Tagged: INDUSTRIAL POVERTY
EU: Titanic Without A Captain
The crisis rhetoric based on the austerity crisis has cooled off. This does not mean that the austerity problem is gone, or that it has somehow magically solved Europe’s problems with government deficits. On the contrary, the austerity campaign of 2012 has wiped out any prospect of growth in the euro zone, and possibly in the EU as a whole, for the next couple of years. There are still austerity plans unfolding in primarily Greece, Portugal and Spain but other countries may join if their budgets do not improve over the remainder of this year.
But the fact that the media frenzy about austerity is gone is taken as a sign by some of Europe’s political leaders that it is time to focus on something new and fresh. Interestingly, as soon as political leaders in Europe start calling for more visionary leadership, the Brussels-based Eurocrats who led the authoritarian austerity assault on some member states of the EU are suddenly going AWOL.
The European Commission on Wednesday (12 June) came under pressure to be a bold policy-maker, as a meeting of EU leaders later this month shapes up to be another damp squib.
The EU Commission and the leaders of the European Central Bank surely do not feel that they are not leading. They are leading the charge against deficits. They are leading attacks of fiscal firebombing on countries whose economies are already in deep trouble, but that connection is lost on the likes of Barrosso, van Rompuy and Rehn. They think they have been showing strong leadership during the austerity crisis. (That the end result is worse than the situation they tried to solve is another matter.)
The real problem here is of course that the EU Commission has been spending so much of its political efforts on shoving tax hikes and spending cuts down the throats of Greek, Spanish, Portuguese, Italian and other taxpayers that they simply do not grasp the notion of positive, visionary political leadership.
This might actually turn into an interesting situation. The austerity crisis is only dormant, not solved, and will resurface again toward the end of this year. In the meantime there is a policy vacuum that some European politicians want to fill with more than political machine guns. They want to build something constructive for the future.
It is of course not possible to do so within the structure of the European Union. Big government growing bigger is not the way forward. But at least it is a bit amusing to see how the second tier of Europe’s political leadership – the members of the European Parliament – struggle to find a way to Europe’s future in roadless land.
Back to the EU Observer story:
Deputies in the European Parliament urged the commission to table far-reaching proposals on banking union – a three-pillared plan seen as key to establishing and maintaining a stable eurozone. “Exactly the same mistakes are happening again,” said Belgian Liberal MEP Guy Verhofstadt about member states getting complacent. Dutch Liberal MEP Marietje Schaake said “lack of leadership” meant structural problems in the banking sector “remain unresolved.”
For all Americans: as we know, “to table” something means in English to defer it. However, when the Brits use their awkward version of our language the verb “to table” means putting something right on top of the agenda.
Now, then… what vision do the members of the European Parliament have for the future of the EU? What bold, ambitious agenda are they looking for?
Leaders first agreed the need for a banking union a year ago as a way of breaking a link that sees failing banks burden governments with more debt. While plans for a single supervisor to oversee eurozone banks is underway, a recent Franco-German paper all but bins the other pillars of the bank union. It makes vague reference to a weak-sounding resolution board involving national resolution authorities (meant to wind up failing banks) and no reference to a eurozone-wide deposit guarantee scheme.
That is almost cute. Their entire continent is sinking into industrial poverty. The most recent forecasts for GDP growth show another lost two years with zero growth. A generation of young Europeans are marginalized, disenfranchised and left with little or no economic loyalty to the nations and the Europe they are supposed to inherit. In 19 countries youth unemployment exceeded 20 percent in 2012; it exceeds 30 percent in seven countries. Greece has lost one quarter of its economy to the crisis; the Portuguese economy has not grown a dime in the past ten years. Even France, the Netherlands and Germany are now at zero growth. And government budgets are still in trouble.
Europe is deadlocked in a monumental, systemic problem – and what are the elected MEPs most worried about? More regulations on banks.
In reality, as this blog has demonstrated, the recession did not escalate into a crisis until governments started defaulting on debt. In other words, if anything should be regulated and kept in a tight leash, it is government.
EU Observer again:
The commission for its part is supposed to be tabling a proposal on a central resolution authority, in principle handing Brussels the power to shut down ailing lenders, even if their home state objected. It has indicated the plans will be published on the eve of the 27-28 June summit. But there are fears that the proposal will be delayed and weakened, although commissioner Michel Barnier, in charge of the dossier, has acknowledged the importance of both a resolution authority and “and hopefully a common fund one day.”
The Eurocrats who tried to solve Europe’s deficit problems by pouring more gasoline on the fire are now going to get the authority to shut down individual banks all over Europe.
That’s really visionary. More government to solve the problems caused by more government.
Meanwhile, euro deputies also expressed concern that measures to tackle Europe’s youth unemployment will also amount to little. The summit has been billed as an opportunity to “mobilise efforts at all levels … to get [the 6 million] young people back to work,” but initiatives have been few and under-funded. “There is only one answer to the growing anger of citizens and that is an active fight against youth unemployment,” said Austrian Socialist Hannes Swoboda. MEPs say the €6 billion that member states have earmarked for youth unemployment in the EU’s 2014-2020 budget “is nowhere near enough.”
A truly visionary idea would be to get government the heck out of the way, but that is as likely to happen in Europe as 2+2=5.
Again, this is the leadership from the European Parliament that is accusing the European Commission of lacking visions for the future. With this level of ambition among their leaders, Europeans can continue to sleep safely in their sub-waterline cabins on the Titanic. They can rest assure that even if their is no captain at the helm, their ship is on a safe course to a better future…
Europe’s Alarming Jobless Problem
Recent numbers from Eurostat reveal that youth unemployment in Europe is still on the rise. This is bad news in itself, but with social unrest simmering across the continent this is slowly turning into political dynamite. The worst part is that Europe’s political and economic leaders are entirely clueless as to what to do about the problem. They call on the European Central Bank to cut its interest rate, somehow believing that it is the sword that will cut the Gordian knot.
It is not, of course. Europe’s problems are much too big to be solved by a simple interest rate cut.
Let’s start with a report from EU Business:
Eurozone unemployment hit a fresh high in April for the 24th month, deepening the plight of the jobless young and raising analyst calls for a cut in interest rates.
A rate cut by the ECB is the same thing as an expansion of the supply of money, or liquidity as it is known in an advanced monetary economy. The problem for the ECB is that it has already expanded money supply handsomely over the past year in an effort to save credit-defaulting welfare states like Greece, Spain, Italy and Portugal.
