To get the economy growing again, Draghi said leaders should not count only on actions by the ECB, but also do their share: boost investments and implement reforms. He welcomed plans made by the new EU commission chief, Jean-Claude Juncker, to raise private and public money for €300 billion worth of investments for 2015-2017. Draghi alluded to Germany by saying that countries “with fiscal space” should boost internal demand in order to help out the rest of the eurozone.

On the one hand Draghi keeps bashing the member states for not complying with the Stability and Growth Pact debt and deficit rules; on the other hand he demands some sort of help from states in activating the economy again.

Evidently, the knowledge of macroeconomics is rather limited in the higher layers of the European political and economic leadership. That is one of the big reasons why I stand by the same forecast that I have put forward all year long: Europe is in a permanent state of economic stagnation – and there is only one way out of it.

Bad Economic News, Part 2

Yes, there is more bad economic news coming out of Europe. Industrial production fell by 1.9 percent in August compared to the same month last year. Germany, the largest European economy, saw a year-to-year decline of 2.8 percent, but what is even more worrying is that German industrial production fell by 4.3 percent from July 2014 to August, the second highest month-to-month drop in the EU.

Another worrying number comes out of Greece: a decline of six percent year-to-year. While the month-to-month decline is not dramatic i itself at -1.6 percent, the Greek economy has seen industrial production fall month-to-month in five of the past six months. Not a good sign at all.

Furthermore, Sweden, a country filled with large exporting manufacturers, has seen a month-to-month decline in four of the past six months, and five of the past six months on a year-to-year basis.

As far as industrial production goes, Europe is not recovering. At best, stagnation continues. And things don’t look much better on the inflation front, according to Eurostat:

Euro area annual inflation was 0.3% in September 2014, down from 0.4% in August. This is the lowest rate recorded since October 2009. In September 2013 the rate was 1.1%. Monthly inflation was 0.4% in September 2014. European Union annual inflation was 0.4% in September 2014, down from 0.5% in August. This is the lowest rate recorded since September 2009 In September 2013 the rate was 1.3%. Monthly inflation was 0.3% in September 2014.

Despite a frenzy of liquidity expansion, the European Central Bank has not been able to reverse course. Europe as a whole is still heading for deflation. Bulgaria, Greece, Hungary, Spain, Poland, Italy, Slovenia and Slovakia are already in deflation territory. Only five EU member states, Latvia, the U.K., Austria, Finland and Romania have an inflation rate between one and two percent, the highest being 1.8 percent in Romania. The rest of the EU is stuck with zero to 0.8 percent inflation.

No wonder there is a growing conversation about the ailing currency union:

The eurozone appears to have come back onto the markets’ radar amid low inflation, poor economic news from Germany, and Greece’s bailout exit plans. Greece’s long-term borrowing costs went above 8 percent on Thursday (16 October) – their highest for almost a year – as investors took fright at the fragile political situation in the country. The government in Athens has tried to shore up popular support by suggesting it will exit its bailout programme with the International Monetary fund more than a year early. But the recent announcement spooked investors, unconvinced that Greece can stand alone.

The unrelenting stagnation of the European economy is bad news in itself for the sustainability of the currency union. If Greece exits, it will de facto but not de jure abandon the currency union. Moreover, things do not get better when Germans cluster together and sue the ECB for its allegedly illegal expansionary monetary policy:

[Critics] which include Bundesbank president Jens Wiedmann, say that the programme goes beyond the ECB’s mandate of maintaining price stability across the 18-country eurozone. They also say that knowing the ECB will buy their debt could make EU chancelleries less prudent. The plaintiffs had filed their case to the German Constitutional court in Karlsruhe, which in February referred the case to the European Court of Justice. In court, Gauweiler’s lawyer, Dietrich Murswiek, described the ECB scheme as an “egregious extension of [the bank’s] powers” which was designed to “avert the insolvency of member states”.

The ECB is not going to reverse course. They are stalwartly convinced that if money supply just keeps expanding, then eventually they can cause a shift from deflation to inflation. So long as they keep expanding money supply, interest rates will trend to zero. So long as interest rates dwell in that territory, more and more investors will turn to stock markets and real estate for profitable investments. This increases the volatility of those markets, without any gain in the real sector of the economy.

