As Europe’s troubled welfare states are sinking even deeper into unemployment, zero growth, industrial poverty; as an entire continent slowly transforms itself from the home of prosperity into an economic wasteland; their political leaders show over and over again that they are entirely inept at saving the continent. Today we get yet more evidence of this from an article in the EU Observer:
The European Commission has proposed strengthening the social side of its eurozone governance amid fears the EU is in several member states becoming a byword for austerity and joblessness. In an ideas paper published Wednesday (2 October), social affairs commissioner Laszlo Andor said a scoreboard should be established to keep track of unemployment and social data in member states.
This data already exists. It is generously available, especially to anyone who bothers to check the Eurostat website.
This would help “detect trends” in joblessness, people at risk of poverty, young people in neither training or education, inequality, and household income at an early stage.
Again, those trends are readily available at Eurostat. Unemployment data is there in large quantities, annually or quarterly, seasonally adjusted for trends or not adjusted for the immediate “raw” image. As for the other numbers, most of it can be found under the “social inclusion” tab or again under labor market data.
And then, of course, we get to the magic word “inequality”, a sacred word in leftist dictionaries. It is used to motivate virtually everything the welfare state does, but expands beyond direct income redistribution. “Inequality” motivates steeply punitive marginal income taxes; it motivates preferential treatment for people with certain racial and ethnic backgrounds; it is used to excuse government incursions into the labor market, into education, health care… practically every aspect of our lives.
Every common-sense minded person knows that “inequality” is a fantasy, a made-up concept with no real anchor in reality. More on that later, in another article; for now, let us get back to the EU Observer and their report on what the EU commissioner for social affairs is up to:
The scoreboard is to be integrated into the EU’s budgetary cycle – the European semester – so that national policy recommendations made by Brussels would take this data into account. “This should serve as an analytical tool, allowing for the better and earlier identification of major employment and social problems,” says the commission.
Really? How long did it take Brussels to detect that Greece was plunging into a depression chasm? How long did it take them to detect that Spain was following right on Greece’s footsteps? How long did it take the Eurocrats to realize that 20 EU member states have a youth unemployment 20 percent or higher? Regular readers of this blog have known all this for a long time. How hard can it be for the very well paid flunkies in the hallways of the EU headquarters to supply the EU Commissioners with the same data that I report here?
The EU Observer again:
The key indicators would focus on “employment and social trends that can severely undermine employment, social cohesion and human capital.” However, member states will not be forced to changed the policies in these areas if the scoreboard – due to be established in November – shows up failings. There will be “no automatic consequences” from the scoreboard results but it should help policy-makers to “focus better,” said Laszlo. He acknowledged that “many would like to see more [ambition]” but pointed to the “limitation” of the EU treaties where social and employment policy is in the hands of member states.
This sounds exactly like a set-up for a future EU power grab. If member states do not reduce income “inequality” and if their scores on other fronts under this new proposal do not improve as the Eurocrats want, then it is only a matter of time before the EU takes charge of a chunk of the welfare state. This of course means taxation as well as entitlement spending, elevating what is already a dysfunctional, ailing, unsalvageable social and economic system to a new, even more irresponsible level of government.
There is actually a give-away in the EU Observer article to this effect:
Laszlo’s paper also says the commission … will also present plans in 2014 on simplifying the granting of unemployment benefits for those looking for work in another member state. The paper comes as the eurozone faces record unemployment rates as it continues to focus on austerity measures as a way out of the economic crisis. The latest figures, for August 2013, show 19.2 million people are without jobs in the eurozone. Of these, 3.5 million (24 percent) are young people. The figures are starkest in Greece, where 63 percent of young people have no work.
So the only tangible consequence of this new initiative is an EU initiative to make it easier for people on unemployment to move across member-state borders. That is all fine and dandy in and by itself, but when put in the context of the next sentence in the article, this initiative is exposed for what it is: the Eurozone, says the article, “continues to focus on austerity measures as a way out of the economic crisis”. But as everyone with a common sense knows by now (and readers of this blog have known for two years) the austerity policies forced upon Greece, Spain, Portugal, Italy, Cyprus and to a lesser degree France have only made matters worse. These countries are farther away today from full employment than they were when the austerity campaign started.
We simply have to assume that the Eurocrats in Brussels are aware of this. (If they aren’t, then Europe is in very, very deep trouble…) Given this, the statement by EU social affairs commissioner Laszlo reinforces the impression that this is just another power grab by Brussels. He knows that austerity is making Europe weaker and poorer, yet his proposal is not designed to force a change in poverty-increasing policies. All he wants to do is put some already-existing data in a new report.
If he was really concerned about reducing poverty and unemployment, he would give this new scoreboard some real influence. He would say that when a country scores too poorly, it has to reverse all its policies and move in the opposite direction. But this is not happening – and so for a reason. The commissioner knows that the only way he can reverse Europe’s slide into industrial poverty is by taking on austerity.
And that, he won’t do. Therefore, the only tangible outcome of this will be a centralization of entitlement programs, starting as mentioned with more EU control over unemployment benefits. But more EU control over Europe’s dying welfare state will not rejuvenate that behemoth. All it will do is create a false impression of the EU doing something for “the poor”.
On September 20 I explained the welfare-state debt game, noting that Europe’s welfare states have put themselves in a very dangerous situation. Their debt levels are rising steadily, despite years of attempts by the EU to get budget deficits under control, and the European Central Bank has decided to pump out whatever amount of money they think is needed in order to avoid debt default among euro-zone states. The money pump is hooked up to a bond buyback program where the ECB promises to buy every single Treasury bond issued by a troubled welfare state, any time, anywhere.
In the short term, this program is theoretically going to prevent a “run on the bond” where investors lose confidence in the Treasury bonds from one country and dump them onto the market. In practice, this program has cemented high interest rates for troubled welfare states and could even push international rates up over time: after all, why should you buy a Swiss Treasury bond at little over one percent interest when the ECB gives you an ironclad guarantee for a Greek bond at ten percent interest.
Over time, though, another threat looms, namely inflation. The ECB is already pumping out new M-1 money at a rate close to eight percent per year; since the euro-zone economy is not growing there is no growth in transactions demand for money. In short: people’s spending is at a standstill, so they can do with the same amount of money every month. Instead of feeding a need among the general public for liquidity, the M-1 money pump is going toward purchases of Treasury bonds from struggling welfare states. The ECB is using its monetary printing presses to cover budget deficits across the euro zone.
Europe’s welfare states are refusing to structurally reform away their entitlement programs. Instead they have entered a dangerous alliance with the ECB to keep funding spending programs their taxpayers are chronically unable to pay for.
In the end, funding the welfare state with printed money is a recipe for high, lasting inflation rates. Venezuela is an example of sorts, but a better one is Argentina, where entitlement spending, paid for with runaway money supply, has driven inflation up to a socially and economically explosive 30 percent. Needless to say, this inflation rate is crushing the Argentine currency, just as runaway inflation always does.
The combination of a welfare state with persistent budget deficits and a central bank willing to fund those deficits until the next Big Bang is basically a ticket for the high-speed train into a macroeconomic disaster zone. So far the “new” Europe has withstood inflation – their latest fight with it was in the late ’70s – but that could also be the reason why the leaders of the EU do not see where they are heading.
To make matters worse, the same could be said about the United States. We have a smaller government, higher growth, lower unemployment and a more resilient political system than the Europeans. If any economy in the world can avoid a new encounter with inflation, it is ours. But that holds true only for as long as we make responsible decisions, on Capitol Hill as well as in the board room of the Federal Reserve.
