Tagged: EUROPE

More Gasoline on EU’s Fiscal Fire

Europe’s political leaders are showing more and more signs of discomfort – not to say emerging panic – over an economic crisis that just won’t go away. My diagnosis is that this is a permanent crisis, brought upon Europe by its fiscally obese and unsustainable welfare state. (Make sure to get my book Industrial Poverty when it comes out August 28!) By consequence, it is therefore not possible for Europe to get out of the crisis unless they first roll back and eventually fully dismantle their welfare state.

Not everyone agrees. As the EU Observer reports, the social affairs commissioner of the EU – compare him to the U.S. Secretary of Health and Human Services – is getting mighty frustrated with the crisis and calls for a restoration of the welfare state:

The EU’s social affairs commissioner on Friday (13 June) lashed out at the EU’s response to the economic crisis. Lazlo Andor, in a speech delivered in Berlin, said debt-curbing policies designed to resolve the sovereign debt crisis have wrecked Europe’s social welfare model. “Austerity policies in many cases actually aggravated the economic crisis,” he said.

Has he been sneak-peeking on this blog? Apparently, because he cannot have read my articles in full. If he had, he would know that there are two answers to his frustration over austerity and the crisis. On the one hand, yes, the spending cuts have slashed entitlement programs and made it tougher to get by on government handouts. On the other hand, though, the current European austerity model has raised taxes on businesses and households. This has stifled economic growth and thus made it harder for people to get out of their government dependency.

The reason for this is that austerity, as designed and carried out during the crisis in Europe, has had the purpose of balancing the government budget – even at the cost of depressed private-sector activity. Other forms of austerity, applied back in the late 20th century, had other goals, among them to inspire growth in the private sector. The difference is monumental for the outcome of an austerity strategy.

Europe has been under the statist version of austerity, the purpose of which is to balance the government budget and therefore restore fiscal sustainability in government. The reason for this, in turn, is that as Europe’s political leaders designed a response to the crisis, it never occurred to them that the very existence of a welfare state could have something to do with the crisis.

Back to the EU Observer:

He described the EU’s economic and monetary union (EMU) as flawed from the start, forcing troubled member states to make deep cuts in the private and public sectors via internal devaluation. “Internal devaluation has resulted in high unemployment, falling household incomes and rising poverty – literally misery for tens of millions of people,” he said.

This is a technical level of macroeconomics. What Commissioner Andor is saying is actually that Greece would have been better off when the crisis began if they had been able to devalue their own currency – the drachma – vs the Deutsch mark. However, that is a way to grossly simplify the problem: the argument rests on the assumption that Greece fell into a depression because of bad terms of trade vs. Germany. But the fact of the matter is that Greece was in trouble for years before the outbreak of the Great Recession, with deficit and debt problems resulting not from insufficient exports capacity (which is what Commissioner Andor alludes to) but from a vast system of entitlement programs that promised a lot more to their recipients than taxpayers could afford.

The EU Observer again:

[The] EMU is gripped by a social and economic paradox. “On the one hand, we introduce social legislation to improve labour standards and create fair competition in the EU. On the other hand, we settle with a monetary union which, in the long run, deepens asymmetries in the community and erodes the fiscal base for national welfare states,” he said.

There you go. No blame on the welfare state, all blame on admittedly dysfunctional EU institutions. But the role of the EU did not become acute until the economic crisis had escalated to depression-level conditions in some southern EU states. It was not until the Troika (EU-ECB-IMF) went to work in 2010-11 that the venom of ill-designed austerity went to work deep inside the economies of Greece, Spain, Portugal and Italy. By then, the crisis had already started, it had escalated and caused runaway unemployment and rampant deficits.

So long as Commissioner Andor persists in believing that the welfare state is the victim, not the culprit, in this crisis, the crisis will prevail.

Commissioner Andor’s complete ignorance on this item is revealed as the EU Observer story reaches its crescendo:

A possible way out, he says, is to disperse some money from national coffers through so-called “fiscal transfers” between member states using the euro. Some of the pooled money would be used, in part, to fund a European Unemployment scheme to better prop up domestic demand, says Andor.

How many entitlement programs, and how many levels of government, do you have to involve before government expansionists understand that pouring more gasoline on the fire is not going to put out the flames?

Exports Drive Weak EU Recovery

In an article commenting on the latest Eurostat GDP numbers, Euractiv,com proclaims:

Eurozone employment rose for the second consecutive quarter in the first three months of the year in a sign the recovery was finally helping the labour market. A widening trade surplus signalled a further positive contribution to growth in April.

The article goes on to report an upward trend in economic activity for the European Union. As readers of this blog know, however, such optimism should always be consumed in moderate portions. Far too many commentators, political analysts and policy leaders have far too often declared the European crisis over, and far too many of them – all, in fact – have been wrong. Therefore, let us dive into the most recent national accounts numbers from Eurostat and see what they can tell us.

In the first quarter of 2014, the total EU economy grew at an inflation-adjusted 1.4 percent over the same quarter 2013. This is the strongest growth number since the third quarter of 2011. For the 18-state euro zone, growth was not as good: a meager 0.9 percent, which again is the best number since the third quarter of 2011.

These are not growth numbers to write home about, but the fact that they are the best in 2.5 years is at least worth a note. But what is perhaps the most remarkable news in this is that the EU and the euro zone have gone two and a half years with growth below, respectively, 1.4 and 0.9 percent. In fact, the average annual growth rate for 2012 and 2013 was -0.16 percent for the EU and -0.54 percent for the euro zone.

So does this mean that Europe is now finally seeing the light in the tunnel? Not so fast. First of all, the big problem for the European economy, the welfare state, remains in place, not unscathed by the economic crisis but vigorous enough to continue to weigh down the private sector, and in fact make life even worse for taxpayers in the future. Austerity has changed the presence of government in the economy by raising taxes and cutting spending, to a point where it will start net-taxing the economy through budget surpluses far earlier in the economic recovery phase than previously. This will stifle growth and contribute to long-term economic stagnation.

There is another, even more important reason to believe that this is not the beginning of a sustained recovery. The largest component of the European economy, namely private consumption, grew more slowly than GDP did: 0.7 percent in the EU and 0.3 percent in the euro zone. This means that households remain either heavily economically depressed by the lingering effects of austerity, or that austerity has scarred their outlooks on the future (or both). They are therefore holding back consumption as best they can. Until households recover and restore their faith in the future, there will not be any sustained economic recovery.

Business investments grow faster than private consumption: up 3.5 percent in the EU and 2.3 percent in the euro zone. With private consumption growing as weakly as it does, this investment boom must have an external reason.

And it does: exports are up 4.1 and 4.0 percent, respectively in the EU and the euro zone. This may look like a jackpot for the European economy, as sharp increases in exports should lead to significant multiplier effects out to the rest of the economy. So far, it looks like that is true to some degree, as gross fixed capital formation (investments) is rising as fast as it is. However, even if these are the largest investment growth numbers since the start of the Great Recession, it is crucial to keep in mind that investments have declined, in inflation-adjusted terms, in four out of the last five years. At some point businesses simply have to replace aging equipment.