GDP at zero growth, double-digit unemployment, prices deflating, money supply exploding. Yep. This can’t go wrong.

But the budget deficit, folks – the budget deficit is now under control. Aren’t you happy?

When young, third-generation unemployed Europeans are getting tired walking up and down the streets looking for the jobs that aren’t there; when struggling former middle-class families have mopped up the scraps of what used to be a promising future; when the patients in austerity-ravaged hospitals are caught between untreated pain and calling the nurse in vain; when they all want to catch a break in their struggle to make ends meet in their new lives in industrial poverty; all they have to do is look up in the sky and see the shining budget balance spreading its glory over the economic wasteland.

In Search of Economic Leadership

The global economy is gradually becoming more disparate. The United States and Japan are pulling ahead while Europe is in a permanent state of stagnation and China is likely going to experience its first, real industrialized recession ever.

In this structurally changing world there is a need for thought leadership, both nationally and globally. We have institutions that, at least to some degree, where created for that purpose. The International Monetary Fund is a good example. Unfortunately, the IMF is not taking a lead, echoing instead much of the same analysis and arguments heard from the national governments whose macroeconomic ineptitude created this long crisis in the first place.

A good example of the Fund’s attitude is put on display in a new report where the managing director of the IMF notes that:

the IMF’s World Economic Outlook had trimmed its growth forecasts for the global economy. “In the face of what we have called the risk of a new mediocre, where growth is low and uneven, we believe that there has to be a new momentum and that is what we will be discussing with the membership in the coming days. “This new momentum—with, hopefully more growth, more jobs, better growth, better jobs—is certainly something we would call on the membership to produce,” Lagarde declared.

So what is the IMF’s idea on how to get the world economy growing again? Well, Lagarde said…

the IMF has noted growing country specificity in its analysis, where within each group of economies some countries are progressing and others are lagging behind. She said the IMF recommends action in three particular areas. Monetary policy where, particularly in the euro zone and Japan, more accommodative monetary policy is needed going forward to support the economy.

This is actually the wrong recipe. Europe is already profusely accommodating with a stretched-to-the-limit monetary expansion totally unbecoming of what the founders of the ECB had in mind. Accommodation policies are in fact so bad that the euro zone is now over-saturated with liquidity and interest rates on bank overnight lending have gone negative.

None of this has helped. There is no sign on the European horizon that real-sector activity has picked up. Instead, it looks very much as though Europe has now entered its own version of the Japanese decade. After almost 15 years of a combination of stagnation, deflation and liquidity saturation, the economy has now finally entered a recovery phase. But there is no doubt whatsoever that the very protracted monetary expansion period put a lid on real-sector activity, precisely the opposite of what was intended.

The mechanisms that brought about the Japanese decade were those that Keynes specified when he defined the liquidity trap. The mechanics of the trap are important, but a topic for a separate article. What is important here is that IMF managing director Lagarde no doubt disagrees with the Keynesian analysis and, despite lack of evidence in her favor, suggests that yet more liquidity supply would get the European economy going again. That does not bode well for the Europeans.

But what about fiscal policy? Well, says the report,

more growth-friendly measures can be put in place as outlined in the IMF’s latest Fiscal Monitor that called attention to fiscal policies adjusted to support job market reforms.

No word about the need for lower taxes, more reforms promoting private deliveries on government promises. No word on how structurally over-bloated welfare states have put an unbearable burden on the welfare state in the vast majority of the world’s industrialized nations.

The IMF should be a thought leader on these issues. Instead, it has become a service organization for countries that have become stuck in a permanent state of anemic growth, recommending 20th century solutions to 21st century problems.

Europe Trapped in Welfare Statism

Europe keeps struggling with its impossible balanced-budget endeavor.