While I do believe that our political system will actually be able to handle the budget deficit problem, I would not bet on the right solution unless I knew for sure that the Federal Reserve would see the dangers in pumping more newly-printed dollars into the federal budget. So far Ben Bernanke has been a disappointment on this matter, and I have serious questions about his designated successor, Janet Yellen. She has been quoted as an “inflation dove”, i.e., as someone who is willing to keep feeding the Treasury even at the expense of higher inflation.
Normally a person in her position would meet fierce resistance from established economists and people in Congress. After all, Americans in general harbor a clear hostility toward inflation, and even Democrats detest it – almost as much as they hate Sarah Palin.
But there seems to be a change in tone in the public debate when it comes to inflation. A good example is a story from Moneynews.com back in August:
The economist whose research foreshadowed the unusually long slog back from the 2008 financial crash is calling for the unlikeliest kind of central banker to lead the Federal Reserve: one who welcomes some inflation. Harvard University Professor Kenneth Rogoff, whose influential 1985 paper endorsed central bankers focused more on securing low inflation than on spurring employment, is highlighting the benefits of a Fed led by either Janet Yellen or Lawrence Summers precisely because they fail his old litmus test. … What qualifies them in Rogoff’s view is their dovishness, a refusal to place too much weight on stable inflation at a time when unemployment is far above its longer-run level. Rogoff is espousing aggressive monetary stimulus, even at the cost of moderate price increases. At a time of weak global inflation, higher prices may even help the U.S. economy by lowering real interest rates and reducing debt burdens, he said.
Professor Rogoff is playing with fire. The old notion that inflation is a monetary phenomenon, caused by too much money supply, has been thoroughly proven wrong. You can flood an economy with all the liquidity you want – if there is no real-sector activity to put all that liquidity to work, there won’t be any activity that can drive up prices. In other words, the transmission mechanisms from the monetary sector to the real sector are weak and slow.
Under the old monetary notion of inflation it would be “easy” for the central bank to keep inflation at a desired level by matching that level with appropriate money supply. But in order for prices to rise as a result of a money supply increase, someone has to spend that new money on a product whose price then rises. That is where the transmission mechanisms come in; had those mechanisms been working as implicitly assumed in monetarist inflation theory, the expansion of the U.S. money supply over the past few years (ten percent in the last year alone) would have caused an explosion in consumer prices. That has not happened, precisely because the private sector is not spending the money. Consumers, bankers and businesses are too uncertain about the future to absorb the enormous amounts of liquidity that the Fed has created.
The one sector that does spend money regardless of the future outlook is – you guessed it – government. Since most of what the federal government spends money on happens to be entitlements, the welfare state is a perfect venue for work-free money to make its way into consumer markets – i.e., circumvent the normal transmission mechanisms from the monetary sector to the real sector. As a result, entitlement spending could drive inflation in the U.S. economy almost as easily as it has done so in, e.g., Argentina.
Therefore, when Professor Rogoff advocates a higher tolerance toward inflation he is in effect giving Congress a blanket endorsement to continue to deficit-spend, and to the incoming Fed chairman to continue funding that spending with newly printed money.
In an article in April, the Huffington Post quoted Yellen as sharing this dovish view of inflation:
The Federal Reserve should focus its energies on bringing down an elevated U.S. unemployment rate even if inflation “slightly” exceeds the central bank’s target, Fed Vice Chair Janet Yellen said on Thursday. Yellen, who is seen as a potential successor to Chairman Ben Bernanke, says she looks forward to the day when policymakers can abandon unconventional tools like asset purchases and return to the conventional business of lowering and raising interest rates, currently set at effectively zero. But she made that clear that time is not near, saying eventual “normalization” of policy by the Federal Open Market Committee is still far in the future. “Progress on reducing unemployment should take center stage for the FOMC, even if maintaining that progress might result in inflation slightly and temporarily exceeding 2 percent,” Yellen told a meeting sponsored by the Society of American Business Writers and Editors.
There is another factor at work here, in addition to the continued monetization of the federal budget deficit. International investors have become cautious about buying U.S. Treasury bonds, up to a point where a ten-year T-bond issued by the U.S. government pays a higher interest rate than the same bond issued by the French Treasury. If at this point the Federal Reserve continues to massively expand the U.S. money supply, the effect could easily be a combination of currency depreciation and considerably higher interest rates.
Currency depreciation quickly creates inflation.
This scenario has already been picked up by international investors. In September, a Bloomberg news report explained:
Inflation expectations in the U.S. are rising in financial markets, and hedge-fund manager Mark Spindel sees Janet Yellen’s candidacy to be the next Federal Reserve chairman as a catalyst. “If it is Janet, I think you have to price in some tolerance for higher inflation,” said Spindel, head of Potomac River Capital LLC, which manages $570 million, and former manager of $15 billion at the World Bank’s private-sector lending unit, the International Finance Corp.
The report did caution that Janet Yellen’s inflation dovishness may not be as unequivocal as some might suggest:
She might prove him and other investors wrong. Her economic framework and communications strategy show little tolerance for higher prices. She led a subcommittee of the Federal Open Market Committee that produced an explicit inflation target of 2 percent, a topic the panel debated for more than a decade. Her policy approach uses models and rules that view stable prices as a necessary condition to try to move the economy toward full employment while holding interest rates near zero. “The market does have it wrong if they think she is going to be soft on inflation,” said Stephen Oliner, a resident scholar at the American Enterprise Institute in Washington and former senior adviser at the Federal Reserve Board. “She has very little tolerance for inflation above the 2 percent target.” As the FOMC subcommittee put together a strategy document published in January 2012, Yellen stood behind a phrase that said anchoring the public’s views on inflation “enhances the committee’s ability to promote maximum employment in the face of significant economic disturbances.”
That may very well be so, but this all happened under Bernanke’s chairmanship, which technically means that he had the last say on inflation policy. But more importantly, while the Fed may have been able to pump galactic amounts of money into the federal budget – and the global economy – during the QE years, without paying any price in the form of inflation, that should not be taken as a guarantee that inflation is not on the horizon now. As the Argentine example shows, there comes a point when a central bank’s faithful funding of a welfare state’s budget deficit turns from a benevolently misguided attempt at stimulating the economy into being an inflation monster.
Once deficit-caused inflation takes charge, it won’t go away until the deficit goes away. To make the deficit go away, Congress will resort to panic-driven spending cuts combined with equally panic-driven tax hikes.
Greek austerity, for short.
I don’t see that point waiting around the corner. But we are moving in its direction. The best contribution at this point would be a clear and unwavering statement from Janet Yellen that she will:
a) end QE,
b) stand firm on the 2-percent inflation target, and
c) will not give in to pleas from either the president or Congress to keep funding their deficit.
What are the chances of this happening? Not huge, but not remote either. If, that is, common sense prevails.
The latest news on the U.S. fiscal crisis is that President Obama is changing is mind on negotiations with Congressional Republicans. The man who would rather negotiate without preconditions with Iran’s Islamist thug regime than democratically elected American legislators has been pushed to the negotiation table by the looming threat of October 17. That is the date when, according to the Obama administration, the U.S. Treasury runs out of money and will default on its debt. Therefore, in order to avoid having to do the unconstitutional, namely to not make debt payments, Obama chooses to sit down with the only people on the face of the planet that he would never negotiate with.
In theory, if the president had ordered the Treasury not to make debt payments he could have been impeached. We will not know for a long time what has been going on behind the scenes in DC over the past couple of weeks, but it is noteworthy that the president suddenly decided that it was better to show a glimpse of leadership on the federal budget situation. It is an open question what the outcome will be, but at least there are talks and different views are being vetted, allowed to clash and then pave the way to an informed compromise. It may not be the best compromise in terms of fiscal policy, but the very fact that there is a vigorous debate in Washington, DC – and that the sides involved can take such harsh stances that the federal government shuts down for a while – is ultimately a sign that the American constitutional republic is in fact working.