With the European Central Bank trapping the euro zone in an abundance of liquidity, this is indeed a good time to do it. But even when you pay almost no interest on your loans, you still have to make loan payments. If it was not for the rise in exports, Europe’s businesses would have relatively weak reasons to invest. But combined with the weak numbers for private consumption this means that the exports-investment “boom” may very well be isolated from the rest of the economy.

A further indication of this is that imports have grown basically on par with exports: in the EU with its 28 member states imports and exports grew at exactly the same rate, namely 4.1 percent. In the euro zone imports grew at 3.9 percent, a tenth of a percent behind exports. Since private consumption is growing slowly – much more slowly than imports – it is very likely that the increase in imports is directly related to the growth in exports. Manufacturers in Europe buy raw materials and intermediate products from low-cost suppliers outside the EU (with north and east Africa becoming increasingly important here), bring them in, assemble more advanced products and ship them off to a slowly recovering U.S. market, but also to still-growing Pacific Asia.

Due to the direct dependency on foreign trade, this is a dicey way for an economy to recover. The Chinese economy is increasingly troubled, especially by a looming real-estate crisis. Japan is on the rebound – their annual GDP growth rate has been accelerating for five quarters in a row now – and their appetite for imports is growing even faster. However, that is not enough to sustain an exports boom in Europe, especially not since Europe is increasingly burdened by high energy prices compared to competitors in North America.

Add to that the high taxes that keep household consumption down, and the case for a sustained recovery remains as weak as I have explained before.

One last point that adds to my forecast of continued stagnation in Europe: consolidated government consumption grew by 1.3 percent in the EU and 1.0 percent in the euro zone. Compare these numbers to the 0.7 and 0.3 percent, respectively, by which private consumption increased, and we have a case of continued government dominance over the domestic economy.

With government spending growing 1.8 to 3.3 times faster than private consumption (EU and euro zone respectively) Europe is simply cementing its place in history as the birthplace of the welfare state, and the economic wasteland created by it.

IMF Wants to Kill Deficit Rule

Big news. The IMF wants Europe to focus less on saving government from a crisis that government created, and to focus more on getting the economy growing again. From a practical viewpoint this is a small step, but it is nevertheless a step in the right direction.

Politically, though, it is a big leap forward. Two years after the Year of the Fiscal Plague in Europe, the public debate on how to get the continent growing again is beginning to turn in the right direction.

The EU Observer reports:

The EU’s rules on cutting national budget deficits discourage public investment and “imply procyclicality,” prolonging the effects of a recession, a senior IMF official has said. Speaking on Tuesday (10 June) at the Brussels Economic Forum, Reza Moghadam said that reducing national debt piles should be the focus of the EU’s governance regime, adding that the rules featured “too many operational targets” and a “labyrinth of rules that is difficult to communicate.” “Debt dynamics i.e., the evolution of the debt-GDP ratio, should be the single fiscal anchor, and a measure of the structural balance the single operational target,” said Moghadam, who heads the Fund’s European department.

Let’s slow down a second and see what he is actually saying. When the Great Recession broke out full force in 2009 the IMF teamed up with the EU and the European Central Bank to form an austerity troika. Their fiscal crosshairs were fixed on Greece and other countries with large and uncontrollable budget deficits. The troika put Greece through two very tough austerity programs, with a total fiscal value of eleven percent of GDP.

Imagine government spending cuts of $800 billion and tax increases of $1 trillion in the United States, executed in less than three years. This is approximately the composition of the austerity packages imposed on the Greek economy in 2010-2012. No doubt it had negative effects on macroeconomic activity – especially the tax increases. But the econometricians at the IMF were convinced that they knew what they were doing.

Until the fall of 2012. I have not been able to establish exactly what made the IMF rethink its Greek austerity strategy, but that does not really matter. What is important is that their chief economist, Olivier Blanchard, stepped in and published an impressive mea-culpa paper in January 2013. The gist of the paper was an elaborate explanation of how the IMF’s econometricians had under-estimated the negative effects on the economy from contractionary fiscal measures – in plain English spending cuts and tax increases.

The under-estimation may seem small for anyone reading the paper, but when translated into jobs lost and reduction in GDP the effects of the IMF’s mistake look completely different. It is entirely possible that the erroneous estimation of the fiscal multiplier is responsible for as much as eight of the 20 percent of the Greek GDP that has vanished since 2008 thanks to austerity.

This means that by doing sloppy macroeconomics, some econometricians at the IMF have inflicted painful harm on millions of Greeks and destroyed economic opportunities for large groups of young in Greece. I am not even going to try to estimate how large the responsibility of the IMF is for Greece’s 60-percent youth unemployment, but there is no doubt that the Fund is the main fiscal-policy culprit in this real-time Greek tragedy.

Despite the hard facts and inescapable truth of the huge econometric mistake, the IMF in general, and chief economist Olivier Blanchard in particular, deserve kudos for accepting responsibility and doing their best to avoid this happening again. Their new proposal for simplified fiscal-policy rules in the EU is a step in this direction, and it is the right step to take.

Back to the EU Observer story:

“The rules are still overlapping, over specified and detract focus from the overall aim of debt sustainability,” he said. The bloc’s stability pact drafted in the early 1990s, and reinforced by the EU’s new governance regime, requires governments to keep to a maximum deficit of 3 percent and a debt to GDP ratio of 60 percent. However, six years after the start of the financial crisis, the average debt burden has swelled to just under 90 percent of economic output, although years of prolonged budget austerity has succeeded in reducing the average deficit exactly to the 3 percent limit.

Yes, because that was the only goal of austerity. The troika – especially the EU and the ECB – did not care what happened to the rest of the economy. All they wanted was a balanced budget. The consequences not only for Greece, but for Italy, Spain, Portugal, Ireland, France, the Netherlands, Belgium and even the Czech Republic have been enormous in terms of lost jobs, higher taxes, stifled entrepreneurship, forfeited growth…

I believe this is what the IMF is beginning to realize. The European Parliament election results in May put the entire political establishment in Europe on notice, and the IMF watched and learned. They have connected the dots: austerity has made life worse in Europe; when voters see their future be depressed by zero growth, high unemployment and a rat race of costlier government and lost private-sector opportunities, they turn to desperate political solutions.

When people are looking ahead and all they see is an economic wasteland, they will follow the first banner that claims to lead them around that wasteland. Fascists and communists have learned to prey on the desperation that has taken a firm grip on Europe’s families. But the prospect of a President Le Pen in 2017 – a President Le Pen that pulls France out of the euro – has dialed up the panic meter yet another notch.

In short: the IMF now wants Europe’s governments to replace the balanced-budget goal with fiscal policy goals that, in their view, could make life better for the average European family. The hope is that they will then regain confidence in the EU project and reject extremist alternatives. I do not believe they can pull it off, especially since they appear to want to preserve, even open for a restoration of, the European welfare state.

EU Observer again:

[Critics] … argue that the [current fiscal] regime is inflexible and forces governments to slash public spending when it is most needed at the height of a recession. “Fiscal frameworks actively discourage investment….and imply pro-cyclicality and tightening at the most difficult times,” commented Morghadam, who noted that “they had to be de facto suspended during the crisis.” Procyclical policies are seen as those which accentuate economic or financial conditions, as opposed to counter-cyclical measures which can stimulate economic output through infrastructure spending during a recession.