In a desperate attempt to save the welfare state while also balancing the government budget they keep destroying economic opportunity for their entrepreneurs and households. This leads to panic-driven spending cuts combined with higher taxes, the worst alternative of all routes available to a balanced budget. The reason – and I keep emphasizing this ad nauseam – is that they desperately do not want to remove the deficit-driving spending programs.

To break out of the shackles of their self-imposed welfare-statist version of austerity, some European politicians have suggested that the EU needs to revise the rules under which member states are brought into compliance with the Union’s balanced-budget amendment. This is not viewed kindly among the Eurocrats in Brussels. From Euractiv:

The European Commission will not let EU budget discipline rules be flouted, incoming economic affairs commissioner Pierre Moscovici said on Monday (29 September), days after his former colleagues in the French government said Paris would again miss EU targets. Last year, European Union finance ministers gave Paris an extra two years to bring its budget deficit below the EU ceiling of 3% of national output after France missed a 2013 deadline in what is called the ‘excessive deficit procedure’. But earlier this month, the French government said it would not meet the new 2015 deadline either and instead would reduce its budget shortfall below 3% only in 2017.

They certainly could meet the deadline, and they could do it even faster than proposed. All they would need to do would be to chainsaw the entire government budget until what is left fits within the three-percent rule. However, they know they cannot do that, for two reasons. The first is simple macroeconomics: so long as you do not cut taxes, any spending cuts will mean government takes more from the private sector and, relatively speaking, gives less back. That reduces private-sector activity and thus exacerbates the recession.

The second reason is that when half or more of the population depend on government for survival, you can only do so many spending cuts before they set the country on fire. The solution is a predictable way out of dependency, one that gives people an opportunity to become self sufficient without suffering undue, immediate financial hardship. That excludes tax hikes and sudden spending cuts – but on the other hand it mandates structural spending cuts that permanently terminate entitlement programs.

However, this solution to their unending economic crisis keeps eluding Europe’s policy makers.

Euro Left Stalls Free Trade Deal

I am a strong supporter of the United States armed forces, which are the world’s most powerful force for liberty. But war and other armed conflicts are costly in more ways than one; there is a much more efficient way to break down tyranny.

Economic freedom.

The world’s largest authoritarian regime, China, is slowly but steadily reforming in the right direction. The underlying force moving China in the right direction is, plainly, economic freedom. When people are free to own property, be entrepreneurial, build wealth and pursue a lifestyle above what a state-run economy can provide, they will eventually demand political freedom as well. The Chinese leaders know this, but they also know that political freedom can be destructive if introduced before a country is ready for it. They wisely and fearfully look at what happened in Russia after the collapse of the Soviet Union, where political freedom preceded economic freedom – and economic freedom was introduced haphazardly.

But the benefits of economic freedom are not just limited to authoritarian nations. Other countries where government plays a destructively large role can also benefit substantially from a new dose of economic freedom. As I explain in my new book Industrial Poverty, Europe is going backwards as an economy because of persistent efforts by the political leadership to preserve the welfare state and all its big spending programs – not to mention its high taxes.

Economic freedom comes in many forms: deregulation, termination of spending programs, tax cuts… and free trade between sovereign nations. Often, free trade can be an inroad for economic freedom to open up heavily regulated economies. In Europe’s case, free trade with more regions of the world could give some entrepreneurs opportunity to thrive when the domestic economy is holding them back.

Therefore, it would be good if the EU could ratify its pending free trade agreements with the United States and Canada. Unfortunately, it does not look like that is about to happen, at least any time soon. And the reason is a section of the trade agreements that protects private investments under certain conditions. The EU Observer reports:

Provisions allowing companies to sue governments to protect their investments must be taken out of an EU-Canada trade agreement (Ceta), German chancellor Angela Merkel’s coalition partners have said. Speaking in the Bundestag on Thursday (25 September), Sigmar Gabriel, who leads the centre-left SPD, noted that “the chapter regarding investment protection is not approvable,” adding that “the last word hasn’t been spoken yet”.