As I explained recently, while the Europeans may be laughing at the American “bickering” and government shutdown, their own fiscal house is far from in good order. While there is a hot political fight over how to get the U.S. debt under control, the Europeans seem to have given up entirely on that front. Consider these numbers from Eurostat, reporting changes in debt-to-GDP ratio from first quarter of 2011 to first quarter of 2013:
Source: Eurostat; seasonally adjusted numbers.
Over the past two years, 23 out of the EU’s 27 member states (not counting rookie member Croatia) have increased their debt-to-GDP ratio. Portugal is worst: in the first quarter of 2011 their government debt was 95.1 percent of the Portuguese GDP; in the first quarter of 2013 it was 127.2 percent of GDP, an increase by 32.1 percentage points in two short years.
For the EU-27 as a whole, debt has increased from 80.2 percent to 85.9 percent. This is partly due to the fact that almost all of Europe’s economies are standing still, but the main reason is of course that the variables that drive spending in Europe’s welfare states are still in place. Much of government spending in a welfare state is on autopilot, driven by eligibility variables in entitlement programs. In Denmark, e.g., conventional wisdom among economists is that the legislature can directly affect about three percent of the annual government budget – the rest is governed primarily by welfare-state entitlement programs.
Needless to say, there is a connection between a GDP that stands still and a welfare state that has to dole out more money through its entitlement systems. But this only reinforces the point that Europe has a big debt problem: if structural spending systems run away with the government budget, you don’t sit around with your arms crossed. You dismantle those spending systems.
If you don’t, you will keep on borrowing. Which, again, is precisely what the welfare states in Europe do. Of the 27 EU states, 25 increased their debt in euros – only Hungary and Greece had a nominally smaller debt in Q1 of ’13 than in Q1 of ’11 – and the decline in the Greek debt was entirely due to the partial default almost two years ago. In terms of growth, their debt is back on an out-of-control path.
In total, the 27 EU states have borrowed another 1.1 trillion euros over the past two years. Five countries now have a debt that exceeds 100 percent of their GDP: Greece, Italy, Portugal, Ireland and Belgium. This is compared to two countries, Greece and Italy, two years ago. France is heading in that direction, with a ratio that has increased from 84 percent in 2011 to 92 percent today.
These are all bad numbers. But what is worse is that there is no debate in Europe about how to stop this debt growth. The austerity policies put in place by the EU, the ECB and the IMF have been embraced as fiscal policy gospel by Europe’s political leaders. Since austerity has been in place for four years now in some countries, and since the outcome has been utterly disappointing, it is high time for Europe to reconsider its current path.
For that to happen, though, you need an open and honest debate. America has an open and honest debate. Europe does not.
Guess who will prevail in the end…
I don’t often agree with President Obama – in fact, I almost never agree with him – but he has gotten one thing right: America’s future foreign policy, military and economic interests are not primarily trans-Atlantic, but trans-Pacific. Asia’s economies are still on the rise, even though China is wrestling with an inflation problem slowing its growth. But compared to Europe, Asia is a miracle of economic health and a promising outlook on the future.
When contrasted against Asia – from South Korea to China to India – Europe comes across as more and more of a museum over the 20th century: big, manufacturing corporations protected from local competition by costly labor-market regulations, governments desperately trying to preserve whatever they can of their welfare states and generations growing up to a void of opportunities, overshadowed by perpetual unemployment.
Speaking of unemployment, no other economic phenomenon is as long-term destructive as youth unemployment. It shatters hopes and aspirations, it depresses ambitions and robs generation after generation of the ability to start a life, build their own prosperity and even feed themselves. In place of a bright outlook on the future, youth unemployment gives the young despair, depression and cynicism.
Youth unemployment discards our children already before they have set their foot in the world of self determination. As a direct consequence, over time it destroys the interest among our children to inherit our society. The consequences of that are formidable. As a first glance at what this means, consider the latest numbers on unemployment among Europe’s young:
When young people are disenfranchised in the numbers shown here, it should come as no surprise that many of them will turn their backs on society. The very social and economic institutions they have been brought up to like and appreciate have, in their minds, let them down and thrown them on the macroeconomic garbage pile. What reason do they have to be loyal to a society that does not provide them with opportunities to build their own lives?
There are fiscal and monetary policy solutions to this problem. Doing away with unemployment is not hard - all it takes is some solid knowledge of macroeconomics, some fiscal fortitude and a healthy dose of disrespect for political conventionalism. But as things are now in Europe, conventionalism is the biggest enemy the young face today. Political conventions that say “defend the welfare state” get in the way of healthy economic policies that otherwise would pave the way for massive job creation.
But even more serious is the proliferating notion among Europe’s political leaders that there should not even be a debate over policy solutions. A clear witness of this is in the dictatorial fashion by which the leaders of the EU spearheaded the austerity assault on troubled member states. There was never a debate about the virtues and vices of austerity, never any questions about the soundness of crushing the welfare state in Greece while preventing the private sector from providing alternative solutions. There has been no discussion about why it would be a good idea to scale back, massively, poverty relief in depression-ridden countries like Greece and Spain, while at the same time cracking down on private organizations trying to fill the void left by an increasingly austere government.
In Spain, the depression has turned young professionals into food scavengers. In Greece, the neo-Nazis have challenged government by setting up poverty-relief systems and food distribution networks. This has raised their voter support to where they are now the third biggest party in Greece.
If the Eurocrats in Brussels had invited to a vigorous debate about austerity, both its economic and social consequences, and if they had solicited alternative strategies, then anti-democratic organizations such as neo-Nazi Golden Dawn in Greece would not be where they are today. But instead of realizing how utterly dangerous their monotheistic approach is, the Eurocracy reinforces its campaign to eradicate debate. The latest addition to their toolbox is the new, European “tolerance” campaign which I reported on two weeks ago. Superficially it is aimed at going after expressions of extremist political views, but in reality it serves as yet another tool to stifle policy debate in general.
In view of Europe’s steadily rising youth unemployment, this is exceptionally serious. When one in five young European is left idle, at least these young men and women must be granted a chance to voice their criticism of existing social and economic structures, of political conventions that they see favoring others than themselves. And even though the aforementioned “tolerance” campaign is not explicitly aimed at stifling debate in general, it seriously narrows down the spectrum of what debate is permissible and what is deemed intolerant and therefore banned, either de facto by social stigmata or de jure by new speech-stifling legislation.
Where free speech is thrown out, prosperity will exit as well. It will take a long time for Europe’s political leaders to realize this. In the meantime, let’s listen to what Dispatch International has to say about the “tolerance” campaign:
Powerful organizations specializing in humanism and paid by the EU have embarked on a new offensive to standardize national legislation. … professional human rights activists … mean business when they demand a ban on, e.g., criticism of feminism.
You may wonder what this has to do with solving the problem of youth unemployment. Directly, there is no connection. But there is an indirect one that we will get to in a moment. For now, back to Dispatch, which reports that the new “tolerance” directive from the EU includes a proposed ban on forms of speech that are deemed to be “anti-feminist”:
[Anti-feminism] must be banned and combated according to “A European framework national statute for the promotion of tolerance – submitted with a view to being enacted by the legislatures of European states”. This document has been circulating in the EU’s paper-lined labyrinths and will probably be approved by a majority in the European Parliament. The statute – intended to be imposed as law in the member states – proposes “concrete action to combat intolerance, in particular with a view to eliminating racism, colour bias, ethnic discrimination, religious intolerance, totalitarian ideologies, xenophobia, anti-Semitism, anti-feminism and homophobia”.