All of this, taken piece by piece, is correct. The problem is the implied conclusion, namely that you can do counter-cyclical fiscal policy with the big government Europe has. You cannot do that. The confectionary measures at the top of a business cycle simply become too large, too fast. The reason is that taxes and entitlements are constructed in such a way that they redistribute income and resources between citizens on a structural basis. If you use this structure as a measure to stabilize a business cycle you will inevitably reinforce the work-discouraging features of high marginal income taxes at the top of the cycle, but you won’t weaken work-discouraging entitlements at the same point in time. The combination of work-discouraging incentives then accelerate the downturn.

Long story short, if you attempt to use a modern welfare state is not suited for countercyclical fiscal policy, you will end up with weaker growth periods and stronger recessions. Exactly the pattern we have seen over the past quarter-century or so in Europe, and to a lesser degree over the past 15 years in the United States.

The only viable route forward for Europe – and long-term for the United States as well – is to do away with the welfare state. Until we get there, though, this rule change, proposed by the IMF, would be a small step in the right direction. It would ease the austerity pressure, take focus away from attempts at saving government and putting the political spotlight on the need to restore the private sector of the European economy.

Deflation Coming Closer

Yes, folks, it’s time for one more article on Europe’s deflation threat. This one adds a bit more to the picture of just how dangerously close Europe is to deflation.

On June 3, The Guardian reported:

The European central bank will almost certainly act this week to breathe life into the eurozone’s struggling economy after a shock fall in inflation, economists said. An unexpected fall in annual inflation to 0.5% in May from 0.7% in April appeared to seal the case for additional stimulus when the ECB announces its June policy decision on Thursday. It remains well below the ECB’s target of just under 2%, and surprised economists polled by Reuters who had forecast no change.

The “Thursday” that the Guardian refers to is, of course, last Thursday’s ECB meeting where they decided to introduce negative interest rates on banks’ overnight deposits. Banks now pay a penalty for depositing money with the central bank, a move that the ECB hopes will encourage banks to lend even more aggressively to the private sector.

The problem is that the private sector in Europe in general does not have enough confidence in the future to take on more debt. Those that would gladly borrow more money are probably not credit worthy, due to half a decade of recession, unemployment and struggling businesses.  Banks therefore end up with piles of liquidity they cannot make money on – unless they lower their credit standards.

Hopefully that will not happen. Back to The Guardian:

Christine Lagarde, the head of the International Monetary Fund, has been among those to raise concerns that “lowflation” will persist against the backdrop of a sluggish recovery in the 18-nation eurozone, urging the ECB to act. The fear is that weak price pressures could ultimately trigger a dangerous deflationary spiral, where consumers and businesses put off spending amid expectations that prices will fall further still. May’s fall in inflation dragged the annual rate back down to March’s four-and-a-half year low. Eurostat, the region’s statistics office, said food, alcohol and tobacco prices rose by just 0.1% in May compared with a year earlier, while energy prices were flat, as were non-energy industrial goods prices.

And this after years with a money supply that has increased several times faster than money demand, leaving plenty of new liquidity out in the economy.

All this with no effect on GDP growth. Back to The Guardian:

A sustained recovery has yet to take hold in the eurozone, with growth slowing to 0.2% in the first quarter, down from 0.4% in the previous quarter. There was some slightly better news from the labour market on Tuesday, as the unemployment rate fell unexpectedly to 11.7% in April, from 11.8% in March. The number of people out of work fell by 76,000 to 18.75 million. But the headline figure hid big disparities between the 18 member states. The lowest jobless rates were recorded in Austria at 4.9% and Germany at 5.2%. Greece had the highest rate, at 26.5% in February, followed by Spain at 25.1%. Youth unemployment also fell in the eurozone, by 202,000 to 3.38 million people. The rate fell to 23.5% from 23.9% in March. But more than half of young people in Greece and Spain do not have a job.

Small changes back and forth in unemployment make no difference over time. It would take a closer look at employment rates and similar data to find out if this is indeed the beginning of a recovery, or simply an exit from the workforce entirely. The abysmal GDP numbers would indicate the latter.

With no recovery in sight, deflation is still a real possibility in Europe. It is definitely more likely than a sustained recovery.

Europe’s Japanese Decade

Europe is now officially in the liquidity trap.

Even though this gives me plenty of reason to say “See I Told You So”, I prefer to note that this is a thoroughly bad thing for businesses and households in the euro zone.

The ECB may have a positive intent with this, but the only thing it has achieved is to cement a fundamental imbalance in the euro-zone economy. That imbalance is a structural excess supply of liquidity. This is what happened in Japan in the ’90s, when what was then the world’s third largest economy got stuck in a state of economic stagnation for so long that the country basically lost an entire generation to dependency on parents and whatever social welfare they have there.

The significance of the ECB overnight rate move cannot be understated. The ECB is one of the world’s four most important central banks (together with the Bank of England, the Federal Reserve and the Bank of China). By nailing its interest rates not to the floor, but to the ceiling of the basement, the ECB has officially capitulated on the monetary policy front.

This is huge. Before we get into just how huge this is, let us listen to a couple of astute observers, whose points illuminate the practical side of the issue. First, Ambrose Evans-Pritchard from the Daily Telegraph:

The way we are going, the whole world will end up with zero interest rates or some variant of quantitative easing before long. Such is the overwhelming power of deflation in countries with burst credit bubbles. Such too is the implication of a global savings rate that has spiralled to an all-time high of 25pc of GDP, starving the world of demand.

There you go. While Evans-Pritchard is wrong about the root cause of QE (I will explain this in a moment) he nails it right on the head about aggregate demand. Lack of demand is, in turn, driven by overarching pessimism among businesses and households, a pessimism that translates into a net reduction of spending in the economy. To quote Lord Keynes (General Theory, Chapter 16):

An act of individual saving means — so to speak — a decision not to have dinner to-day. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence or a year hence or to consume any specified thing at any specified date. Thus it depresses the business of preparing to-day’s dinner without stimulating the business of making ready for some future act of consumption. It is not a substitution of future consumption-demand for present consumption-demand, — it is a net diminution of such demand. Moreover, the expectation of future consumption is so largely based on current experience of present consumption that a reduction in the latter is likely to depress the former, with the result that the act of saving will not merely depress the price of consumption-goods and leave the marginal efficiency of existing capital unaffected, but may actually tend to depress the latter also. In this event it may reduce present investment-demand as well as present consumption-demand.

And that is precisely what has happened in Europe. While the American economy seems to continue its sluggish recovery after a hiccup in the first quarter, the European economy is sinking even deeper into the stagnation quagmire. Neither businesses nor households want to spend. They choose to save instead, which increases liquidity levels in the banking system. Banks in turn signal excess liquidity to the ECB, which now has responded by saying “don’t come to us with your money – lend it out instead”. But so long as households and businesses remain pessimistic and prefer to save, not spend, they will not demand more loans from Europe’s financial institutions.

As I pointed out back in April, interest rates in Europe have been on the downslope for at least three years now, without generating a macroeconomic restart. There have been isolated pockets of recovery, such as in the Spanish and Portuguese exports industries, but overall the European economy remains at a standstill. The problem is not lack of liquidity – the problem is lack of confidence.