So what is this investment protection that the European left is so passionately opposed to? Here is how the Office of the United States Trade Representative explains it:

[The U.S. government] seek to ensure that Americans investing abroad are provided the same kinds of basic legal protections that we provide in the United States to both Americans and foreigners doing business within our borders.  One element we use to achieve that goal is investor-state dispute settlement (ISDS).  ISDS creates a fair and transparent process, grounded in established legal principles, for resolving individual investment disputes between investors and states. … Over the last 50 years, nearly 3,200 trade and investment agreements among 180 countries have included investment provisions, and the vast majority of these agreements have included some form of ISDS.  The United States entered its first bilateral investment treaty (BIT) in 1982, and is party to 50 agreements currently in force with ISDS provisions.

Another point made by the U.S. Trade Representative is that the ISDS does not allow any government regulations at all. As anyone even remotely familiar with the United States economy would know, that is absolutely false. We have our own (un-)fair share of regulations. All that the ISDS does is protect private investors from arbitrary, authoritarian government intrusions into the realm of free enterprise.

The European interpretation of ISDS is a bit less forthright. The EU Observer again:

celebrations are likely to be muted now that the [Canada-EU trade] agreement, which is widely seen as a trial run for the ongoing trade talks with the US, faces a number of obstacles before it is ratified. The mechanism, known as investor state dispute settlement (ISDS), allows companies to take legal action against governments if their decisions risk undermining their investments. Critics of ISDS claim that investor claims can prevent governments from passing legislation in fields such as environmental and social protection, enabling corporations to claim potentially unlimited damages in “arbitration panels” if their profits are adversely affected by new regulations.

The part about “unlimited damages” is patently absurd. It would require a forecast for the investment in question that credibly predicts endless profits. But you do not need to study finance or economics to realize that such forecasts simply do not exist. That would require something called “perfect foresight”, an ability of economic agents to predict the world with absolute certainty.

But as the EU Observer reports, reason and good analysis do not prevent leftist hardliners from acting according to their beliefs:

Deputies from the centre-left Socialist and Democrat group and the Liberals have indicated that ISDS would have to be left out in order for them to support Ceta, while the Green and far-left GUE factions have already come out against the treaty. … In a statement on Thursday, the European trades union congress (ETUC) said that it would not support Ceta if ISDS remained part of the agreement. The ETUC also called on officials to include a list of sectors that would not be liberalised by the agreement and for Canada to sign up to the International Labour Organisation Conventions.

The EU Commission appears to be determined to complete the trade agreement with Canada. However, the left-bound winds in the EU Parliament are a guarantee for a protracted battle. This is unfortunate, since the EU is in dire need of strengthening its economy. In lieu of advancements for economic freedom inside the EU, a couple of trans-Altantic free-trade agreements would be of great help.

Life in the Liquidity Trap

In Europe, frustration is growing almost by the day over the endemic recession. Unemployment is an unending problem, especially among the young, which at least in part explains the rise of the EU skeptics all over the continent. The only solution to the perennial crisis that Europeans seem to be able to come up with is to keep growing government, an idea that would only compound the continent’s structural economic problems and send them further into the territory of industrial poverty and stagnation.

Unsurprisingly, earlier this month the European Central Bank weakened its growth forecast. There is absolutely no doubt that this was an unwelcome piece of news at the time, and frustration among the EU leadership over the stagnant economy has only been growing since then. This is especially true of the central bankers at ECB, an institution that is making increasingly risky policy decisions the longer the crisis persists. The EU Observer explains:

European Central Bank (ECB) chief Mario Draghi has said he is prepared to use more unconventional measures to spur growth in the eurozone. “We stand ready to use additional unconventional instruments within our mandate, and alter the size and/or the composition of our unconventional interventions should it become necessary to further address risks of a too-prolonged period of low inflation,” he told MEPs on Monday … He said loose monetary policy will only be stopped “when we have complied with our mandate” which is to keep inflation at close to 2 percent. Currently inflation is at 0.4 percent.

It is important to remember that the ECB was created in the late 1990s as an institution of monetary conservatism. Its policy goal was limited exclusively to the preservation of price stability. It had no authority to provide funds to governments that ran deficits in excess of the balanced-budget requirement in the EU constitution (a.k.a., the Stability and Growth Pact). It was also beyond the bank’s realm of authority to fight unemployment, which meant a ban on trying to stimulate GDP growth.