There are other, real-sector related reasons why the European economy is not moving forward. We will get to those in a minute. First, back to EU Business, which paints a grim picture of a continent in permanent decline:
The latest picture from the Eurostat data agency offered little hope of a quick exit from recession for Europe’s “lost generation” of under-25s. As the economy struggled and 95,000 more people joined dole queues between March and April across the 17-nation eurozone, the unemployment rate edged up to a record 12.2 percent, or 19.3 million people, the Eurostat data agency said. The data brought more bad news for young people who overall are especially hard-hit by the sluggish economy, nearly three times more likely than older people to be unemployed.
Imagine the devastation that this is doing to an entire generation. Unemployment is slowly growing, not shrinking. In more and more European countries, it is more common for a young person to be unemployed than to have a full-time, steady job. In yet another group of countries it is more common for young people to be unemployed than to have any job at all. Here are Eurostat’s youth unemployment numbers from 2012, and these are only the EU member states that have a higher-than-20 percent rate of unemployment among working-age citizens 25 or younger:
| 2012 | |
| Greece | 55.3 |
| Spain | 53.2 |
| Croatia | 43.0 |
| Portugal | 37.7 |
| Italy | 35.3 |
| Slovakia | 34.0 |
| Ireland | 30.4 |
| Latvia | 28.4 |
| Bulgaria | 28.1 |
| Hungary | 28.1 |
| Cyprus | 27.8 |
| Poland | 26.5 |
| Lithuania | 26.4 |
| France | 24.3 |
| Sweden | 23.7 |
| Romania | 22.7 |
| United Kingdom | 21.0 |
| Estonia | 20.9 |
| Slovenia | 20.6 |
In order to keep their welfare states afloat these countries typically need a workforce participation rate way above 70 percent. In fact, over time they need that rate to increase to compensate for expanding demand for welfare-state entitlements and services. (One aspect of this is that high immigration, putting more demand on the output side of the welfare state, only accelerates the need for workforce participation.) How are these countries going to maintain a workforce participation rate high enough to keep their welfare states afloat if as many as one quarter to one half of their young generation cannot even find a job – never mind a job that will pay well and put them on a successful career track?
The EU Business article concurs:
The eurozone is in its longest recession ever and concern is mounting over the growing numbers of jobless youth amid fears they will never get on the careers ladder. In the 12 months to April, almost 200,000 young people joined dole queues in the eurozone and 100,000 in the full 27-nation European Union. Total youth unemployment was at 5.6 million (23.5 percent) in the full EU and 3.6 million (24.4 percent) in the eurozone. But in Greece in April two out of three youngsters were without jobs, one out of two in Spain and two out of five in Italy and Portugal.
This is bad. Very bad. The European economy has entered a new phase, one of permanently lower standard of living, because the cost of the welfare state over the past two decades has weighed down so heavily on the private sector that it has stopped evolving. Taxes and labor market regulations – the former feeding the welfare state and the latter designed to protect it from even higher unemployment costs – have caused the private sector to stop evolving, stop rejuvenating, innovating and keeping up with global competition.
With a stagnant private sector came a stagnant economy. With a stagnant economy came a stagnant tax base and stagnant tax revenues to feed the welfare state. But demand for the services and the entitlements of the welfare state has been rising steadily, especially (but not exclusively) at the lower end where more and more people need unemployment benefits and poverty relief. This forces the legislators of these countries to cut benefits down to a bare-bones level, something they will do very reluctantly. But after having maxed out taxes (partly during the austerity phase they are now in) they will have no other choice.
The unemployed generation will inherit the ruins of the welfare state, the crumbs from the last supper that the generation of their parents enjoyed before voting to turn Europe into an economic wasteland. Rather than structurally and predictably phasing out the welfare state, they chose to stay the course all the way to the edge of the cliff.
The European economy is in such bad shape that it can’t be saved with an interest rate cut. Anyone willing to borrow money at low interest rates will not invest it in starting or expanding businesses. He will instead buy Spanish treasury bonds which still pay almost seven percent interest rate per year. That rate, and the very investment in the bond, is guaranteed by the European Central Bank, the same institution that is pushing lending rates through the floor. By guaranteeing all money back on Spanish bonds the ECB has eliminated the market-based risk assessment of treasury bonds, and therefore artificially inflated the return on that investment.
As a result, anyone with two cents worth of credit will go to a bank in Europe, borrow one million euros at two percent and buy Spanish treasury bonds at seven percent. With an ECB-guaranteed investment, he is cashing 50,000 euros per year without doing anything more than eat, breathe, sleep and walk his dog.
What reason does he have to risk it all by investing in productive activity for an economy that is stagnant or shrinking?
If the ECB let go of the Spanish, Greek, Portuguese, Italian and French welfare states, they could return to reasonable monetary policies. The problem is that you cannot just shut down a welfare state – the hundreds of millions of Europeans who depend on it for their daily lives would suffer undeservedly, and for a long time. The only way to get rid of the welfare state is through structural reforms that gradually transfer the responsibility for operating and funding entitlements to the private sector.
Such reforms will take quite a bit of hard work on behalf of Europe’s elected officials, work that I seriously doubt they would ever want to put in. They seem to be chronically unable to think with the long-term perspective in mind. But if they don’t do anything to save Europe from its transformation into an economic wasteland, they will find themselves faced with much uglier problems than a stagnant economy. Der Spiegel gives us a hint:
Thousands of “Blockupy” protesters gathered in Frankfurt on Friday, surrounding the European Central Bank to air their concerns about euro-crisis policies. Both the banks and police were reportedly well-prepared for the anti-capitalist demonstration. An estimated 2,500 supporters of the anti-capitalist group “Blockupy” demonstrated in the German financial capital of Frankfurt on Friday, blocking access to the European Central Bank (ECB) in protest of euro-crisis austerity policies. Banging on drums and carrying signs that read slogans such as “Block the ECB — Fight Capitalism and Austerity” and “Humanity before Profit,” the demonstrators cut off roads leading into the downtown financial district.
Those of us who saw the “Occupy” movement up close were amused at its transient nature and its disdain for hard work. They were too lazy to even put together a concerted message on what they were for – or against, for that matter. The demise of the “Occupy” movement was inevitable, in good part because this is still America. You can voice your disdain for hard work and self determination all you want, but those values still build the backbone of this country (Obama’s effort to the contrary notwithstanding).
Similar movements in Europe have much stronger political potential. The Europe that emerged from the ruins of World War II put more and more of its economic resources into building a welfare state. Gradually, whatever sentiments of pride in self determination that Europeans had honored, dissipated and were replaced with equally strong sentiments of entitlement and complacency.
The political equivalent of that combination is called “social democracy” or “democratic socialism”. This also became a defining political movement across Europe with dozens of parties with thousands of elected legislators all across the continent. It has now fostered two generations into believing that it is a law of nature that man shall be dependent on government.