Somewhere, the ECB knows this, but they are not the ones who can restore it. Yet as Evans-Pritchard suggests, their sub-zero interest rate policy is an expression of a desperate desire to do the impossible, namely use monetary policy in a liquidity-saturated economy to restore business confidence:

The chief purpose is to drive down the euro, an attempt to pass the toxic parcel of incipient deflation to somebody else. The ECB is expected to map out future purchases of asset-back securities, “unsterilised” and intended to steer stimulus with surgical precision towards small businesses in what amounts to light QE. This is not yet the €1 trillion blitz already modelled and sitting in the ECB’s contingency drawer.

But that is the next step. And, again, the ECB’s commitment to buy treasury bonds from any troubled country, at any time, at any amount, is de facto a standing commitment to start QE at the drop of a hat.

One more point from Evans-Pritchard:

In China the new talk is “targeted monetary easing”, with the first hints of outright asset purchases. Railways bonds have been cited, and local government debt. The authorities are casting around for ways to keep the economy afloat while at the same gently deflating a property boom that has pushed total credit from $9 trillion to $25 trillion in five years.

Which, again, de facto puts all three major global currencies in the QE zone. So far only the euro has reached liquidity-trap territory, but its fate is a stark warning to other central banks to put a foot down at some point when it comes to saturating the economy with liquidity – in other words, printing money day and night.

Another Telegraph columnist, Jeremy Warner, explains:

This is truly desperate stuff. That nearly six years after the collapse of Lehman Brothers, Europe is still belatedly trying to address the twin afflictions of deflation and economic depression tells you as much about the political paralysis that grips the euro area as about the severity of the crisis.

Yes. However, I am not sure Warner knows exactly what that political paralysis consists of. Europe needs deep, far-reaching structural reforms in order to get its economy going again. The key content of those reforms must be the gradual, but eventually complete dismantling of the welfare state. This will not only eliminate the heavy tax burden on Europe’s private sector, but also open up large sectors of the economy for free-enterprise entrepreneurship. Both these effects will generate GDP growth way beyond what today’s political leaders in Europe – and, frankly, in America – can imagine.

Such reforms would also pave the way for a restoration of sanity in monetary policy. Today’s vastly excessive supply of money, both in Europe and in the United States, is related to big, structural government deficits. In a way, government has established a third funding arm for its expenditures: in addition to taxes and borrowing from the general public, Europe’s and America’s welfare states have learned to work with their central banks to create an ongoing funding opportunity for government outlays. Central banks print money, buy treasury bonds and thereby allow welfare states to survive – theoretically in perpetuity – even as they max out taxes and their credit rating with the general public.

In other words, the purpose behind money supply under a welfare state is broader and more complex than in a free-market economy. In the latter, all the central bank does is provide a base for liquidity in the economy; in the former, the central bank adds to its liquidity commitments a “funding buffer” for big government. Since big government slows down economic growth, over time the tax base cannot keep up with the growth in entitlement spending that is symptomatic for the modern welfare state. As a result, money supply grows faster to provide compensating funding. When the economy makes a serious downturn, as it did a good five years ago, this slow replacement of money supply for taxes to fund the welfare state accelerates.

Eventually, money supply becomes impotent. Unless fiscal policy picks up the slack; unless legislators make the necessary reforms; the central bank will hit the point of zero interest rate. From there, it only has two ways to go: back or down in the negative-interest basement.

The ECB chose the latter.

Welcome to the liquidity trap, Europe. Enjoy the stay, because it is going to be long. A Japanese Decade long.

Growing Support for Euro-QE

Support for a European version of QE is growing. The latest voice to join the choir of praise comes from a think tank in Brussels. Over to the EU Observer’s Opinion section:

The eurozone has been suffering from record low inflation for several months now. Last October the inflation rate dropped below 1 percent and has remained there ever since. This low pace of price increases is dangerous because it undermines growth and makes our debt piles even more difficult to handle. The situation is beginning to resemble the ‘lost decade’ that Japan endured in the 1990s. After a long period of hesitation, the European Central Bank (ECB) finally seems ready to counter low inflation.

I wrote about this over a month ago. The entire issue smells of desperation. The EU and its member-state governments have exhausted their fiscal policy opportunities to do anything for growth and more jobs. They have focused all their attention on budget deficits, using ill-designed austerity policies to try to save the welfare state with measures that – in reality – have prolonged and deepened the economic crisis. Now, clueless as the policy makers are in Europe, they hope that an expansion of the money supply is going to make a difference. That is perhaps the most inefficient policy instrument they could turn to at this point.

I weep for Europe.

The author of the EU Observer opinion piece does not agree. Stijn Verhelst, as his name is, works for the EGMONT Royal Institute for International Relations in Brussels and seems to think that a money supply that is already growing at 4-5 times the GDP growth rate without making a difference for the better, would actually have a substantially positive effect on the economy if it grew even faster:

The ECB appears to have set out an order of play in which it first exhausts ‘conventional’ monetary policy, before considering ‘unconventional’ policy. Yet due to the crisis this distinction between conventional and unconventional policy is seriously out of date. ’Conventional’ monetary policy refers to a modification of the ECB’s interest rates, which was indeed the usual policy instrument before the crisis. These interest rates are now at an all-time low. The rate at which banks can borrow from the ECB stands at only 0.25 percent. The rate on the ECB’s deposit facility – the remuneration that banks receive for placing their money in the ECB – is as low as 0 percent.

This is getting technical, but here is what it means in a nutshell. Modern-day banking, just like old-days banking, is based on banks borrowing money cheaply and lending it out with a mark-up on the interest rate. The difference is that modern-day banking is no longer confined to lending the money people deposit into checking and savings accounts. Instead, it is based on borrowing money from the central bank. This means that the central bank de facto controls the interest rates on loans given by banks to businesses and households. The lower the rate that the central bank lends at, the lower the rate banks can offer their customers.

Sometimes, though, banks cannot find enough businesses and people to lend to. They may end up with un-committed liquidity in their accounts, which they then can deposit with the central bank, compensated at a certain interest rate. If the central bank wants to cool down bank lending it can raise this interest rate until business and household loans become uncompetitive. If it wants to stimulate bank lending, it cuts that same interest rate.

This is exactly what is happening in Europe. At zero interest rate, banks can lower their rates on loans to basically a basic risk-based charge. If the central bank wants to go even more aggressive on pushing loans onto businesses and families, it can charge banks a fee for parking money in overnight accounts.

Such fees are effectively negative interest rates. Imagine your bank offering you a $20,000 car loan and you tell them “OK, I’ll take it but you will have to pay me a two-percent premium as thank you for accepting your loan”. Don’t see it happening? Neither do I. But the European Central Bank is de facto at that point right now with its zero interest on bank deposits.

Back now to Mr. Verhelst and his EU Observer Opinion piece:

In terms of monetary policy, such a negative deposit rate would be highly unusual. Only a couple of smaller central banks, like those of Denmark and Sweden, have ventured into this territory. If the ECB were to become the first major central bank to push its deposit facility into negative territory, this would be a historical decision with uncertain consequences.

We can get a hint from Sweden, where household debt now equals 180 percent of disposable income. By comparison, when the American real-estate bubble burst six years ago the same ratio was 130 percent here. In other words, the ECB could contribute to another financial bubble.