Today, the ECB has broken through every boundary on its policy mandate. It has participated in vast funding schemes for deficit-ridden states in the euro zone. It has issued a guarantee to buy an unlimited amount of Treasury bonds issued by any “troubled” euro-zone state, thus de facto making a promise for future monetary expansion way beyond what the Federal Reserve ever did during the height of its QE programs.

The ECB has also cut interest rates on overnight liquidity deposits that banks make with the ECB. These interest rate cuts have gone so deep that they are now negative: banks literally have to pay the ECB to accept deposits.

The last move reeks of desperation. But doing all this has not been enough of a monetary expansion to get the EU economy going, so the bank added a program for favorable lending that was supposed to provide funding for entrepreneurs eager to make massive expansions to their operations – all they lacked was the cash to do it.

Or so the ECB thought. The EU Observer again:

The ECB has taken a series of steps since the summer to try and boost the economy and head off deflation, including interest-rate cuts and cheap loans to banks. In early September the Frankfurt-based bank cut rates further and announced it planned to buy asset backed securities (ABS). However its lending programme was deemed to have faltered when 255 eurozone banks last week only borrowed €82 billion of the €400 billion available.

And why did they not borrow more? Well, according to Draghi banks are afraid to look less solvent than they must in the upcoming “stress tests”. There is actually a grain of truth in that: banks that borrow but cannot lend won’t make any money on the interest margin. However, what Draghi fails to mention is that banks cannot find people and businesses to lend to simply because Europe’s families and entrepreneurs live in a stagnant economy. So long as stagnation prevails there will be no prospect of profits on new business investments.

In fact, according to Eurostat national accounts data, gross fixed capital formation – the national accounts variable that reports productive business investments – has been falling almost uninterruptedly since 2008. In fixed prices the decline is 16.8 percent from ’08 to 2013.

By contrast, data from the U.S. Bureau of Economic Analysis shows that businesses in the United States increased their investments in 2013 over 2008. The increase was a marginal 1.9 percent, adjusted for inflation, but that is a major sign of health relative European business investments.

To make the difference even more clear: in Europe gross fixed capital formation has decreased in five of the past six years since the Great Depression started; in the United States it has increased in four of the past six years.

No wonder Mario Draghi is getting desperate. But he has now effectively run out of options, proving what I said already in early June: Europe is now officially in the liquidity trap. That means two things: monetary policy is completely impotent and there will be no way out unless and until legislators reform away the enormous and very burdensome welfare state. And those reforms will not happen. So long as the welfare state remains, people are massively disincentivized from working and incentivized to live on welfare. The government budget is structurally in deficit and the massive supply of liquidity in the economy makes it very cheap for government to do nothing about that deficit.

I have said it before, sometimes frustratedly, that Europe is becoming the next Latin America, an economic wasteland filled with the remains of squandered prosperity. But while parts of Latin America are rising again (think Chile and Brazil) Europe continues its slow  decline. And the ECB’s desperately-cheap-money policies are not exactly helping.

EU Fails the Young Unemployed

Scottish voters narrowly said no to independence. This was the better outcome: an independent Scotland governed by the Scottish National Party and Labour would have build a full-fledged Scandinavian welfare state, paid for in good part with revenue from oil taxes. It would have been a bad deal for the Scottish people, especially since they were apparently planning on staying part of the EU.

By remaining part of the United Kingdom the Scotsmen will be better off the day Britain leaves the EU. British taxes are still at the lower end in Europe, its welfare state is not quite as elaborate as in, e.g., Scandinavia and there is still a tradition of individual responsibility and opportunity left there. By seceding from the EU, Britain would have a future at least as bright as that which lies ahead for the United States once we are through this laggard recovery and back in full gear again.