When a radicalized youth movement protests “Capitalism” and “banks”, it resonates with millions of young, unemployed and very frustrated Europeans. There is a great deal of potential for radical movements to capitalize on the disenfranchisement that comes with mass youth unemployment, stagnant economies and an overall depressing outlook on the future.
The rhetoric of the German protesters may sound awkward to an American, but they strike a dangerous tone with Europeans:
“The business operations of the ECB have been successfully hindered,” a spokeswoman said, according to the German news agency DPA. “We are making Europe-wide resistance to devastating policies of poverty visible.” The European Blockupy movement … is critical of euro-zone leaders’ approach to the debt crisis. Forcing struggling countries to raise taxes and implement tough austerity measures has only served to deepen the Continent-wide recession, they allege.
This is a correct analysis – nothing to be afraid of in other words. What should have everyone worried is the underlying antipathy for the forces of the free market, Capitalism and economic freedom. To get a glimpse of what these people are aiming for, consider this paragraph from one of the blog articles at Blockupy Frankfurt:
While the German state and media like to portray Germany as a strong economic example, as a “profiter of crisis”, and indeed a broad section of German society identifies with this talk, a closer look reveals other realities. The labor market reform pushed through in Germany in 2004 – slashing long fought-for workers’ rights and securities and resulting in a massive precarization of the workforce – serves as the model for the neoliberal reforms that the German government and European financial elites try to push in all of Europe. Real wages have declined in Germany for the past ten years, while the financialization of ever more spheres of life and the privatization of ever more common goods and spaces lead to a drastic increase in the cost of living. We are struggling against increasing precarity and its constant stress and social destruction.
It is easy for the “right” kind of political movement to turn this frustration into political energy. Let us hope that does not happen. Europe does not exactly have a stellar track record in respecting democracy and economic and individual freedom.
In the Ruins of the Welfare State
Sweden’s capital Stockholm is surrounded by rundown, crime-ridden public housing projects. For the fourth night in a row these housing projects are erupting in riots, encircling Stockholm with a ring of burning cars, firebombed schools, with garages, recycling stations and other structures engulfed in flames. Mobs of immigrant youth – of which there are plenty in Sweden – attack shopping centers, mass transit and even fire and rescue teams called out to put out the fires they start.
The mobs aggressively charge at police, hurling rocks and other objects at them. They have vandalized at least two police stations and one train station. Last night (Wednesday), the fourth night in a row with riots, the unrest spread to most of the housing projects around Stockholm (there are two about dozen, each of them with roughly 8-10,000 residents). Cars and other property were being burned on at least 15 locations around the capital.
The riots are beginning to spread to other cities, primarily Gothenburg, Malmö and Uppsala. An inept government is sitting on the sidelines, confounded and clueless like Chamberlain when Hitler invaded Poland.
Sweden is just one example of a welfare state in decline and disintegration. The housing projects where the riots are erupting often have unemployment rates above 50 percent, with the vast majority of the residents being dependent on welfare. Contrary to the general perception in Europe as well as in America, Sweden is not a peaceful society that went through the recession largely unscathed. Their government finances are in good order, but that only means that they have over-taxed the private sector for a very long time, combined with moderate but frequent cuts in welfare programs. The cumulative effect over time has been that the private sector is being drained for life blood by taxes while the spending cuts are pushing the most vulnerable people into utter despair.
It is hardly surprising that Sweden has one of the highest crime rates in the industrialized world.
Unlike other countries in Europe, Sweden has been subject to a slow but steady austerity policies. Instead of causing an eruption of social and political protests at once, as has happened in countries like Greece and Spain, this Swedish strategy has worked like a slowly progressing venom in the economy. Eventually, the pressure from these cuts, combined with equally slow-progressing cuts in health care, public education and general income security programs, break out in one big eruption.
That is not to say there were no warnings. In my book Remaking America I tell the behind-the-scenes story of a crumbling welfare state, of how a young, frustrated generation burns down hundreds of public schools every year and how practically every social institution under the realm of the welfare state has turned from being benevolently user-friendly to being maliciously focused on balancing their budget under steady spending cuts.
Since the welfare state still maintains monopoly on all its services, people whose lives are being cut by austerity have nowhere else to go. The result is riots, social unrest, high crime rates and political extremism.
We are seeing all of this in Sweden, and in many other European countries. What we are not seeing is a realization among Europe’s political and intellectual leaders of how deep the crisis really is. George Friedman, chairman of Stratfor, provides an excellent analysis at RealClearWorld.com:
Spain invites endless historical considerations, but on this trip I was struck by something more immediate and prosaic. We were on the road from Granada, near the coast, to Madrid, the capital in the center of the country. It was a four-lane highway, what Americans would call an interstate. The road was clean, well maintained and, as we moved north, nearly empty. Every few kilometers a car would pass in the opposite direction, or we would run alongside another car heading north. It was not the paucity of cars that struck me; it was the almost complete absence of trucks. This was, after all, the road from the coast to the capital, not the only road but still a significant one. It was early afternoon on a weekday. The oddest moment came when we reached a tollbooth not too far from Madrid. There was only one booth open and when we pulled up there was no one in it and no coin or credit card slot. We waited, then we left. Perhaps the attendant was in the bathroom. Perhaps the revenue didn’t justify paying a toll taker. Perhaps this was one of the austerity measures they had taken. I will never know. What I do know is that the drive had a sort of post-apocalyptic feel, except that it was very clean.
A glimpse of an economic wasteland, emerging from the rubble as the austerity storm moves to the next country.
We marveled at it and then realized that there was nothing that ought to have surprised us about it. The unemployment rate in Spain is more than 27 percent. Gasoline costs 1.4 euros a liter (more than $6.50 a gallon). At that price, a drive is no longer a casual undertaking; it has to justify itself. As for trucks, when that many people are out of work — and have been for many months — the demand for goods declines to the point that trucks will be rare on the road.
An excellent way to put abstract reasoning into a real-world context. But there is more:
We stayed in a very nice hotel in Granada. In the morning when we left the hotel, there was a beggar sitting on the sidewalk, his back to the wall, to our right. … He was in his mid-to-late 20s, wearing glasses and reading a book. He was dressed in khakis and a decent shirt. He wasn’t mad, he wasn’t drunk and he wasn’t like the hippies of my youth. He wasn’t playing an instrument. He was sitting, absorbed in a book and begging. There were other beggars in Granada of the more conventional sort but also several more who looked like this one.
Youth unemployment in Spain is epidemic. It almost tripled in six years, from 17.9 percent in 2006 – a disturbingly high number in itself – to 53.2 percent in 2012. Preliminary numbers for 2013 point to 57 percent and rising.