First, the usual disclaimer. As a libertarian I am opposed to any statist ideology, from American liberalism through European social liberalism to social democracy. I am a staunch defender of individual freedom for all humans, regardless of whether they are Australian Aboriginies, Shaolin monks in China or struggling farmers in Siberia. I don’t care about a person’s skin color, ethnic background, religious affiliation or gender identity – so long as they are willing to respect their fellow citizens on the same terms, we can all live in peace and pursue our individual goals in life.
This means, of course, that I am vehemently opposed to racist and totalitarian ideologies, such as Nazism, Communism and Islamism. I abhorred Apartheid in South Africa and I pray for the freedom of the people in North Korea. And I am thoroughly disturbed by the fact that Nazis hold democratically elected seats in a parliament in Europe for the first time since the 1930s.
That said, I do not believe that you fight any of this by stifling free speech. People are not drawn to totalitarian ideologies for random reasons; young men and women do not line up behind movements like Golden Dawn or the British National Party because they were born to hate. They do so because at some point they have drawn the conclusion that society as they were told it worked, does not offer them a path to the future. Somewhere along the line they have been discouraged in their efforts to believe in democracy, and instead turned to its very antithesis.
As a result, young men and women in Europe become radicalized. They turn their backs on the society they were supposed to inherit. For a while, the radicalization process was contained by the welfare state, as swaths of young Europeans went from school to dependency on tax-funded entitlements. But as the welfare state bled taxpayers dry, and budget deficits ran rampant across Europe, the last-resort solution for young Europeans to feed themselves began dissipating. Austerity destroyed the firewall that kept people from severing their moral ties to parliamentary democracy.
The result? A growing political movement across Europe that despises democracy, rejects liberty and fights for a ”Great Europe” united under a fascist banner. So far they are fringe movements, but that will very likely change – and change soon. The “tolerance” campaign by the EU is going to exacerbate the radicalization of Europe’s voters, especially the young. The same government that has let the young down; the same society that has deprived them of economic opportunity; is now going to try to regulate their speech.
Instead of engaging and including those who are being marginalized, the Eurocracy is trying to rally its member-state governments behind yet another measure that will disenfranchise even more people. And just to drive home the point of how serious this “tolerance” directive is, Dispatch International reports:
Governments must take concrete steps to prosecute persons who “make defamatory comments … in public and aimed against a group … or members thereof – with a view to inciting to violence, slandering the group, holding it to ridicule or subjecting it to false charges”.
In my analysis of this “tolerance” directive I noted, with reference to the “holding to ridicule” part:
The prevailing interpretation seems to be that it is now going to be illegal in Europe to poke fun at someone. While seemingly harmless, the true meaning of this is that the Europeans are going to outlaw satire as a means to criticize in politics. Perhaps one should expect hostility toward political satire from the members of the European Commission. It is hard to find a group of human beings who take themselves more seriously than the EU Commissioners. That aside, the intention behind the ambition to make “group libel” charges available against humorists is to turn the table on freedom of speech. By adding such serious infringements as are suggested here, the European Commission effectively changes the default settings on freedom of speech: if this does become the law of the land in the EU it will shift the balance between what is permitted and what is banned so that the permitted forms of speech are now enumerated.
In short: this directive could lead to a situation where speech that is not explicitly allowed is banned by default.
This is nothing short of an authoritarian straitjacket on the free exchange of ideas in Europe. It will most certainly drive more people into the arms of totalitarian movements – after all, if a government that is supposed to be democratic can put this kind of draconian restrictions on a basic individual freedom, then how big is really the difference between democracy and totalitarianism? If legislators elected by the people can severely rein in the liberty of that same people, then why should people endorse the process that elected those lawmakers?
But it does not stop there. This new “tolerance” directive will have repercussions for the debate over how to solve the problem with youth unemployment. How do you make the argument that Europe needs less government and must do away with its welfare state when at the same time the government you are criticizing could label you intolerant for doing so? Far fetched? Not at all. The only thing government has to do is make the case that your policies of reducing the size of the welfare state would hurt certain minorities. If, say, a majority of African immigrants in France live on welfare, and you advocate the elimination of tax-funded welfare, then under this new “tolerance” directive you could be charged with intolerant speech.
Even more obvious is the link between Europe’s irresponsible immigration policies and the high youth unemployment rates across the EU. Many people make the arithmetically based argument that when immigration adds to the labor supply in times of high unemployment, then unemployment will rise, not fall. Since this argument ties immigration to unemployment, it would be banned as intolerant speech under this new “tolerance” directive.
Absurd? Absolutely not. Keep in mind that the EU does not have anything like the U.S. First Amendment in its constitution. There is, simply, no constitutional protection of your right to free speech in Europe. Nor does Europe have the open court system that we have in the United States. Therefore, infringements on freedom like this directive can pass unchallenged.
Europe’s arrogant political leadership is digging the grave of democracy. As they dig, they shorten the distance from Brussels in 2013 to Unter den Linden in 1933.
One of the most interesting properties of government is that whenever it does something, it has unintended consequences running as ripple effects through the economy. Those effects are then taken as reasons for government to get even more involved in our lives with new taxes, fees and regulations. A story from Euractiv.com on the European health care system provides an excellent example:
Austerity-hit member states must avoid deepening inequality when cutting their healthcare budgets, the European Commission said at the European Health Forum in Austria. As a result of the financial and economic crisis, many EU countries have reduced their healthcare budgets, leading to an overall drop in expenditure in the sector for the first time in decades.
Was no one in Brussels highly paid enough to figure that out before they went on an austerity crusade? This is the most easily predictable effect of the austerity policies that those same Eurocrats have been pursuing for five years now. Even a four-year-old can figure out that if he and his three friends have eight jelly beans to share today but only six tomorrow, there is going to be less for each and everyone of them.
After having used austerity to create resource scarcity in the single-payer health care systems across the EU, the Eurocrats in Brussels now see an excellent chance to take their involvement in people’s lives to the next level. Euractiv again:
Speaking at a panel discussion on Wednesday (2 October) in Gastein, Paola Testori Coggi, director general of the European Commission’s health and consumer policy directorate (DG Sanco)…
How is that for a title? Don’t you Europeans feel just awesome waking up every morning knowing that your hard-earned tax money goes to pay for a director general of the European Commission’s health and consumer policy directorate?
…said member states had good reasons to make their healthcare systems more cost-effective and sustainable. But they should also be aware of the social consequences. ”We need to maintain the access to universal healthcare services which exists as an obligation in our treaty under human rights. All European citizens have the right to access healthcare of good quality. But we know that this in fact is not the real situation for all the member states,” Testori Coggi said.
No kidding? Resource scarcity in socialized health care systems is a long-lasting phenomenon. The OECD has studied the problem numerous times, such as in this paper from 2004. In recent years EU states with socialized systems have introduced various policies to “shorten” their waiting lists, but in reality all they have done is shuffle around the same scarce resources, sending physicians and nurses to patients in the longest lines. While they work down orthopedic waiting lists, patients waiting for ear surgery form a new waiting list to which everyone is sent running as soon as the orthopedic wait list has shrunk a bit.
This whack’em’all version of health care is neither efficient nor sustainable. The root cause of the problem remains: patients are not allowed to buy health care – cash or through private insurance – directly from providers, without the involvement of tax-paid bureaucrats.