In fact, the list of reasons for member states to leave the EU grows longer almost by the day. The latest addition is the so called “youth guarantee”, a feeble and typically statist idea to reduce youth unemployment. From the EU Observer:

Outgoing EU commissioner for employment Laszlo Andor on Wednesday (17 September) defended EU-wide efforts to tackle youth unemployment amid critical remarks from MEPs. Andor told deputies that the so-called youth guarantee “is well on track and is already bringing results”. He noted many of the programmes in the policy are set for adoption this year. He also said national authorities expected to send the commission “concrete information” by the end of the month on the estimated number of young people who stand to benefit. Submitting and getting the commission to adopt operational programmes is important because it entitles member states access to EU funding.

This is a good summary of what the “youth guarantee” is all about. The EU taxes its citizens (visa member states) then spends the money on putting young men and women on subsidized employment. Employers get cheap labor that they could not afford without the subsidy – and cannot afford when the subsidy ends – while government can formally count the tax-sponsored “employees” as no longer unemployed.

This is a classic example of “active labor market policy”, ALMP. Like most other bad economic ideas it has its roots in Sweden, which by the way at 27.6 percent has the eighth highest rate of youth unemployment in the EU (according to Eurostat, second quarter 2014).

The EU Observer again:

So far only France and Italy fit the description. Launched last year, the guarantee is the EU’s response to persistent record high unemployment rates among the under-25s. It aims to find young people work or training within four months after graduation or after being laid off. “In principle the youth guarantee is a very positive thing for young people, but national leaders lack the political will and ambition to properly implement it,” Allan Pall, secretary general of the Brussels-based European Youth Forum, told this website.

Of course they do. The EU has created this and expects that member states share the cost for it. First Brussels strong-arms member states into jobs-destroying austerity programs – thus saving the welfare state at the expense of full employment – then Brussels comes back and tries to mandate that those same member states spend money on artificial, tax-subsidized employment for the young men and women who could not find jobs because of austerity.

Back to the EU Observer:

Meanwhile, the jobless trend remains stubborn with one in two youths still unable to land a job in either Greece or in Spain. Spain (53.8% in July 2014) now has the highest youth unemployment numbers, overtaking cash-strapped Greece (53.1% in May 2014). Italy, Croatia, Portugal, and Cyprus are not far behind. Overall EU numbers indicate that more than one in five young people still cannot find a job.

Here are the numbers from Eurostat for the EU states that so far have reported youth unemployment for the second quarter of 2014:

2014Q2
Spain 53.1
Greece 52.7
Italy 41.5
Croatia 39.8
Portugal 35.6
Cyprus 35.2
Slovakia 30.9
Sweden 27.6
Ireland 26.8
Finland 25.6
Belgium 23.1
Poland 23.1
Slovenia 22.3
Bulgaria 21.9
France 21.5
Lithuania 21.3
Latvia 21.1
Hungary 20.0
Estonia 18.4
Britain 16.0
Czech Rep. 15.5
Malta 12.4
Denmark 12.3
Luxembourg 12.0
Netherlands 10.6
Germany 7.9

It is worth noting that the Greek unemployment rate has fallen almost ten percentage points in two years. A good part of the reason, though, is that young Greeks emigrate, even to such formerly deplorable economies as Romania.

Overall, the youth unemployment rate in EU-28 is 21.7 percent and 22.9 for the 18-state euro zone. By comparison, America’s youth unemployment rate has fallen to 13.5 percent, down 3.1 percentage points in a year. That is twice the reduction in the EU-28. But more importantly, of the 26 reporting EU states, seven saw youth unemployment rise in the past year, and that includes Germany. The Netherlands reported unchanged unemployment since second quarter 2013 and only eight states reported a decline bigger than that in the United States.

To further highlight the lack of an EU-wide trend of declining youth unemployment, please note that almost one in three young men and women who went from unemployment in Q2 of 2013 to a job in Q2 of 2014 lived in Britain. In Q2 of 2013 Britain was home to only 9.3 percent of all the unemployed youth in the EU, a fact that reinforces the point that Britain, with its strong currency, moderate taxes and Anglo-Saxian economic and social traditions, does not belong in the European Union. It belongs in a trans-Altantic relationship with its culturally proximate friends in North America.