An entire generation is being sentenced to a life in the ruins of the welfare state. The consequences of this are almost unfathomable. Friedman again:
When a young man is unemployed because he is a musician or an artist awaiting discovery or because he has lived carelessly, that’s one thing. But this is different unemployment. It is a generation whose dreams are shattered. They may have hoped to be a businessman or a craftsman, but that’s not going to happen now. Unemployment of this sort doesn’t go away in a few months or years. This is the level of unemployment the United States experienced in the Great Depression, the kind of unemployment that scars an entire generation.
Just as the Great Depression was prolonged by reckless welfare-statist policies, the crisis in Europe has taken a choke hold on the economy and is not going to let go any time soon:
No one knows how long this will last but everyone suspects that it will be a long time, and I share that suspicion. How do you accept a situation that says you, at the age of 22, will live on the margins of society along with half of your friends? More important, how do you live with that fact if you worked hard preparing for a career? … when nearly half a generation, most from middle-class families, finds itself at the bottom, there is no explanation to provide solace.
One of the factors that define industrial poverty is that the growing generation will live a life less prosperous than the life their parents have. Europe has been on the doorstep of industrial poverty for some time now, and this economic crisis was all it took to push the entire continent over the edge. And they will not climb back up again in at least a generation.
If the political leaders of Europe stick to defending the hollowed-out welfare state as a political ideology, the continent is doomed to being an economic wasteland for the rest of this century.
Add to that the risk for political extremism. Friedman sees this, too:
In its place there is, quite reasonably, a sense of victimhood. Whatever explanation one gives for the Spanish crisis — the stupidity of politicians, the laziness of the public, the greed of bankers or whatever else — the generation that is bearing the burden is the only one that is not guilty — at least not yet. This — being the victim in personal calamity shared by half a generation — is the foundation not just of political instability but also for the politics of rage. The older middle-class citizens, with the lives they thought they had secured shattered, hurled into the ranks of the permanently impoverished, represent the vanguard, if you will. But those who will never live the lives they thought they would, they are the explosive mass.
Then Friedman makes an outstanding observation:
I think the reason things are so calm — occasional riots hardly count — is that no one really believes that they won’t awake from the nightmare. There is a firm belief that this period will end. The denial of what has happened is not confined to Spain.
When the denial washes away; when one million young, unemployed, Spaniards join forces with 645,000 young, unemployed French, 200,000 young Greeks without work and another 3.8 million young in the EU with no job to go to; when they wake up and realize that this nightmare is not going away… that is when politicians like the leaders of Golden Dawn in Greece will be there, ready to scoop up their rage, funnel their frustration into political action.
And transform Europe in a way that Stalin nor Hitler may have had wet dreams about, but neither of them was able to do.
Make sure to read the rest of George Friedman’s excellent article. He does not seem to understand the root cause of the crisis and therefore cannot prescribe any solution, but his projection of where Europe is heading is intelligent and well worth the time.
Europe Drowning in Debt
The European economy is in bad shape. On May 3 the EU Observer reported:
The eurozone economy will contract by 0.4% in 2013, Economics commissioner Olli Rehn said Friday. Presenting the EU commission’s Spring Economic Forecasts, Rehn said that the bloc would return to growth in 2014 by a slower-than-expected 1.2%. Meanwhile, the average debt levels will hit 96% in 2013.
Looking at the 27 EU member states, things are looking almost as bad: inflation-adjusted GDP growth is forecast to be 0.4 percent this year, though that will probably be adjusted downward in the next few months. EU institutions that publish economic forecasts have a tendency to downgrade their forecasts as the present catches up with the future.
At the same time, total general government debt in the 27 EU countries is heading the other way: from 2010 to 2012 those countries added 1.4 trillion euros to their total debt. In terms of growth rates, EU-27 have added debt at frightening rates over the past few years:
2008: 6.1 percent
2009: 12.8 percent;
2010: 12.3 percent;
2011: 6.7 percent;
2012: 6.7 percent.
Due to an almost total absence of GDP growth, the ratio of debt to current-price GDP has grown at stunning rates:
To reinforce the persistent nature of the economic crisis, the EU Observer also reports:
France has moved centre stage in the crisis, after EU economic affairs commissioner Olli Rehn said that the country would fall into recession in 2013 and needs two more years to bring down its budget deficit. Presenting the Commission’s Spring Economic Forecasts on Friday (3 May), Commissioner Rehn described Paris’s forecasts, based on a mere 0.1 percent growth rate, as “overly optimistic.”
It is hard to see how France has ever been out of the Great Recession. From 2008 through 2012 the French economy averaged 0.06 percent in real GDP growth. During the same period of time its debt-to-GDP ratio went from 68.2 percent to 90.4 percent.
This explains why, as I reported recently, the French government is panicking over the prospect of more austerity. They know it has not worked for their southern neighbors and they are not going to stir up the same kind of political turmoil as those policies did in, e.g., Greece. The socialist French government knows that parties like Front National – often perceived, wrongly so, to be ideologically close to the Greek Nazis, Golden Dawn – as well as radical communists could make significant political gains if the French people were subjected to the same bone-crushing fiscal measures as the Mediterranean EU members have implemented.
The French resistance to more austerity caused the EU Commission recently to declare that the War of Austerity is over. It is not, of course, or else there would be a complete course change throughout southern Europe. Furthermore, the EU Commission would not be continuing to pressure Paris over balancing its budget in the midst of a recession. The EU Observer again:
The eurozone’s second largest economy would run deficits of 3.9 percent in 2013 and 4.2 percent in 2014, he said, calling on Francois Hollande’s government to draw up a “front loaded” package of cuts and labour market reforms to stop “persistent deterioration of French competitiveness.” For its part, Paris maintains that it will reduce its deficit to 2.9 percent in 2014, fractionally below the 3 percent limit in the EU’s Stability and Growth Pact. Hollande in March announced that an additional €20 billion worth of tax rises and €10 billion in spending cuts would be included in his budget plans but said no further cuts would be made.
Because if he tries, the socialist government is going to end up in real trouble. Many of the prime minister’s cabinet members are truly fearful of more austerity, for various reasons.
But wait, there’s more:
Crisis-hit Cyprus, which has now finalised a 10 billion bailout, is set to be worst hit by recession with an 8.7 percent fall in output. Meanwhile, the average national debt pile is expected to peak at 96 percent of GDP in 2014, with six countries – Belgium, Ireland, Greece, Italy, Cyprus and Portugal – having debts larger than their annual economic output. Rehn indicated that Spain would also be given an additional two years to bring its deficit down to the 3 percent threshold, while Slovenia would also need more time.