Back to Euractiv:
Groups that were already vulnerable before the crisis, such as undocumented migrants, asylum seekers, drug users, sex workers, destitute European citizens and homeless people, have seen a reduction in social safety nets which provide them with basic help.
Why? Because those groups are the ones that benefit from the welfare state. It is for whom the core of the welfare state was built. If you cut services that the welfare state provides without giving the private sector a fighting chance to replace them, then it is only logical that the groups mentioned will suffer.
That said, replacing spending cuts with higher taxes would not protect those groups either. The higher taxes would increase the ranks of the unemployed; at the far end of the unemployment lines, those who have been without work the longest will be thrown out of the system and end up among the “destitute” – i.e., the desperately poor. Demand for poverty-relief programs would increase and cause the same funding imbalance that the system is now wrestling with, only with more people being harmed. The Euractiv story agrees:
Among the patients visiting clinics at the humanitarian organisation Doctors of the World, 20% have reported being denied access to healthcare services in the last 12 months, with 62% of those occurring in Spain. In Greece, before the crisis most of the patients visiting Doctors of the World’s clinics were migrants with little or no financial means. But in the last year, almost half of the patients were Greek citizens who could no longer afford healthcare services.
And this in a country with a socialized health care system! The costs that people cannot afford are usually what Americans know as co-pays on their private insurances, only in European countries the co-pays come on top of income taxes typically one and a half to two times higher than what they are here in America.
In other words, single-payer health care systems cannot afford to provide all the health care they promise people. Unless a single-payer health care system can actually deliver the health care it has promised, then governments can issue whatever rights declarations they want - including the aforementioned EU human rights declaration about health care. Without a physician there to provide health care, that right is not worth more than the paper it is written on.
So, as the Euractiv article explains, when resources in Europe’s single-payer systems become even more scarce, the immediate reaction from the Eurocracy is not to question government’s wet-blanket involvement, but to try and micromanage who gets what of the shrinking pie:
Testori Coggi emphasised that member states should focus on the aspects of health with certain social consequences: nutrition, use of alcohol, tobacco and physical activity. ”We need to reduce inequality in Europe because this contributes to social cohesion and helps to reduce poverty,” she stressed.
Single-payer systems were created precisely to eradicate so called inequalities in access to health care. Half a century or so after most of Europe had socialized their health care systems, tax-paid bureaucrats still talk about doing away with “inequality”. In other words, the welfare state has not solved the problems it was created to solve, and the socialized-health care system has certainly not been the equality blessing it was supposed to be.
There is only one obvious conclusion from this, namely that it is high time for Europe to transition out of the welfare state. Needless to say, that is not on the Eurocrat agenda, but that only increases the need for freedom-minded people and organizations to ramp up their efforts at educating the Old World on the virtues and the attainability of liberty.
PS: For more on the immorality of single-payer health care, check out my essay Eugenics and the Welfare State.
This is to all of you around the world who are laughing at the shutdown of the federal government here in the United States. Especially European media have portrayed this as a farce, and with the exception of the British press there are virtually no attempts at understanding the underlying issue.
What led to the shutdown was not some political posturing, but indeed an ideological rift that runs right through U.S. Congress. This is at the end of the day a fight between conservative and liberal, not to say social-democratic, values. Over the past two elections, 2010 and 2012, the conservative flank of the Republican party grew stronger and has solidified its presence in both chambers of Congress. By contrast, Obama-leaning radicals have made inroads in the Democrat party. This has widened the ideological span in Congress, making our legislature one of the most pluralistic in the industrialized world.
And right here is where most foreign commentators are led astray by their own prejudices. There is a prevailing idea in Europe, again with the exception of Britain and to some degree Denmark, that politics is about bringing everyone to the consensus table. The construction of the EU has reinforced the institutional structures that favor consensus over a free, vigorous debate. Where American politicians can end a debate on a note of disagreement, Europeans often get nervous over the lack of consensus and agreement.
I am not going to speculate as to where Europe got its consensus extremism from, though the parliamentary system itself may have been biased in favor of compromise and consensus rather than principled disagreement. But what really matters is that a political system that favors compromise and consensus gradually erodes, and eventually eliminates, principled debate. As part of the convergence toward a compromise the European parliamentary system implicitly establishes a value norm that then becomes the attractor point for all future political discourse.
The European welfare state is a good example. Consuming 45-55 percent of GDP, depending on where you go in the EU, the welfare state has transferred crucial decisions on people’s lives from individuals and families to government. Through the welfare state, Europeans have handed over their health care, their retirement planning, their children’s daycare and education, their decisions when to be home sick or when to be home with infants, and much more, to government. It is almost easier to list the parts of their lives that Europeans have not entrusted government with.
This heavy socialization of everyday life is universally accepted in most of Europe. So called conservatives such as former French president Sarkozy or just-re-elected German chancellor Merkel are just as good stewards of the welfare state as their socialist competitors. in Sweden, a welfare-state Mecca for American liberals and European social-democrats, the ideological rifts over the welfare state that still existed in the 1980s are now long gone. The Moderate Party, once known as a solid conservative force in Swedish politics, has morphed into a clever copy of the Social Democrats, being at least as good stewards of the welfare state as those who once created it.
Europe’s gravitation toward a consensus around the welfare state has effectively eradicated ideological differences, both in the public discourse and in the parliamentary system. This is visible all through European society, from German cities which, under “conservative” Angela Merkel’s administration, are spending half their money on redistributive entitlement systems, to the fierce efforts by the Eurocrats in the European Union to preserve the welfare state by means of austerity.
Questioning the big-government project is akin to political suicide in the European political culture. By contrast, questioning big government in America is very much part of the established political discourse. This is exemplified by several ideologically driven fights in U.S. Congress in recent years, especially since Obama was elected. The Obamacare issue is perhaps the most fervent of them, with Tea Party-supported conservatives in the Republican Party clashing with exceptionally statist Obama Democrats.
The government funding issue is another one where a vigorous ideological difference comes to full display. Americans may sigh and shake their heads over the battles being fought in Congress, but they themselves are not alien to expressing their political viewpoints and agreeing to disagree with friends, coworkers and even the occasional stranger encountered on an airplane or at Arby’s over lunch.
I am the first to recognize that the ideological rifts in American society have grown, and not always for the better, during the Obama administration. But those rifts have always been there, and it is a sign of health for American democracy that those rifts remain. Sometimes they get in the way of the regular operations of government, such as right now, but if the issue is principled enough the fight is worth it. Opinion polls also show that Americans are – yes – opinionated about the shutdown: while they tend to disagree with the shutdown itself they tend to agree with the Republicans on trying to stop (or at least delay) Obamacare.
In other words, the ideological spectrum in American politics remains wide and vibrant. That is healthy for the future of American society and democracy. The contrast to Europe is formidable, and not to the favor of the Europeans. In fact, there is a growing fear in Europe over disagreements even on minor issues such as immigration, a fear that manifests itself in the redefinition of stigmatizing political labels like “Racism” or “Fascism”. The end result is a further narrowing-down of the political spectrum until it becomes entirely two-dimensional: either you agree completely and you are accepted, or you express even minor disagreements with the main political discourse, and you immediately become an outcast.
When the art of disagreement is sacrificed at the altar of political consensus, the long-term consequences are unfathomable. One of the first major sacrifices is economic freedom and prosperity. When the political culture and the public discourse are alien to open and vigorous debate, which prevents people from questioning the purpose behind policies that are destroying large parts of the European economic landscape.
Here in America, we still operate on the premise that debate and disagreement lead to the best argument winning – and that the best argument comes with the best policy solutions. That is why we still have a good chance to avoid following Europe down the path to industrial poverty.