As for the rest of the EU member states, they would be well advised to develop an orderly plan for dissolving the super-state structure before Marine Le Pen becomes the next French president and destroys the euro by reintroducing the franc.

Rise of the EU Skeptics

The political momentum has definitely turned against a unified Europe. Exhibit #1 is the referendum in Scotland:

Travelers to Scotland, beware. In buses, pubs and street rallies, people have only one thing on their mind these days: Scottish independence. They wear bumper stickers with “Yes” or “No thanks”, dye their hair white and blue, sing folk songs and hand out leaflets. Posters are everywhere. For the yes camp, it is about a nation going its own way, breaking away from a political elite in Westminister. To “naysayers”, it is a foolish decision instigated by populists, that will ruin two nations for generations to come. Both camps are virtually equal, with pollsters saying the referendum on Thursday (18 September) can go either way. The referendum will also have an impact on other independence-minded regions in the EU, such as Catalonia in Spain and Flanders in Belgium. Scotland will set a precedent for how Brussels deals with territories breaking off from an EU member state.

Alas, Exhibit #2, the independence movement in Catalonia:

Around 1.8 million Catalans took to the streets of Barcelona on Thursday (12 September) calling for the right to vote on independence. The demonstration marks the beginning of a critical period in Barcelona-Madrid relations. Dressed in red and yellow – the national colours – people shouted “in-inde-indepedencia!” and “volem votar!” (we want to vote) while waving the Catalan independence flag. Almost a quarter of the 7.5 million Catalans celebrated Catalan National Day – La Diada – in the streets of Barcelona, according to the local police forces. The day commemorates Catalonia’s loss of independence in the War of the Spanish Succession in 1714, exactly 300 years ago. Earlier this year, the Catalan Parliament voted two-thirds in favour for a consultative referendum to be held on 9 November, asking the Catalans “whether Catalonia is a state” and “if yes, whether that state should be independent”. The central government in Madrid, however, has said that it has ”all the mechanisms in place” to prevent such a vote.

Catalonia is the most prosperous region in Spain, having paid a big price for the country’s ill-designed austerity measures. It would be foolish of the Madrid government to try to suppress the Catalonian independence movement. A much better way forward is to recognize the undercurrent of anti-EU sentiments that also fuel this independence movement. The harsh austerity policies over the past couple of years where imposed on Spain by Brussels; if Spain was independent of the EU or at least had the backbone to stand up to their mad policy ideas the Catalonians would have much less of a reason to want to secede.

Anti-EU sentiments also played a major role in Sweden, our Exhibit #3. Last Sunday’s election sent nationalist Swedish Democrats skyrocketing to a position as the nation’s third largest party. In addition to their criticism of the current immigration policies in Sweden, the SD party is the only outspoken party against Swedish EU membership. They loosely resemble other EU-critical parties, such as Exhibit #4 in Germany:

Germany’s anti-euro party Alternative for Germany (AfD) got a further boost on Sunday (14 September) entering two more state parliaments following regional votes. “We are a party that is renewing the political landscape in Germany where people turn their back to traditional parties that have lost their profile,” said AfD party head Bernd Lucke. “One can’t deny it anymore: the citizens are thirsting for political change,” he added. Preliminary results suggest the right-wing party secured around 10.6 percent of the vote in Thuringia state and 12.2 percent in Brandenburg. The two states are traditionally seen as a power base of support for Chancellor Angela Merkel’s Christian Democrats. Founded 19 months ago, the AfD manifesto calls for a scrapping of the euro in favour of the German Deutsche Mark. The eurosceptic party has strongly criticised the eurozone bailouts and opposes the concentrated power base of the EU institutions in Brussels.

So long as the economic crisis continues it will be close to impossible for pro-EU politicians to gain back the momentum. And, as I have repeated ad nauseam, the crisis will not end until they structurally reform away the welfare state. Which, again, won’t happen.

The sad part of this is that the movements trying to roll back the EU for the most part want to do it to protect their national welfare states from EU-imposed austerity. The only real exception is UKIP which fundamentally is a libertarian party. But everywhere else the goal is to localize control over fiscal policy so that they can perpetuate their own version of the standard, redistributive welfare state.