Mr. Verhelst does not seem to be worried about this. His focus is on whether or not the ECB’s policies are “conventional” or “unconventional”:

It would, in any case, not be conventional. So what exactly is ‘unconventional’ policy, if it is defined in opposition to ‘conventional’ policy? The concept refers to instruments that are not part of the regular toolbox of central banks. The best known type of such unconventional policy is ‘quantitative easing’, … The Fed, the Bank of England and the Bank of Japan – all the major central banks in industrialised economies – have embraced quantitative easing during the crisis. That is, all but the ECB which has been most cautious with regard to unconventional monetary policy.

Actually, no. Their pledge to buy any amount of treasury bonds from a troubled euro-zone country, at any time, is de facto a commitment to quantitative easing. Anyway:

Despite the theoretical distinction between conventional and unconventional monetary policy, the reality is that we have been deep in new monetary policy territory for some time now. Due to the once-in-a-lifetime economic and financial crisis, all monetary policy has actually become highly unconventional.

Well… Unless Europe’s policy makers get their act together, this is going to be a rest-of-a-lifetime economic crisis. It does not matter what you do with monetary policy if private consumption and investments are suppressed by an unaffordable, fiscally unsustainable welfare state. But that’s just a side bar. Back to Verheist, who concludes by recommending QE for Europe:

In many ways, quantitative easing is actually the prudent tactic. In terms of monetary policy therefore, the division between conventional and unconventional policy is a myth. If the ECB decided on a negative interest rate for its deposit facility without quantitative easing, this should not be viewed as the exhaustion of its conventional policy. The decision might be the right one to make, but the ECB should provide a thorough explanation of exactly why it is the right choice. Reliance on the myth of conventional monetary policy should not be a part of that explanation.

I just have one question for Mr. Verhelst. So far, QE has been used in the United States to save over-spending Congress from itself. The quasi-QE program in place so far in Europe, also known as the troubled-countries bond buy-back program, has also been used to save fiscally obese welfare states from a debt-induced heart attack. What would this new QE program be aimed at? Where would the newly printed money go? The ECB is already punishing banks for not lending enough (the whip on their backs being the zero interest rate on overnight deposits) which they undoubtedly have to do because there are not enough people out there who want to borrow money. The average interest rate on loans to non-financial corporations is below four percent in the euro zone. How much lower does Mr. Verheist think that banks need to push that rate before loans pick up?

My bet is that QE will fail in Europe. The reason is not that it will trigger inflation, because it won’t. The transmission mechanisms just aren’t there. No, the reason is that the fiscal policy applied by almost every EU member state is tight and aimed squarely at balancing government budgets. The U.S., on the other hand, combines a deficit with QE, which has proven to be a reasonable stimulus model for growth and job creation. We hit a wall in the first quarter of this year, and it remains to be seen how hard that crash was. But there is no doubt that if our fiscal policy was as tight as it is in Europe, we would be in far deeper trouble than we are now. QE has helped the federal government keep fiscal policy relaxed, something that cannot continue forever. But at least through 2010-2013 it helped us fare better than Europe.

Bottom line: QE can only be a success story if it works as an auxiliary measure to fiscal policy. With the latter tight, the former will have no positive influence on the economy.

The European Game Changer

In last week’s elections, did Europe’s voters plant the seeds of a post-EU Europe? The question has surfaced in response to the strong showing of Euroskeptics and outright anti-EU parties across the continent. While most observers of European politics are still at loss trying to comprehend the fact that some of their fellow citizens actually don’t like the EU, some sharp-minded analysts see the writing on the wall for what it actually is. In addition to Yours Truly, you can always trust Daily Telegraph columnist Ambrose Evans-Pritchard. Again, he has elevated himself above the murmur. Starting with Britain, he gradually expands his perspective, laying out a credible scenario for Europe’s future:

If Europe’s policy elites could not quite believe it before, they must now know beyond much doubt that they have lost Britain. This island is no longer part of the European project in any meaningful sense. British defenders of the status quo were knouted on Sunday. UKIP won 27.5pc of the vote … Margaret Thatcher’s Tory children are scarcely more friendly to the EU enterprise.

This is an important observation. The British vote shows two things: first, that British democracy, unlike continental Europe’s, still has not succumbed to Europhoristic centralism – on the contrary, Brits still believe in their traditions and their way of governing themselves; secondly, classical Anglo-Saxian liberalism still has a voice in Britain.

The second point carries more weight than perhaps even the Brits themselves realize. Deep down, UKIP’s ideology is a mild version of what we here in America refer to as “libertarianism”, namely a solid refutation of all government beyond a small set of strictly contained and enumerated core functions. A UKIP prime minister would never pursue the termination of the British welfare state, but he would most likely revive some of Thatcher’s legacy, a legacy that has been carefully squandered by the Conservatives.

Britain needs more Thatcherism. Europe could use a big dose of it as well. Hopefully, an invigorated UKIP can deliver that, with the right cooperation in the European Parliament.

Back to Evans-Pritchard:

Britain’s decision to stay out of monetary union at Maastricht sowed the seeds of separation, as pro-Europeans fully understood at the time, though almost nobody expected EMU officialdom to clinch the argument so emphatically by running the currency bloc into the ground with 1930s Gold Standard policies and youth unemployment levels above 50pc in Spain and Greece, and above 40pc in Italy. European leaders must henceforth calculate that the British people will vote to leave the EU altogether unless offered an entirely new dispensation: tariff-free access to the single market along the lines already enjoyed by Turkey or Tunisia; and deliverance from half the Acquis Communautaire, that 170,000-page edifice of directives and regulations that drains away sovereignty, and is never repealed.

In a nutshell, Evans-Pritchard is saying that the euro was doomed without Britain’s participation – a statement that is only partially correct. The structural imbalance of the euro project goes deeper than that. But more on that later. Evans-Pritchard refers to reckless austerity policies as having removed the fiscal and, especially, monetary policy foundations for a sound, strong common currency. He is right about austerity, as regular readers of this blog know; the Liberty Bullhorn contains more analysis of Europe’s austerity policies and their consequences than any other website in the world.

But even if we disregard the structural imbalances built into the euro project, it is important to note that the ECB has exacerbated the crisis by frivolously printing money right, left, up and down to save credit-crashing welfare states from fiscal ruin. If there is one single policy move that really drove the pole through the heart of the euro, it was the ECB’s decision to bail out its worst-rated welfare states. That open-ended commitment to print money reduced the euro from Deutsch Mark status to something of a business-class Drakhma.

Evans-Pritchard also makes a note of the ever-growing regulatory burden on EU’s member states. In this category, the EU is competing with the Obama administration, though in the latter case things have slowed down considerably in the last couple of years. Also, it is increasingly likely that the next president of the United States will have libertarian roots – probably stronger than those of UKIP leader Nigel Farage – which will vouch for a historic regulatory rollback. For that to happen in Britain, the country has to leave the EU.