So long as Europe keeps its welfare state, it has no way out. The welfare state is what is driving Europe’s crisis today, and it will continue to do so for as long as the welfare state exists. Nothing is changing for the better. Europe is drowning in its entitlement-driven government debt. The continent is stuck, and the talk about austerity being over is politically motivated hot air.
I stand my my diagnosis: austerity policies exacerbated the financial crisis into a welfare state crisis and turned Europe into an economic wasteland. What used to be a thriving industrialized continent is now facing an endless future of industrial poverty.
Another EU Lie: “End to Austerity”
First you send your tanks in and pound away at schools, hospitals and private businesses. When people are laid off and flock to unemployment offices you direct your bombardment at those instead. When the unemployed and homeless former middle-class citizens go scavenging for food in dumpsters behind McDonald’s, you hammer away at them with yet another round of big-caliber fiscal ammunition. Then you tell everyone that this invasion may be a bit hard on them right now, but at some point, somewhere in the long run, their lives will get better.
When people still defy your fiscal army you keep fighting them until they have lost a quarter of their income and their jobs and their entire country has been transformed from a relatively prosperous European nation to an economic wasteland.
You keep going until your austerity storm troopers have wreaked havoc and destruction on country after country and reached the outskirts of Paris. Then, but only then, do you pause and try to brush off the image of a fiscal imperialist. From the EU Observer:
European Commission chief Jose Manuel Barroso on Monday (22 April) indicated that the EU’s budget-slashing response to the economic crisis has run its course. Speaking in Brussels at a meeting of European think tanks, Barroso commented that “while I think this policy [austerity] is fundamentally right, I think it has reached its limits.”
Of course. When austerity robbed the Greeks of 25 percent of their GDP, they got what they deserved. When Spain is risking regional secession and political and economic disintegration, and when Portugal is simmering at the point of civil unrest, that is all right and good in Barroso’s playbook.
In reality, what really concerns Barroso is the presence of public opinion in the way of his fiscal tanks. The EU Observer again:
In a reference to rising public discontent at the severity of spending cuts and tax rises, he noted that “a policy to be successful not only has to be properly designed, it has to have a minimum of political and social support.” ”We have to have tailor-made solutions for each country, we cannot apply a one size fits all programme to the European countries,” he added.
What exactly does this mean? Different combinations of tax hikes and spending cuts depending on what country you are in? More tax hikes in Portugal and more spending cuts in France? Do note that Barroso still believes in austerity – his only reason for not charging ahead to conquer France is that the French prime minister’s cabinet is not united in the desire to greet the invading austerity army at the border.
In the words of the EU Observer:
Barroso’s remarks are a further sign that Brussels is ready to give the likes of France, Spain and Italy more time to force through unpopular economic reforms to reduce their budget deficits. For his part, speaking at the same event, EU Council President Herman Van Rompuy conceded the economic crisis is “lasting too long. He added that “patience is understandably wearing thin and a renewed sense of urgency is setting in.” He underlined the need to “move faster on the reforms with the biggest immediate growth impact.”
The problem with Barroso and van Rompuy is that they have absolutely no idea of what really gets an economy going, nor do they have an interest in learning about it. Their only goal is in expanding their own power, and they have discovered that austerity is a formidable tool that can conveniently be applied to further that goal. Right now they are hesitant because France is a big chunk of real estate to bite off, and French politicians are a bit less inclined to bow their heads to the new fiscal masters than they were in Athens, Rome, Madrid and Lisbon.
As the EU Observer notes, the critics of the EU’s fiscal invaders have just been given more ammunition to use in the defense of their national fiscal sovereignty, as the EU Commission’s own economic forecasts…
make grim reading, especially for countries on the Mediterranean rim, which have been among the worst hit by the eurozone’s economic crisis. … Portugal and Spain saw their deficits swell to 6.4 percent and 10.6 percent of GDP, respectively, while Greece’ deficit rose to 10 percent. The ongoing recession also forced up average EU government debt levels to 90.6 percent, well above the 60 percent threshold set out in the EU’s Stability and Growth Pact.
In other words, the countries that have been subjected to austerity the longest, are the ones with the biggest deficit and GDP growth problems. Austerity is sold as a recipe for smaller deficits and stronger economic growth, yet the outcome is the exact opposite.
I have only one thing to say to my many European readers: don’t let yourselves be fooled by what Barroso says about austerity reaching its limits. He has stopped his barrage for now because you are paying attention. Once you let your guard down and look the other way, his fiscal stukas will be taking aim at your country again before you know what hit you.
Emerging Panic over Stagnant Europe
Austerity is spreading its ever darker shadow over Europe. It has now grown to such proportions that it is beginning to really scare members of Europe’s political elite. Among the deeply concerned are members of the French prime minister’s cabinet. This is big news that few seems to notice. One who does, though, is Ambrose Evans-Pritchard, sharp-eyed editor with The Telegraph:
French president Francois Hollande is facing an anti-austerity revolt from his own ministers as he pushes through a fresh round of tax rises and austerity to meet EU deficit targets. Three cabinet members have launched a joint push for a drastic policy change, warning that [spending] cuts have become self-defeating and are driving the country into a recessionary spiral.
And these are no small words coming out of the French cabinet:
“Its high time we opened a debate on these policies, which are leading the EU towards a debacle. If budget measures are killing growth, it is dangerous and absurd,” said industry minister Arnaud Montebourg. “What is the point of fiscal consolidation if the economy goes to the dogs. Budget discipline is one thing, cutting to death is another,” he said.
See I told you so. But where have the French been over the past five years when Greece has been sinking into the dungeon of austerity, mass unemployment, poverty, economic despair and political extremism? What did the French do to help Spain avoid bone-crushing austerity that has turned middle-class Spaniards into food scavengers? Did a single leading French socialist lift as much as an eyebrow when Portugal was almost torn apart by social unrest following EU-imposed austerity?
Evans-Pritchard does not bring up this European context, but his analysis of the French socialist austerity revolt is nevertheless worth listening to:
Mr Hollande will on Wednesday unveil another round of belt-tightening worth €12bn, even though Paris is already carrying out the harshest fiscal squeeze since the Second World War and France may already be in a triple-dip recession. The cuts are hard to reconcile with Mr Hollande’s campaign pledge last year to end austerity. They have set off furious criticism across the French Left. “Austerity is no longer tenable in Europe today with millions of unemployed,” said social economy minister Benoît Hamon.
So Mr. Hollande has shifted foot. His original plan was to “end austerity” by having government spend more, not less, while still raising taxes through the roof. That alternative does about as much damage down the road as austerity, especially if at the same time you are trying to balance the government budget.