In short: the way things are going now it is a safe bet that the EU will be history long before the European welfare state.

Industrial Poverty – New Book!

Today my book Industrial Poverty: Yesterday Sweden, Today Europe, Tomorrow America is officially available. You can order it directly from the publisher or through Amazon. An ebook version is on its way out, too, but why wait when you can get the real thing now?

In his foreword, Cato Institute senior fellow Michael Tanner writes:

Larson provides convincing evidence that the welfare state, and misguided policy choices by Europe’s governments, turned a regular recession into a systemic economic crisis. During the seemingly prosperous first years of the European Union, few people could foresee the problems ahead, and even fewer viewed these developed countries as struggling with a form of poverty. However, during this stubborn economic recession, GDP growth in many European countries slowed (or even stopped), private consumption stalled, government spending surged, and unemployment rates among the young increased. This book helps us to better understand the current situation facing Europe today, one far more complicated than the austerity versus stimulus dichotomy that is so often imposed.

And that is the most important point I hope readers will take away from this book. Europe’s crisis is not just a recession – it is the result of decades of bad policy compounded slowly into an ultimately unbearable burden for the private sector. There is plenty of evidence for this. Europe’s decline during the Great Recession is not new, but the logical continuation of four decades of slow but inevitable stagnation. The U.S. economy is on a similar, but more recent trajectory and still has the dynamics to recovery (albeit modestly) from the recession.

With slower growth it becomes more difficult for Europeans (and Americans) to increase, and eventually maintain their high standard of living. Stagnant economies also produce less surplus that can be used for aid to poor nations, either through government or through charitable donations. Trade also suffers negatively, hitting primarily low-income nations first.

Another side of economic stagnation with global repercussions is high, persistent unemployment. More than one in five young men or women in the European Union is unemployed. Overall unemployment remains stubbornly above ten percent. While the United States is experiencing declining unemployment rates, job growth is still far from as strong as it normally would in a recovery. With unemployment remaining high, it becomes increasingly difficult for Europe to provide opportunities for immigrants from poorer parts of the world.

With the two largest economies in the world tentatively on a path to long-term stagnation, the consequences for the rest of the world could be serious, especially in terms of the ability to provide disaster relief, aid and development funds. This paper suggests that the long-term stagnation is the fault of the industrialized countries. Given that the people of the prosperous nations of the world have a moral obligation to help those in abject poverty, it is immoral to fail to address the cause of long-term stagnation.

In other words, what is happening in Europe is not just a matter for the poor 500 million souls who live there, but for the rest of the world. It is of vital importance to all of us that Europe today, and the United States very soon, get their macroeconomic act together and remove the hurdles to growth and prosperity that the welfare state has created.

Yes, the welfare state. It is the root cause of Europe’s many problems. Their crisis is, to put it plainly, self inflicted. Over its more than half-century long life, the welfare state has fundamentally transformed large parts of the economic landscape. It has changed work incentives by means of both taxes and entitlements. Income-security programs, much larger in Europe than in the United States, have weakened people’s motives for participating in the workforce. The redistributive nature of the income-tax system discourages entrepreneurship and the pursuit of high-end professional careers.

Self determination and innovation are replaced by sloth and indolence.

This is a new perspective on the European crisis, a perspective that I spend my entire book explaining. The usual question “why isn’t anyone else saying this?” is easily answered: it is only recently that we have access to enough information, enough economic data, to piece together a hypothesis about the welfare state’s long-term effects on its host economy. Especially in view of the Great Recession it is now possible to study broader economic trends and the long-term macroeconomic effects of the institutions that constitute the welfare state. In this new wealth of information, a pattern is emerging, suggesting that while the welfare state can have short-term positive effects on economic growth, its long-term effects are undeniably negative.

In particular, it now appears to be possible to identify a “point of no return” beyond which the welfare state pushes an economy over the line, from the realm of GDP growth into perennial stagnation.

For more on that, and for more on what life looks like under Industrial Poverty, buy my book today!