Which, again, is probably going to happen in the next few years. Now for the broader perspective, and Evans-Pritchard’s analysis of where France is heading:

It is a fair bet that EU leaders would search for an amicable formula, letting Britain go its own way while remaining a semi-detached or merely titular member of the EU. Let us call it the Holy Roman Empire solution. Yet Britain is the least of their problems. The much greater shock is the “Seisme” in France, as Le Figaro calls it, where Marine Le Pen’s Front National swept 73 electoral departments, while President Francois Hollande’s socialists were reduced to two. … It is widely claimed that the Front is eurosceptic only on the surface. Perhaps, but when I asked Mrs. Le Pen what she would do no her first day in office if she ever reached the Elysee Palace, her reply was trenchant. She would instruct the French Treasury to draft plans for the immediate restoration of the franc… She vowed to confront Europe’s leaders with a stark choice at their first meeting: either to work with France for a “sortie concertee” or coordinated EMU break-up, or resist and let “financial Armageddon” run its course. … She said there can be no compromise with monetary union, deeming it impossible to remain a self-governing nation within the structures of EMU, and impossible to carry out the reflation policies necessary to defeat the economic slump.

Given that the Front National has suffered no notable setback in national voter support over the past decade, but instead gradually grown stronger, the prospect of a Madame President Le Pen is one that both Europe and the United States should get used to. Therefore, as Evans-Pritchard rightly explains, it is also time to get used to the prospect of Europe returning to national currencies.

The one point in this that I disagree with is that reflation is the way out of the recession. More on that in a moment. First, one more point from Evans-Pritchard, this one about the future of the euro with rising Euro-skepticism among voters:

The euro will inevitably lurch from crisis to crisis without some form of fiscal union and debt pooling. Yet voters have just let forth a primordial scream against any further transfers of power.

Indeed. So long as there is any form of government involved in the economy, there has to be a fiscal policy tied to that currency. Furthermore, so long as there is a welfare state there will be government deficits, either in recessions or on a structural basis as has been the case in Europe and the United States for decades now. Such deficits will be denominated in a currency, and that currency has to be the same that the government accepts for, e.g., tax payments, as well as the same currency that they use to pay out entitlements. In other words, there has to be a jurisdictional overlap between a currency and a fiscal government, or else the currency inevitably becomes unstable.

Some of these points were made by economists, among them Robert Mundell, already 15 years ago, before the euro was minted. However, they were drowned out by the Europhoria that dominated most of the ’90s in Europe, leaving the continent with a fundamentally unsustainable imbalance between monetary and fiscal policy.

So long as national government deficits were of manageable levels the imbalance did not have any notable political or macroeconomic consequences. As I describe in my forthcoming book Industrial Poverty, this was the case between the Millennium and Great Recessions. However, as soon as budgetary sink holes opened up around Europe from 2008 and on, the imbalance became a true problem.

The full explanation of this requires an intricate but fascinating macroeconomic analysis. I am working on it separately, hoping to share it later this year. In the meantime, let’s acknowledge that Evans-Pritchard hits it right on the nail: the mounting voter resistance to more EU power is a game changer for both the EU and the future of the euro currency. What is missing from his column is the right economic conclusion, namely that dismantling the welfare state – not reflation – is the way forward for Europe. But that is a minor point. Do take a moment and read the rest of his entertaining yet sharply analytical column.

EU Must Prioritize U.S. Trade Talks

The political establishment in the EU is grasping for some positive news in the election fallout. It is still too early to say definitively what the consequences will be, but my first conclusion, namely that Euroepan democracy was dealt a blow, still stands. The anti-democratic flanks of the political spectrum gained ground at the cost of centrist parties. The one silver lining is that democratic, Euro-skeptic parties like the UKIP did very well and will increase their influence on the European scene.

As I also pointed out in my last article, the election has put Europe at a fork in the road: either the continent makes a turn toward a better future, with less EU-level government and a general move in the libertarian direction, or the anti-democratic collectivists – in the shape of communists, Nazis and aggressive nationalists – will gradually gain more power and push the EU in a very dangerous direction. If the EU political establishment is smart, they will extend an olive branch to democratic Euro skeptics like Nigel Farage from UKIP and Morten Messerschmidt from the Danish People’s Party.

Based on post-election media reports thus far, it is by no means certain that the Eurocracy will make the right choice here. As an example, consider this report from EUBusiness.com:

European Union leaders agreed Tuesday to take a fresh look at the bloc’s policy priorities, after a stinging vote setback across Europe that saw dramatic gains by radical anti-establishment parties. Meeting for a post-mortem summit in the wake of the dismal European Parliament election results, the bloc’s 28 national leaders gave European Council chairman Herman Van Rompuy a mandate to fine-tune policy goals on issues from jobs to energy. … He said that now that Europe was emerging from economic crisis, there was a need for an agenda of growth, jobs and competitiveness. He also stressed that “a strong response” was needed to the climate change challenge and “a push” towards energy union and to lessen energy dependency.

Not a word about the need to reconsider the growth of the Eurocracy. Not a word of self reflection over what the EU has become. To be blunt, if this is how the mainstream parties in the European Parliament are going to respond to last week’s elections, the chickens are going to come home to roost, marching in lines behind either a hammer and a sickle, or a swastika.

It is still unlikely that this will happen, but it definitely cannot be ruled out. The question is if the Europhile parties in the Parliament have it in them to slow down the EU project and be more reflective than Herman van Rompuy. The EU Business again:

Projections give the conserv ative European People’s Party (EPP) 213 seats out of 751, with the Socialists on 190 and the Liberals 64. That will give the centre-right, centre-left and Liberals a solid working majority. … The anti-EU camp will have about 140 seats though analysts say it will be difficult for the disparate groups to operate in a coherent fashion.

It would be foolish of the Europhile parties to use this arithmetic as a basis for their policies. Nevertheless, there is a great risk that this is how they choose to read the voter mandate from last week’s elections. A story from Euractiv concurs:

The Eurosceptic election victory, notably in France, the UK and Denmark, should not drastically affect the work of the European Parliament. With 140 MEPs in the next legislature, Eurosceptic parties will still represent a minority out of the 751 MEPs in the EP. “Their influence will be low. They will only have a slow-down effect on proceedings,” said Henri Weber, an outgoing French MEP. “They will obstruct more, and turn up to sessions with their national flags, as did Nigel Farage’s UKIP party during the last mandate,” he continued. Law-making should only be marginally affected by the increase of Eurosceptic MEPs, as most plenary session voting in Strasbourg is taken by absolute majority. With 751 MEPs from 28 EU member states, the Eurosceptic vote cannot reach the absolute majority alone (376 seats). “The National Front is definitely not the dominant political party in Europe. The party that came out on top in these elections was the EPP, followed by the PES and ALDE” stated Nathalie Griesbeck, French centrist MEP.

Yes, but they lost seats right and left. However, if there is one positive touch to this, it is that the Eurocracy will probably move ahead with some items that could actually help the European economy. One of those items is the proposed Transatlantic Trade and Investment Partnership, TTIP, which has strong support in the EU political leadership as well as in the European business community. Back in February, EU Observer reported:

The ‘honeymoon phase’ of talks aimed at brokering a landmark EU-US trade deal are over, business leaders have warned. Speaking at a meeting of business leaders in Athens to coincide with a meeting of EU trade ministers on Friday (28 February), Markus Behyrer, the director general of lobby group BusinessEurope, led calls for EU leaders and the business community to tighten their communications strategies to retain public support. “The honeymoon phase of the negotiations appears to be over,” said Behyrer. “Now the phase when negotiators will need our support and encouragement…we will have to prove that this is not a race to the bottom but a race to the top.” At a press conference later Karel de Gucht commented that “the debate should be based upon the facts – not just speculation and fear-mongering.”