I recently expressed my deep concerns regarding the unstable political situation in Greece, concluding that the government’s attempt to ban or otherwise neutralize the neo-Nazi Golden Dawn party is a very risky game. while morally the right thing to do, and politically probably necessary, the potential for a violent backlash is very high. One reason is that many Golden Dawn supporters appear to be supporting the party because they want Greece out of either the currency union or both the EU and the euro.
Their motive is not hard to understand: it has now been five years since Greece entered the economic crisis, and at least four of those years have to the average Greek been dominated by EU-imposed austerity. In package after package, the EU, the ECB and the IMF have dictated bone-crushing spending cuts and prosperity-destroying tax hikes. Since Greece is a welfare state, government is deeply involved in almost every aspect of people’s lives. When it goes on an austerity rampage the effects are by necessity both far-reaching and painful for Greek families.
Today, Greece stands with one foot in the EU and one foot in social and economic chaos. Political extremism is growing, both in the form of terrorizing socialist political violence and growing political intimidation from Golden Dawn. At the same time, unforgiving austerity policies, aimed at stabilizing government debt, have been a complete and utter failure, Greece’s government budget is suffering from chronic deficits, partly because one quarter of the tax base, a.k.a., GDP, has vanished during the austerity years, and partly because a much larger portion of the Greek population depends on the welfare state now than was the case before the crisis.
The question is what the EU-ECB-IMF troika is going to do next. Before we seek an answer to that, let’s take a look at the Greek debt trajectory. This figure shows the Greek government’s debt as percentage of GDP per quarter since 2008:
The debt ratio rises steadily through 2011, then drops dramatically at the beginning of 2012. That is the point when the Greek government, aggressively “encouraged” by the Troika, wrote down its own debt.
When the write-down – effectively a partial default – was executed the Greek government owed 170 euros for every 100 euros of Greek GDP. That ratio was considered entirely unsustainable at the time, especially since the quarter-to-quarter increase in the ratio was at 3.3 percent. But the problem for the EU-ECB-IMF Troika is that the rise in the Greek debt ratio has not changed since the partial default – at least not for the better. Through the first quarter of this year the debt-to-GDP ratio has grown by 4.1 percent per quarter, putting the ratio at 160.3 for the first quarter of 2013.
Before the end of this year Greece will probably have a debt ratio that exceeds what it was at the partial-default point. Here are two scenarios:
The blue line represents a scenario where the Greek debt ratio continues to grow as it has during 2012 and 2013 thus far. The red line extends with a growth trajectory based on the ratio growth rate from 2010 and 2011, namely 3.3 percent per quarter.
As we can see, the difference is negligible. And even if we disregard the exceptionally high debt ratio growth from the first quarter of 2012 (9.3 percent) we still end up with a post-default debt ratio growth of 2.5 percent per quarter. In other words, it is only a matter of time before Greece is back in the same situation as it was in 2011, only this time with an even more tense political situation, an even higher level of economic despair among the people and a youth unemployment rate at a completely destructive 60 percent.
So, back to the question: what is the Troika going to do next? Part of the answer lies in Angela Merkel’s decisive victory in last week’s German elections. Merkel wants to save Greece, keep the currency union intact and put a smiley face on every EU citizen. As far as she is concerned, the Troika should continue to help Greece.
At the same time, Greece’s self-proclaimed saviors are running out of options. The partial debt default was evidently a disaster that has, at best, bought the Greek government one year of breathable air. No one this side of a lunatic asylum would try another debt default. But austerity has also been utterly ineffective. The Greek economy simply refuses to produce the result that the designers of austerity expected.
What to do? Well, the only workable solution is so radical it will never win even a remotely serious consideration from the Troika – at least not its two European comrades, the EU and the ECB. That solution would involve Greece leaving the EU, reinstating its own national currency, and a dedicated program to reform away the welfare state.
It is almost a given that the EU won’t let any of that happen. But that brings us back to what options the Troika has left.
Well, what options do they have left?
Europe is sinking into a dark age of industrial poverty. The current crisis has already destroyed the lives, jobs, prosperity and future of millions upon millions of families, from the Aegean Sea to the Atlantic shore. Slowly but without mercy, an economic wasteland is crawling north, from devastated middle-class neighborhoods of Athens; it seeps through Spanish back streets where young, unemployed professionals scavenge for food after restaurants close. The economic wasteland conquers government-funded hospitals, sending patients home without proper treatment; it pushes young men and women out of work and into the arms of an ever stingier welfare state.
Despite massive protests, the Eurocrats in charge of the European Union and the European Central Bank have teamed up with the IMF to force state after state in the EU into accepting destructive austerity policies. The purpose behind those policies is not to restore economic growth and full employment, but to save the welfare state and make it fit within a tighter tax base.
In order to get there, the Eurocrats and national leaders have teamed up. In every way possible without abolishing parliamentary democracy, they have dictated to voters and taxpayers that their protests against austerity do not count. The Eurocrats have even appointed prime ministers in EU member states, blatantly disrespecting Europe’s deeply rooted system of parliamentary democracy.
The heavy hand of Brussels has created a sense of abnormality in Europe. Under its shadow, the economic wasteland is moving north into France and may soon threaten the economic epicenter of the European Union. The French socialist government is nearing budget panic while fiscal dictates from the Eurocracy to all economically “troubled” EU states supersede the normal operations of democratic government. In more and more ways, the super-state structure also known as the European Union is suppressing the voice and expression of the people to push its own agendas deeper and deeper into the lives of private citizens.
Nigel Farage, leader of the United Kingdom Independence Party, often mentions that 75 percent of all the laws that apply to Britain are made in Brussels. If this applies across the board, in all EU member states, then parliamentary democracy is already under siege in Europe. Austerity dictates from the Eurocracy increase the pressure on the representative state to a point where not much of it is left.
At this point, when freedom and democracy are becoming scarcities, the Eurocracy invents yet another way of suppressing half-a-billion Europeans. In a grossly misguided, recklessly ambitious document on “tolerance”, the European Commission – de facto the government of the EU – wants to invade people’s everyday lives with a new level of speech dictates. Even more serious is the fact that the Commission wants to disguise its new, Orwellian-on-steroids ambition in the shiny wrapping paper of promoting “tolerance”.
The terrifying new report, aiming to severely restrict speech and debate in European society bears the ominous title “A European Framework National Statute for the Promotion of Tolerance”. It pushes government speech regulation to an entirely new level in two ways: by regulating “group libel” and by enforcing a terrifyingly invasive definition of tolerance. Let’s start with “group libel”:
“Group libel” means: defamatory comments made in public and aimed against a group … with a view to inciting to violence, slandering the group, holding it to ridicule or subjecting it to false charges. Explanatory Notes: (i) This definition covers “blood libels” and anti-Semitic slurs, as well as allegations that, e.g., “gypsies are thieves” or “Moslems are terrorists”. (ii) It must be understood that the “group libel” may appear to be aimed at members of the group in a different time (another historical era) or place (beyond the borders of the State).
The highlighted part has caught the attention of many bloggers. The prevailing interpretation seems to be that it is now going to be illegal in Europe to poke fun at someone. While seemingly harmless, the true meaning of this is that the Europeans are going to outlaw satire as a means to criticize in politics.
Perhaps one should expect hostility toward political satire from the members of the European Commission. It is hard to find a group of human beings who take themselves more seriously than the EU Commissioners.
That aside, the intention behind the ambition to make “group libel” charges available against humorists is to turn the table on freedom of speech. By adding such serious infringements as are suggested here, the European Commission effectively changes the default settings on freedom of speech: if this does become the law of the land in the EU it will shift the balance between what is permitted and what is banned so that the permitted forms of speech are now enumerated.