And at the end of the day, the balanced budget is all that matters. It is the pillar upon which Germany has built its unrelenting campaign against “undisciplined” euro-zone members. The doctrine of the balanced budget was one of the cornerstones of the EU constitution – originally turned into constitutional mandate in Article 104c of the Maastricht Treaty of 1992 – and has since been elevated to religious doctrine. No one in Europe questions the economic logic in, so to speak, putting the balanced budget before the horse.
Not even the French who break ranks with the austerity-touting consensus. However, they actually don’t have to, because the nature of the austerity measures is such that it really does not deviate much from the standard European doctrine of maxing out the size of government:
Almost all the austerity measures will come from tax rises, pension fees and a “green’ levy, rather than spending cuts. The state sector will climb to a record 56.9pc of GDP this year as the economic contraction eats into the private sector. Public spending has reached Scandinavian levels … Critics say the French tax squeeze is not even helping to curb borrowing. France is at growing risk of a debt trap as the slump itself erodes tax revenues. Public debt will jump to 94pc of GDP next year, a drastic upward revision from 90.5pc.
Spending cuts would have made no real difference. Look at Greece, Portugal, Spain and Cyprus. The problem is the over-arching focus on balancing the budget in a recession.
Evidently, as Evans-Pritchard reports, the bad shape of the European economy, after years of unrelenting spending cuts and tax increases, is so bad that the political elite is beginning to panic:
A report prepared for EMU finance ministers over the weekend by the Breugel forum in Brussels said the eurozone’s crisis strategy is a failure, a nexus of confused policies that cut against each other. Fiscal overkill is stopping the banks returning to health, while foot-dragging on the EU bank union is perpetuating the credit crunch in the Club Med bloc. Sky-high unemployment is eroding job skills and “undermining Europe’s long-term growth potential”. Low growth is making it “much tougher for hard-hit economies in southern Europe to recover competititveness and regain control of their public finances”.
This is a good, first look at Europe’s deep structural problems. Austerity is not a structurally oriented policy, but it interacts with a lot of structural features of the European economy that, taken together, conspire to trap the economy in perpetual stagnation. One of those structural features is the system of excessively rigid labor laws. By interfering with the need of businesses to make flexible adjustments of their work force, Europe’s hire-and-fire laws significantly raise the cost of doing business, especially for smaller firms.
As a result, Europe’s work force is not working up to its potential. Tens of millions of workers get stuck in jobs that do not produce optimally, and tens of millions of others get stuck in unemployment. One symptom of this is low labor productivity, which the Breugel Forum notes in its report about Europe’s labor productivity:
Since 2007, the EU15 has taken a productivity holiday, while productivity has increased rapidly in the US (Figure 3). In terms of total factor productivity, both the EU15 and EU12 lag behind Japan. Even economically stronger countries, such as Germany, lag behind the US, and the evolution in the United Kingdom does not differ markedly from that of continental economies. Some hard-hit countries, such as Ireland, Spain and Latvia, have apparently recorded outstanding labour productivity performances since 2007, but most of these gains have been due to compositional changes, such as the shrinkage of low-productivity construction and low value-added services, and the total factor productivity developments in these countries were weak.
By making it excessively costly for businesses to downsize in tough times, Europe’s governments cause a phenomenon called “labor hoarding”, the effects of which the Breugel Forum report explain well:
Labour hoarding can partly explain the initial response to the shock of the recession. Employment contracted by five percent between 2007 and 2010 in the US, while in several European countries the employment shock was of limited magnitude. Public policies, such as Kurzarbeit, a scheme financed by the German government to support part-time work and keep workers employed, were one factor behind this response. Firms also hoarded labour, expecting a rebound and thereby limiting the initial rise in unemployment. Five years on, however, the productivity setback has become permanent, contributing to lower potential output. This cannot be regarded as a cyclical phenomenon anymore. In the short run, weak productivity performance can be related to insufficient demand through the so-called productivity cycle. But the weak cyclical position of the economy cannot explain sustained poor productivity.
It is good that some Europeans with access to the “big stage” are beginning to look deeper into what is really happening to the deeply troubled European economy. However, so long as they do not realize that the welfare state is the root cause of the problems, they will not be able to prescribe a medicine that could actually cure the patient.
The lack of insight into Europe’s ailment will drive the continent straight into the economic wasteland. As tepid as the American recovery is, it offers an infinitely better platform for the future than what the Old World could ever come up with.
ANC: Man Up or Destroy South Africa?
I have written several articles about the decline of the African National Congress, South Africa’s ruling party, into a mess of corruption and power-grabbing socialism. Any common-sense minded observer can see that the ANC has lost whatever they had in the form of credibility and respect after the historic 1994 end to Apartheid. The economy is in poor shape, with private businesses struggling to stay afloat under a barrage of taxes, regulations and high crime; the majority of the blacks are trapped in poverty, either on the government dole or in very low-paying jobs, and far too many of them still live in squalor.
On top of that there is an ongoing genocide against white farmers, of proportions that clearly the ANC government must know about – yet they refuse to even acknowledge the genocide.
The massacre at Marikana revealed how the ANC government has lost its way and become just another superficially democratic yet de facto authoritarian socialist regime. This begs the question how far it really is from Sharpeville to Marikana.
Apparently, some within the ANC are beginning to ask themselves that question. According to the Mail and Guardian, Desmond Tutu is among the worried:
Tutu said at a ceremony in Cape Town on Thursday to celebrate winning the Templeton Prize, that South Africa became the “flavour of the month” when apartheid was abolished in 1994, the Truth and Reconciliation Commission was set up, and citizens were riding on the victory at the Rugby World Cup. “We can’t pretend we have remained at the same heights and that’s why I say please, for goodness sake, recover the spirit that made us great.”
He points to violence as one of the most pressing symptoms of the ANC’s failure:
“Very simply, we are aware we’ve become one of the most violent societies. It’s not what we were, even under apartheid,” he said. Rape, murder and the high number of road accidents, especially over the holiday season, were worrisome, he said.
But then he falls into the same old tirade that all socialists revert back to when their ideological map does not match reality:
Tutu added that one did not have to look at statistics to see that South Africa was one of the most unequal societies in the world, and the problem was underpinned by a lack of spirituality. “This is why we ought to be saying it is utterly blasphemous that we should still have people who live in shacks. It’s not politics, it’s religion.”
When it comes to solutions, though, he delivers nothing. All he says is that he hopes the young generation will fix the problems his generation caused:
According to Tutu it was everyone’s responsibility to see the divine in others, even in the man sleeping in the street. Tutu said he had great faith in the youth being able to deliver on this aspiration. “There is no question at all that young people know what they are looking for and almost all would say it’s a spiritual thing,” he said.