There was one caveat in that article:

Finland’s Europe minister Alexander Stubb warned that “selling” the talks would be “a really tough case”. “We are grappling with people who are anti-free trade, anti-American, and anti-globalisation,” he said.

The anti-free trade, anti-American, anti-globalization crowd made big inroads into the European parliament this election. They will do what they can to stop or delay the TTIP. Fortunately, as the Daily Telegraph reports, the determination was strong as late as last week, on both sides of the Atlantic, to bring the trade negotiations to completion:

US and EU trade representatives have had a “productive” fifth round of talks, but hard work lies ahead, US trade representative Michael Froman says. “We’ve moved from discussing a conceptual framework to defining specific ideas for addressing the majority of the negotiating areas,” Froman said as the talks ended. He said there was “a lot of work ahead” but “steady progress” was being made and there was now “a firm understanding of the key issues that need to be resolved”. Froman’s chief negotiator in the Transatlantic Trade and Investment Partnership (TTIP), Dan Mullaney, called the week’s talks “challenging”. Completing the world’s largest free trade agreement “will require a lot of creativity and a lot of persistence,” he told reporters. Ignacio Garcia-Bercero, chief negotiator for the European Union, underlined that the overall goal was “highly ambitious” but that progress had been made through “intensive” discussions this week on labour, environment and sustainable development issues. The US and European Union aim to expand what is already the world’s biggest trade relationship by dismantling regulatory barriers that force companies to produce different products for the US and European markets.

This would be a huge boost for trans-Atlantic trade and have a cost-lowering effect on many consumer and industry products. Let’s hope the Eurocrats prioritize this as they move forward, but that they also learn to listen to Euro-skeptics when it comes to the relations between the EU and its member states. If they don’t, the authoritarian flanks of the European political scene will continue to grow at the expense of democracy, political stability – and economic freedom and prosperity.

European Democracy in Peril

As the dust settles on the elections to the European Parliament, a somewhat schizophrenic conclusion is emerging:

  • on the one hand voters expressed their skepticism toward the EU project and rejected, overall, the notion of a continuous, business-as-usual expansion of the EU into a new, gigantic government bureaucracy;
  • on the other hand the rejection of even bigger government was partly expressed in a form that, absurdly enough, may very well pave the way for another, even uglier form of government expansion.

The outcome of the election is more dramatic than most media outlets have yet realized. Put bluntly, this election was a loss for European parliamentary democracy and a gain for authoritarianism of a kind Europe has not suffered from for a quarter century now. But as painful as it is to acknowledge, the real winners of this election were communists and aggressive nationalists – also known as fascists.

There is no mistaking the outcome: voters spoke, and numbers changed in the European Parliament. Political parties with a traditional commitment to parliamentary democracy lost dramatically, with conservatives and liberals losing more than one fifth of their seats. At the same time, communists and radical socialists of assorted flavors increased their parliamentary presence by one third.

Add to those gains the big inroads made by aggressive nationalists and fascists.

Europe’s political elite may want to ignore this, but the most dangerous reaction to this election would be to turn a blind eye to what voters did: they passed power out from the democratic center to the outer rim of the political spectrum. There, communists and fascists stood ready to scoop up voters who are deeply dissatisfied with, well, just about everything from unemployment and economic stagnation to immigration and “inequality”.

Europe is now at a fork in the road, one that will decide the fate of a continent that is home to half-a-billion people. But before we get there, let us take a look at what actually happened in the election.

Communist parties did well, especially in southern Europe where the Great Recession has done its biggest damage. In Greece, the radical leftist party Syriza, which sees Hugo Chavez’ Venezuela as a political role model, took 26 percent of the vote and became the largest Greek party in the EU Parliament. In Italy, incumbent prime minister Renzi’s leftist Democratic Party got 40 percent of the vote. Portugal’s old communist party, rebranded as socialists, came in first with 31.5 percent of the vote. In Spain, a radical socialist coalition took ten percent of the votes, placing them third in the election.

But it was not just in southern Europe that communists, old or new, did well. Ireland’s scary-left and historically terrorist-affiliated Sinn Fein got a frighteningly large 17 percent of the votes.

Sweden is an example of how refurbished communists have shown remarkable resiliency in the past two decades. Their radical left is split among three parties, which taken together is more than the country’s traditionally dominant social democrats got. The three radical leftist parties are: the Greens (15.3 percent of the vote), the renovated-communist Leftist Party (6.3) and the new, aggressively socialist Feminist Initiative (5.3).

Altogether, the entire leftist spectrum – from vanilla-favored social democrats to hardline Chavista leftists – held their lines in the European Parliament, in the face of stiff competition. But as indicated by the above mentioned examples, the radical flank within the leftist block made big advancements. Their European Parliament group, called GUE/NGL, increased its number of seats by one third. This number could increase even more when some small, new parties from across the EU choose affiliation.

The underlying message in the shift toward the hard left is that Europe’s voters – already living under the biggest governments in the free world – have forgotten what happens when government grows beyond the boundaries traditionally respected in Western Europe. Perhaps the most conspicuous signal of Europe’s communist amnesia is embedded in the seven percent voter share that Die Linke got in Germany. They are the old Socialist Unity Party, in other words the party that ruled East Germany with an iron fist and back-up from Soviet tanks throughout the Cold War. Die Linke is fiercely anti-capitalist and shares Syriza’s adoration for what Hugo Chavez did to Venezuela.

The fact that Die Linke only got 7.4 percent should be considered in the context of the fact that Germany’s Green Party captured 10.7 percent of the votes. This puts the radical left in Germany at 18.1 percent, a share that grows even more in view of the fact that the SPD, the social democrats, are now parked at a lowly 27 percent voter share. If the social democrats in Germany continue to decline, the combined voter share of the Green Party and the old East German communists could easily exceed 25 percent in the next German national elections.

A surging radical left in the European Parliament will have profound consequences for European politics, but it will also affect Europe’s relations to the United States. More on that in a moment. First, let us take a look at the other flank of the authoritarian lowland.

Known under its less sophisticated label “fascism”, authoritarian nationalists made frightening advancements in the election. Most notorious, of course, is the victory in France for Front National under Marine Le Pen’s stewardship. Her polished version of the party her father founded won a stunning 25.4 percent of the vote, putting them decisively ahead of the nearest competition.

Ten years ago, Front National was little more than a punch line in a political joke. Yes, Jean-Marie Le Pen technically came in second in a presidential run-off against incumbent Jacques Chirac, but the entire campaign was of the same kind as if the Democrats had put up Ralph Nader against George W Bush in 2004. (No other comparison intended between Nader and Le Pen, of course.) Today, Front National is at a point where their leader can confidently demand that President Hollande dissolve the national parliament for new elections. That is not going to happen, but the demand sent shivers through the French political establishment.

It should. Marine Le Pen is no longer just a French political contender – she is in fact not just the leader of what is currently the largest political party in France. She is emerging as the leader of a new, bold, aggressive nationalist movement in Europe. Her party group in the European Parliament will incorporate outspoken fascists such as Hungarian Jobbik (which came in second in Hungary and apparently has its own uniformed party corps). Some media reports state that Front National and Jobbik are already in talks with each other on how to cooperate in the European Parliament.