Granted, this “tolerance” proclamation is limited to speech about ethnic groups and other constructed collectives of people in our society. Therefore, it could be said to have only limited influence on the freedom of speech in Europe. However, the point is not the actual application – in this case to ethnically different groups – but the ambition of the infringement. By adding humor to a long list of stigmatized – and illegal – form of expression, the EU Commission sets a precedent for de facto blanket-banning of speech forms in other areas as well.
Going back to the “tolerance” report we find that the proposed legislation also wants to…
condemn all manifestations of intolerance based on bias, bigotry and prejudice [and take] concrete action to combat intolerance, in particular with a view to eliminating racism, colour bias, ethnic discrimination, religious intolerance, totalitarian ideologies, xenophobia, anti-Semitism, anti-feminism and homophobia.
An obvious question how the EU Commission believes it is going to enforce the anti-Semitism part without entering the mosques where radical islamism is preached.
But beyond that, the addition of anti-feminism is yet another paradigm shifter, and a serious new incursion into the freedom of speech. Feminism is neither a religion nor an ethnic or racial belonging. Feminism is a political ideology, and by criminalizing its criticism the European Union leadership opens for speech infringements against critics of other ideologies. An example: the support for the welfare state is widespread among Europe’s leading politicians, as is the misguided idea that the welfare state somehow is good for people. It is not at all far fetched to assume similar restrictions on speech regarding the welfare state as are now being proposed against “anti-feminism”.
Now for the second part of the Commission’s attack on free speech:
Tolerance does not mean that a group can segregate itself from society as a whole, repudiating the need to interface with other groups.
This sentence, which reveals the practical meaning of “tolerance”, is a horrifying statement to what the Eurocrats have in mind. In today’s European cities there are ghettos, poor neighborhoods, middle-class neighborhoods and wealthy neighborhoods. Just like here in America, people who work hard to put money aside and buy themselves a better home can migrate up the neighborhood ladder. They can put their kids in better schools, lower the risk of being crime victims and overall enjoy a better quality of life.
There is an ethnic parallel to the economic stratification – used descriptively – of Europe’s cities. The ghettos are typically dominated by non-European immigrants while the share of ethnic Europeans rises as you move toward the top of the neighborhood ladder. While some people may pay attention to this when looking for a home, the decision where to live is for most people a predominantly economic one. A home is the biggest economic commitment most families make, in Europe as well as in North America. Therefore, it is simply wrong to add a racial or ethnic dimension to the housing market; it comes with the presumption that ethnic Europeans who move to more affluent neighborhoods do so based on ethnic preferences, not economic considerations.
In its “tolerance” proclamation, the European Commission now wants to define the clustering of an ethnic group in one neighborhood as “intolerance”. Based, again, on the presumption that people’s housing decisions are racially motivated and not driven by economic variables, the Commission then makes clear that all Europeans have a “need to interface with other groups.” The wording of this is a thinly disguised dictate that Europeans have an obligation “to interface with other groups”, which of course gives a whole new meaning to their definition of “tolerance”: instead of simply being respectful of other people, the European Commission wants people to be tolerant by residing in neighborhoods with a different ethnic majority.
But even worse, if this “tolerance” proclamation became the law of the land in Europe – as is the Commission’s intention – government would have the legal authority to force people to move where their own ethnicity is in minority.
This could play out in two ways: either well-to-do ethnic Europeans are forced to move to ghettos dominated by non-European immigrants, or non-European immigrants are given heavy subsidies on taxpayers’ tab to be able to buy a house in an affluent “white” neighborhood.
It goes without saying that hard-working immigrants in Europe can make their way into an affluent neighborhood on their own, just like everybody else. Again, the decision on where to live is an economic one more than anything else. But according to this “tolerance” decree, a poor immigrant in an immigrant-dominated neighborhood cannot remain segregated, and since he or she lacks the means to buy a house in an affluent neighborhood someone is going to have to buy the house for her.
This opens up an entirely new dimension to “public housing”. But far more than that, it brings life in the European Union a few steps closer to the east side of the Berlin Wall. One generation after the Wall came down and people from Sachsen to Sakhalin were liberated, the EU Commission is suggesting new policies that in many ways revive the old Communist dictatorships.
They are not there yet, but the speed toward open intolerance is far too fast for comfort.
As I have reported recently, the European crisis is still cooking. Despite five years of austerity, deficits have not gone away. They are so persistent, in fact, that the European Central Bank has been forced to create an unlimited bond buyback program for troubled welfare states: whatever amounts of Greek, Italian, Spanish, Portuguese or any other euro-denominated Treasury bond anyone wants to sell, the ECB promises to buy them without the buyer losing any money.
This program is not making the welfare-state debt crisis easier, but worsening it. Its ultimate consequence could be high and persistent inflation; in order to see why, let us begin with acknowledging another consequence, namely that you can now buy 100,000 euros worth of ten-year Greek Treasury bonds, get 10,290 euros in interest over a year and then be guaranteed to get your money back as if you had bought a Swiss Treasury bond at 1.09 percent. Two weeks ago I explained the potential consequences of this bond buyback program:
In short: there will come a point when the international bond market will test the ECB’s cash-for-bonds promise. Just to give an idea of how much money the ECB could be forced to print, here is a list of government debt by the most troubled euro zone countries: Government debt 2012
Italy 1,988 bn
Ireland 192 bn
France 1,833 bn
Spain 884 bn
Portugal 204 bn
TOTAL 5,101 bn
Greece, notably, does not report its government debt to Eurostat. Nevertheless, here alone we are talking about five trillion euros worth of government debt. If the ECB had to execute on its bonds buyback program for only ten percent of that, it would have to rapidly print 500 billion euros. To put this in perspective, according to the latest monetary statistical report from the ECB, M-1 money supply in the euro zone is 5.3 trillion euros. Of this, 884 billion euros is currency in circulation while the rest is overnight deposits. If the ECB had to print money to meet a run on the bonds in the countries listed above, it would find itself having to expand the M-1 money supply by up to ten percent in a very short time window (theoretically over night). This is to be compared to the 7.7 average annual growth rate of M-1 in May, June and July of 2013.
For all you statists out there, this means increasing growth in M-1 money supply from 7.7 percent to 17.7 percent. By comparison, the Federal Reserve has increased the U.S. M-1 money supply by an average of 11.5 percent per year over the past 12 months (measured month past year to month current year). The growth rate has dropped in recent months, though, falling to 9.1 percent in August.
A temporary boost in euro money supply to stave off a run-on-the-Treasury wave of bond sales would hurl the euro boat into very rocky waters for some time, but if the buyback program really works as intended, the relentless cash pumping by the ECB will eventually calm things down. The problem for the ECB – just as for the Federal Reserve – is that it is a lot harder to reduce money supply than to increase it. Basically, once the cash is out there in private hands, people are not voluntarily going to give it back to the government.
That is, if the buyback program works as intended. It is a very risky program, especially if it would be extended to other euro-zone countries as well. France alone has 1.8 trillion euros in debt, and even though they are technically not covered by the bond buyback program at this time, they could be the next link in the euro chain to come under stress. Their ridiculous tax policies of late will guarantee very weak GDP performance in the next couple of years. I would be very surprised, frankly, if the French economy manages to grow, on average, in 2013 and 2014.
With zero GDP growth, or worse, tax revenues will not grow as the French government intended. They are still wrestling with a deficit – their taxpayers simply cannot keep up with the cost of the welfare state – and with the new, socialist-imposed extra tax burden that deficit is going to be even more persistent.