Not a very good strategy, especially when viewed against the backdrop of South Africa’s enormous problems. Another story from the Mail and Guardian speaks of rampant corruption in South Africa, which Tutu did not even bother to mention (inequality, though…):
On the edges of Diepsloot stands a half-completed municipal building. Once intended as a library and offices, it was surrendered to decay before it even came to life. A few years ago, it seemed to symbolise a governmental intent to recognise and modernise Diepsloot. Now it is just an unexplained shell, a free supply of building material for locals. It must have cost tens of millions of rand before construction was abandoned. One guesses that its halt was related to corruption: another dodgy tender to another incapable contractor.
Corruption and socialism go hand in hand. Socialism is the unabridged grab for power; corruption is the attempt by suppressed agents of the free market to survive in an environment of unabridged government power.
The Mail and Guardian insightfully recognizes this, though not in such blunt words:
After 1994 political commentators should have been wise to the likelihood that corruption would become a blight on our new democracy. The arms deal shows how the new government was immediately prey to an established global elite of corruptors, people well trained in statecraft, aware of opportunities for grand theft. Observers would have done well to point out, then, that the government would be at risk from a new generation of home-grown baby criminals, who would make corruption a growth industry and a redistributive system.
I cannot remember when I saw such a well-worded analysis of how corruption rides the coat tails of socialism.
Had political scientists stressed these risks at the time, our then bona fide government and its exhilarated, trusting citizenry might have been less naive.
A good point indeed. However, if you were around in 1994 and remember the euphoria surrounding the release of Nelson Mandela, the end of Apartheid and Mr. Mandela’s swearing-in as South Africa’s first black president, then you can also easily imagine what people would have said of you if you had sounded the corruption alarm at that time. The Mail and Guardian are asking for something necessary, yet undeliverable at the time. This, however, does not take away from their analysis of the destructive effects of corruption, which, they say…
involves the theft of value created through real economic production. It is the theft of money, originally collected as tax, intended for reinvestment in economically or socially productive parts of society. Instead, this value exits the economy. It cannot be invested in the real economy because it must be hidden. So it is salted away in hidden accounts, spent on imported luxury items, houses and cars.
Well, technically speaking the corrupted money re-enters the economy at this point. Some people get jobs building, renovating and maintaing those houses; people get jobs importing, selling and maintaining those luxury cars. But the point is well taken: the very economic activity where corruption takes place distorts the allocation of economic value, disrupts free markets and erodes, even shuts down the functioning of democratic government. Which may be the worst of all the costs that corruption inflicts on society. The Mail and Guardian concludes:
The most common mines for corruption are municipalities and the public education and health systems. For example, about R20-billion is stolen every year from the public and private health sectors. This theft makes people sick – literally. People who do not get treatment are less able to progress at school or work.
However, if the ANC government is ever going to be able to do something about the mess they have created, they have to sever their ties to their own dogmatic past and openly admit what has gone wrong during their two decades of being in charge of South Africa. It would take a lot more than Desmond Tutu’s candid but shallow attempt at speaking frankly; but even his short inroad into a very sensitive but even more necessary territory of political introspection is met with resistance from the ANC establishment. This is well illustrated by a story from The Times of Johannesburg about the ANC’s relation to South Africa’s old Apartheid legacy:
There is no contradiction between what President Jacob Zuma and Minister in the Presidency Trevor Manuel have said about the legacy of apartheid, the presidency said on Thursday. “Stating that the apartheid legacy and impact still exists and will linger on for a long time does not mean that the president is saying that public servants should use it to excuse laziness and incompetence,” spokesman Mac Maharaj said in a statement.
The controversy has to do with ANC’s eagerness to maintain Apartheid as a political tool, available for them to use whenever it is expedient:
“To suggest we cannot blame apartheid for what is happening in our country now, I think is a mistake, to say the least,” he said, in an apparent reference to the comments made by Manuel. “We don’t need to indicate what it is apartheid did. The fact that the country is two in one — you go to any city, there is a beautiful part and squatters on the other side — this is not the making of democracy and we can’t stop blaming those who caused it,” said Zuma.
So after the ANC has been in charge for two decades, President Zuma thinks it is perfectly fine to continue to blame Apartheid for the fact that millions of black South Africans live under worse conditions now than they did under Apartheid. He is betting in part on the fact that all South Africans 25 or younger will have no real personal experience with Apartheid and therefore no independent memories of what life was like back then.
Personally, I always found Apartheid a totally unacceptable, race-based, government-imposed invasion in people’s private lives. It was a reprehensible institution that does not belong in any society with modern aspirations. But just as it is important to recognize the wrongdoings of the Apartheid regime, it is crucial for the ANC to recognize how its policies have actually made life worse for most South Africans.
In a matter of speaking, when the ANC came to power it sat down at a table already laid for them, with food on the plates. There was a well-working economy, relative peace except for the violence stirred up by the ANC. Farming, mining and manufacturing were thriving. The one big thing missing was racial equality.
The ANC could easily have accomplished that by simply removing restrictions for the black population. But they did not stop there. They went ahead and started building a massive welfare state, soaked in corruption and spiced up with a vengefulness that to date has cost thousands of white farmers their lives.
The vengefulness and bitterness over years of Apartheid was certainly genuine to many, but to the new political elite it became a power tool, an emotional button to push when they wanted the masses to forget that their lives were actually deteriorating under the new, “democratic” regime. As the ANC’s notorious failures are stacking up, their leadership is desperately trying to hold on to their old way of ruling – not governing – a nation that is at least as divided today as it was under Apartheid. Only for different reasons.
Fortunately, some are trying to point out that the emperor is naked. The Times again:
Speaking to reporters on the sideline of a government leadership summit last week, Manuel said the government should take responsibility for its actions when it came to service delivery. “We [the government] should no longer say it’s apartheid’s fault. “We should get up every morning and recognise we have responsibility. There is no longer the Botha regime looking over our shoulder. We are responsible ourselves.” Addressing public servants at the summit earlier, Manuel said the government had run out of excuses and had failed the people of South Africa repeatedly in terms of service delivery. “We cannot continue to blame apartheid for our failings as a state,” he said in speech prepared for delivery. “We cannot plead ignorance or inexperience. For almost two decades, the public has been patient in the face of mediocre services. The time for change, for ruthless focus on implementation has come.”
This is the kind of attitude that can save South Africa. It falls well in line with what Desmond Tutu is trying to say.
President Zuma, on the other hand, holds on to the old ANC rhetoric:
Zuma said: “While wanting to see change happening fast in every corner of the country, we are under no illusion that South Africa will automatically and comprehensively change in only 20 years. That is impossible.” However, Zuma said as leaders of public servants, the government had to work harder, faster and more efficiently to ensure true freedom reached the poor and working class in a shorter time.