Another of Le Pen’s new friends is Golden Dawn, which in the European election confirmed its position as Greece’s third largest party. Despite extensive legal challenges and elected officials of the party currently being incarcerated, Golden Dawn refuses to go away. More than likely, their strong support among police and the military will be enough to let them return, emboldened and empowered, to both the Greek and the European political scene.

With Front National, Jobbik and Golden Dawn as their pillars, the aggressive nationalist party group in the European Parliament could indeed turn out to be a vehicle for the rebirth of European fascism. The deciding factor will be where Europe’s rapidly rising patriotic parties will land. This is a different breed than the aggressive nationalists, consisting of Euro-skeptic parties, best exemplified by Britain’s UKIP. There is now a whole range of parties in Europe that fall into this category, such as PVV in the Netherlands, Danish People’s Party, Swedish Democrats, True Finns, Alternative for Germany and Austria’s People’s Party.

Some of these parties did remarkably well: both UKIP and the Danish People’s Party won their countries’ respective European Parliament elections. The Swedish Democrats scored almost ten percent of the votes, double what they got in the national elections in 2010. Alternative for Germany surprised many by capturing as much as seven percent of the votes, while there was disappointment among PVV supporters in the Netherlands as their party only got 13 percent and a third place.

It is not an exaggeration to say that this new group of patriotic parties holds Europe’s fate in their hands. Their ideological foundation spans from “basically libertarian” as Nigel Farage once called UKIP to welfare-statist Swedish Democrats. But they all have in common that they are committed to traditional, European parliamentary principles. This sets them apart from the aggressive nationalists whose political visions do not exclude a new full-scale fascist experiment.

If some of the patriotic parties are lured into cooperation with Front National, Jobbik and Syriza, there is a significant risk that Europe, within the next five years, will see a continent-wide fascist movement. There are other aggressive nationalist parties lurking in the political backwoods, ready to capitalize on voter disgruntlement with existing political options. Among those, Germany’s National Democratic Party, NDP, actually captured on seat in the European Parliament this time around.

With the history of Front National in mind, only imagination sets boundaries to what the NPD can accomplish.

Another example is the Party of the Swedes. Originally called the National Socialist Front and merged with violence-prone Swedish Resistance Movement, the Party of the Swedes is waiting for the patriotic, parliamentarian Swedish Democrats to fail to deliver on their voters’ Euro-skepticism. While waiting, Party of the Swedes is gaining parliamentary skills at the local level around Sweden. That experience can then be used in a run for national office – and eventually to reach for the European Parliament.

While fundamentally anti-democratic movements gained ground, the surge of democratic, patriotic parties is the only silver lining in this European Parliament election. This group is still small compared to the traditional center-right parties known under their acronyms EPP (center-right) and ALDE (center-liberal). But these democratic, patriotic parties hold the map in their hands to Europe’s future. If the EPP and ALDE choose to cooperate with them, then Europe will choose the stable, democratic road to the future.

If, on the other hand, the Europhiles in EPP and ALDE continue to ignore the growing, sound, democratic version of Euro-skepticism, and instead charge ahead with their project of a grand European Super-Union, the voter reaction will be fierce and potentially catastrophic. At that point, voters will seek other, much less palatable outlets for their skepticism or outright resistance to the European project.

If leaders of Europe’s conservatives, liberals and social democrats do not pay attention to what actually happened in this European election, they will do Golden Dawn, Jobbik, NPD and Front National a service they will regret for the rest of their lives.

It does not matter if Marine Le Pen is a fascist or an aggressive nationalist. Her surge to pan-European prominence has uncorked a bottle where black-shirted genies have been locked away for decades. History has shown how relentlessly those genies can intoxicate cadres of voters and how viciously they can tear down the institutions of parliamentary democracy.

Europe is playing with fire. The only thing that stands between the torch of fascism, lit up in this election, and a pan-European bonfire is the skill and insightfulness of a small group of Europhile politicians and bureaucrats in the hallways of power in Brussels. So far the leaders of EPP and ALDE, as well as the European Commission, have thoroughly ignored the rise of Euro-skepticism around the continent. So far they have been completely tone deaf to widespread popular frustration with the EU project.

Hopefully, they will come around and start listening to their critics. Hopefully they will let Nigel Farage be the recognized voice of Euro-criticism. But time is running out. If nothing decisively happens soon, the same trend that was set in this election will begin to show up in national elections.

In 2017, the Palais de l’Elysee could have a new tenant – Marine Le Pen.

Europe in Permanent Stagnation

I have explained on numerous occasions that the European economy is not at all in recovery mode. Jobless numbers are frighteningly bad, the long-term trend is still pessimistic, GDP growth is so slow that there is a credible deflation threat hanging over Europe, the OECD recently wrote down its growth forecast for the global economy, including the EU. All in all, Europe is a slow-motion economic disaster.

Now British newspaper The Guardian reports of yet another dark cloud over the European economy:

The eurozone’s fragile economic recovery suffered a setback in the first quarter after slower-than-expected growth. The combined currency bloc scraped together growth of 0.2% between January and March, in line with growth in the previous quarter but disappointing expectations of 0.4% growth.

This amounts to 0.8 percent for the entire year, which is deeply insufficient to turn around the European economy. The best you can say about this growth figure it is yet another indicator that my forecast of Europe being stuck in long-term stagnation is correct. This long-term stagnation is not a recession – it is a new era for the European economy.

There was a huge divergence in fortunes, with Germany growing at the fastest rate of all 18 countries, with gross domestic product increasing by 0.8%. It followed 0.4% growth in Europe’s largest economy in the previous quarter. The pace of recovery also accelerated in Spain, with growth of 0.4% outpacing a 0.2% increase in GDP in the previous three months.

I have explained before that the German economy is growing because of its strong exports. The gains from the exports industry do not spread to the rest of the economy, as is evident from paltry domestic spending figures for the German economy. The same is, in all likelihood, true for the Spanish economy, whose national accounts I will take a look at as soon as time permits.

When exports drive a country’s GDP growth, the country is not in a sustained recovery. The only way a sustained recovery can happen is if private consumption and corporate investments increase together. That is not yet happening in Germany, and it is certainly not happening in Spain.

At the bottom of the pile was the Netherlands, which suffered a shock 1.4% contraction in GDP, reversing 1% growth in the previous quarter. Portugal’s economy shrank by 0.7%, following growth of 0.5% in the final three months of last year. The French and Italian economies were also dealt a blow, with zero growth in France and a 0.1% contraction in Italy in the first quarter. It followed 0.2% growth and 0.1% growth in the fourth quarter of 2013.

Stagnation, for short. And the only remedy that Europe’s political leaders seem to be able to think of is to print even more money, to saturate the economy with liquidity and to thus depreciate the euro vs. other major currencies. But with the Federal Reserve continuing its Quantitative Easing policy and the Chinese facing major problems in their financial sector it is entirely possible that the attempts at eroding the value of the euro will be neutralized by similar attempts from two of the world’s other major central banks. That in turn will put a damper on exports and rob the Europeans of even the illusion that their GDP will at some point start growing again.

At the end of the day, the fact that this negative news disappoints so many people in Europe is yet another indicator that my new book, Industrial Poverty, out in late August, is badly needed.