Since president Hollande and his socialst cohorts in the French National Assembly have pledged to end austerity, they have opened the door for more government spending. This obviously adds insult to injury for an economy already under great stress. It is therefore increasingly likely that the ECB will have to extend its bond buyback program to cover frog-issued bonds as well.
Given the size of the French economy, and debt, this would put the buyback program to the test. Not immediately, but eventually. Today France is paying lower interest rates on its national debt than the United States, but the trend is upward. After almost two years of declining interest rate costs, early this year the trend shifted direction. Interest rates have been going up since February of this year, and the ten-year French Treasury bond now pays almost a half a percent more than it did this past spring.
When the Spanish government started having problems with selling its bonds, it had to increase the interest rate from four to six percent in less than a year. That is a 50-percent spike in the yield demanded by investors, and at the time back in 2011 it took both the ECB and the Spanish government by surprise. Let’s hope no one is surprised if France finds itself in a similar situation 12-18 months from now.
If the ECB thus finds itself saddled with the responsibility to – at least in theory – have cash ready for almost seven trillion euros worth of government debt, it will have to abandon its prime goal, namely price stability. While the United States has proven that you can increase money supply five, six even eight times faster than GDP without causing high inflation, this does not mean that there is no inflation threat attached to money printing. However,
- if the freshly printed money goes out to the private sector in the form of reckless lending – as in China – then there is an inflation price to pay (the Chinese are looking at six or more percent inflation this year); or
- if the fresh new cash goes into the hands of entitlement recipients, thus feeding private consumption without a corresponding increase in private productive activity,
then high, persistent inflation is knocking on the door.
If the ECB starts buying back Treasury bonds en masse, the latter effect could kick in:
1. Troubled governments know that the ECB will guarantee their bonds, thus significantly reducing their incentives to shrink their deficits;
2. The ECB has attached austerity demands to the buyback program, but those demands have proven totally ineffective against government deficits, thus practically voiding those austerity demands of meaning;
3. Persistent, high and socially stressful unemployment has shifted the fiscal balance in troubled welfare states on a permanent basis, with fewer taxpayers and more entitlement takers; in order to maintain political and social stability national politicians will avoid more cuts in the welfare state;
4. As the welfare state’s spending programs remain and more people join them as a result of the economic crisis, government spending will rise while tax revenues are stalled or even decline.
By allowing an increasing share of the population to live on entitlements, Europe’s troubled welfare-state governments will create an imbalance between productive and improductive economic activity strong enough to drive up inflation.
Add to this the imported inflation that inevitably comes in from other countries when the ECB’s new, massive money supply eventually weakens the currency.
The involvement of the ECB in trying to keep Europe’s welfare states afloat is troubling for many reasons. The prospect of the bond buyback program bringing about inflation is not a very healthy one. But for every year that goes by without the EU doing anything to reform away its welfare states, the scenario outline here, which is somewhat speculative today, moves closer and closer to becoming reality.
As I have explained on numerous occasions, Europe’s crisis is not a regular recession. It is a structural crisis that will change the European economic landscape for the foreseeable future. The children now growing up in Europe will live a life less prosperous than their parents, who are now in their 30s or even 40s, who in turn find themselves having to work harder than their parents to achieve the same standard of living.
With youth unemployment exceeding 20 percent in most EU member states, and GDP basically having ground to a halt, the young in Europe are fighting an uphill battle to just get a start on some kind of self-determined life. This, together with widespread unemployment among adults and no end in sight to the crisis, opens the door to a grim future for the Old World. The only way to avoid this scenario is for Europe’s political leaders to give up on the welfare state and let loose the private sector. Free-market Capitalism, for short.
Sadly, that is probably not going to happen. Instead, more and more voices are calling for the continent to double down in defense of the welfare state. The EU Observer reports, starting with an essentially valid but not exactly meaningful criticism of current austerity policies:
Up to 25 million more people in Europe are at risk of poverty by 2025 if governments continue with austerity policies, international aid agency Oxfam has said. In a study released Thursday (12 September) ahead of an EU finance ministers’ meeting this weekend, Oxfam said there are lessons to be learnt from deep cuts made to social spending in Latin America, South East Asia and Africa in the 1980s and 90s, where it took 20 years to get back to recover.
So long as austerity is focused on preserving government in a tighter economy, it will have disastrous effects on the economy. If instead austerity was motivated by a genuine ambition to roll back, and eventually eliminate, the welfare state, then the situation would be much better for the private sector. A roll-back strategy combines spending cuts with well-designed, targeted tax cuts to give the private sector room to replace what government is cutting back on.
Unfortunately, rolling back government is the last thing Europe’s politicians want to do. Their sole purpose with austerity is to save as much as they can of the welfare state, even if it means destroying the future for generations of Europeans. What Europe needs is free-market reforms, lower taxes, a gradual privatization of the welfare state and constitutional reforms to guarantee that big government never happens again.
Again the voices in favor of such reforms are few and far between while the voices with the opposite message are loud and high-pitched. Euractiv again:
“These policies were a failure: a medicine that sought to cure the disease by killing the patient. They cannot be allowed to happen again. Oxfam calls on the governments of Europe to turn away from austerity measures and instead choose a path of inclusive growth that delivers better outcomes for people, communities, and the environment.” Greece, Ireland, Italy, Portugal, Spain and the UK – countries that have pursued budget cuts most aggressively – are soon reaching the rank of most unequal countries in the world. “The gap between rich and poor in the UK and Spain could become the same as in South Sudan or Paraguay,” said Natalia Alonso, head of Oxfam’s EU office.
This is precisely the wrong way to go. Income differences are irrelevant, and to see why, let’s ask Natalia Alonso where she would prefer to live the life of a poor citizen, the United Kingdom or South Sudan.
Nevertheless, the consequences of this focus on “inequality” is that strong voices are pushing for a restoration not of the prosperity-producing private sector, but the prosperity-consuming welfare state. By throwing in comparisons to deplorably poor, undeveloped countries with questionable property-rights traditions and economies perforated by corruption, statists turn a blind eye to structural and institutional factors that really matter in building free, prosperous societies. The Euractiv article on the Oxfam report is a case in point. Having mentioned South Sudan and Paraguay in passing it moves focus back to Europe:
As an example, mortgage laws in Spain see banks evict 115 families from their homes every working day. Meanwhile, almost one in ten working households in Europe now live in poverty and the trend is worsening, the report notes. Child poverty is also rising and workers who do get paid often do not have enough to support their families. In the UK and Portugal, real wages have fallen by 3.2 percent over 2010-2012. The real value of wages in the UK is now at 2003 levels. Italy, Spain, and Ireland all recorded decreases in real wages over this period. Greece has recorded a fall in real wages of over 10 percent.
Yes, Europe is turning into an economic wasteland, and poverty is returning. As an example, Greek unemployment is still rising, hitting 27.9 percent in July. But to somehow compare that poverty to what the South Sudanese experience is intellectually disingenuous. Europe’s population is sinking into industrial poverty, a new form of poverty, best compared to what people in Eastern Europe experienced under the Soviet era. They had access to most of the basic products you expect in an industrialized society, but at basic quality and with no prospect of ever being able to improve their lives. This is a bad future for Europe, and a waste of an economic heritage from generations of hard-working Europeans, but it is still a life vastly better than the life the poor endure in South Sudan.
That said, the medicine for eliminating both forms of poverty is largely the same. Industrial poverty is the result of the welfare state, and can only be eliminated through the elimination of the welfare state. That means doing away with the destructive consequences of decades of social democracy, returning instead to free-market Capitalism.
By the same token, the only remedy for poverty in an under-developed country like South Sudan is free-market Capitalism.