Nothing is impossible in 20 years. Look what the former Communist countries in Europe have accomplished in less time. Look at the transformation of China, the rise of India… President Zuma is using Apartheid the same way some black American grievance merchants are trying to use slavery (which ended a century and a half ago) as an excuse for why many black neighborhoods are poor, unsafe and socially and economically destructive.
The ANC has become the same authoritarian power machine that the Apartheid government was before them. Its effects on the economy and on society as a whole is even worse, though, because they are both ideologically arrogant (a character trait they share with the Apartheid regime) and economically illiterate. This is a destructive combination that has already done a great deal of damage to South Africa.
It is time for the ANC to either man up or get out of the way. If they stay on their current course they will eventually destroy the prosperity that many South Africans still enjoy.
Poverty shared by all is indeed the ultimate price for socialism, but let’s hope it does not come down to that.
Europe’s Crisis Gaining Momentum
It is beginning to dawn on the European political elite that their superstate project, their welfare state and their currency union are on a runaway train heading for disaster. Media is beginning to pick up on that as well. Here is a nice summary by Benjamin Fox at the EU Observer:
February 22 was a black Friday wherever you were in Europe. The morning brought the publication of dismal economic data to the effect that the eurozone will remain in recession in 2013.
Only a statistical illiterate would have thought otherwise.
Then, at 10pm Brussels time as the the markets closed, ratings agency Moody’s quietly issued a statement stripping the UK of its AAA credit rating. For those lulled into a false sense of security through a recent combination of relatively benign financial markets and the euro strengthening against sterling and the yen, it was a rude awakening.
That surge was due mainly to one thing: the commitment by the European Central Bank to print an infinite amount of euros to back its worst-rated treasury bonds. That commitment told global investors that “you can get seven percent return on Spanish treasury bonds and always get your investment back from us – come Hell or High Water!” Of course the euro is going to experience a temporary surge under such ridiculous, and totally unsustainable conditions.
EU Observer again:
Reading the European Commission’s Winter Forecast is a singularly dispiriting experience. The bald figures are that the eurozone is expected to remain in recession with a 0.3 percent contraction in 2013. The words “sluggish … weak … vulnerable … modest … fragile’” litter the 140 pages of charts and analysis.
Some examples of GDP growth numbers from the Forecast: Britain +0.9 percent in 2013; Austria +0.7 percent; Germany +0.5 percent; France +0.1 percent; Netherlands -0.6 percent; Italy -1.0 percent; Spain -1.4 percent; Portugal -1.9 percent; Greece -4.4 percent.
There are a couple of exceptions with slightly higher growth rates, primarily Sweden and Poland. Both economies are heavily dependent on exports and compete increasingly for the same low-paying manufacturing jobs. Due to a better working labor market and a more friendly tax environment my bet is Poland will eke out a victory in that competition, which would further depress the Swedish growth number.
That aside, there is a lot to be seriously worried about in the Commission’s Winter Forecast numbers. The overall standstill in GDP is very worrying, as 2013 represents the fifth year of a crisis that was originally relatively manageable but which has been made far worse by disastrous austerity measures. Since the Eurocracy – both political and administrative – remains committed to austerity, it is basically impossible to find any scenario that would allow Europe’s troubled economies to pull out of this endless recession.
I have warned about this before, and I recently drew the conclusion that Europe is in a state of permanent decline and that this permanent decline involves a drastic reduction in the standard of living for young Europeans – their prosperity is, so to speak, on hold. I also recently explained that Europe now represents what we could define as industrial poverty, that it is becoming an economic wasteland plagued by high unemployment, a static standard of living and overall lost opportunities for everyone except a small, political elite that – thus far – can live high on the hog in the Eurocratic ivory tower.
Perhaps I should take joy in the fact that my analysis has been spot on all the way. But that would be cynical, and I am not prone to either cynicism or schadenfreude. I am sincerely angered by what big government has done to Europe, and I fear that the only way out of this situation is a political Balkanization of the entire continent. That means a disorderly fragmentation, with outlier countries being ruled by fascists or stalinists (In Greece, both are about the same influential size in parliament) and panic forcing a return to national currencies under great financial and fiscal turmoil.
I would of course like to see Europe make an orderly retreat from the EU project, and I wholeheartedly support Euroskeptic heroes like Nigel Farage in fighting to secure that orderly retreat. However, as things look right now I predict that the economic crisis that is sweeping like a bonfire across Europe will burn down the better of the European economy before Mr. Farage and his fellow Euroskeptics gain enough momentum to put out that fire with free-market reforms and structural reductions to Europe’s enormous government.
Unfortunately, there is a lot to back up that last prediction. One example: the Greek economy is going to contract by another 4.4 percent in 2013. The Greek have already lost one quarter of their GDP since the crisis began in 2009. This is nothing short of economic free-fall, a recession that has escalated into full-scale depression, fueled by the destructive forces of austerity.
Back to Benjamin Fox in the EU Observer:
Spain’s budget deficit has cleared 10 percent. The average eurozone country now has a debt to GDP ratio of 95 percent – a figure that observers had previously thought was applicable only to Italy and Greece.
Those observers thought austerity would improve economic conditions in the countries where it is applied. It does not, it never has and it never will.
Mr. Fox then notes that the crisis is spreading beyond its “origin”, Greece:
While the Greek economy will contract by a further 4.4 percent this year – by the end of 2013 Greek economic output will have fallen by more than a quarter in five years – the clear indication from the Winter Forecast is that Athens is no longer in the eye of the storm. Paris and Madrid now have that unwanted place. France was one of a handful of countries called out for censure by commissioner Rehn on Friday. The French budget deficit remains stubbornly high, falling by a mere 0.6 percent to 4.6 percent in 2012. The commission’s projections have it remaining above the 3 percent threshold in 2013 and 2014. Ominously, Rehn told reporters that the commission would prepare a full report on France’s public spending after Paris prepares its next budget plan, adding that President Francois Hollande’s government needs to “pursue structural reforms alongside a consolidation programme.”
The Eurocrats may get away with destroying 25 percent of the Greek economy. But before they set out to do the same to France, they should consider the law of big numbers. France is the second largest euro-zone economy. If you destroy one quarter of that economy, you will accelerate the current European crisis from a looming depression into something that could even be more devastating than the Great Depression.
Mr. Rehn and his Eurocrat cohorts are not playing with fire. They are playing with a macroeconomic Hiroshima.
Benjamin Fox at the EU Observer does not quite seem to get the magnitude of the problems he is reporting, but that does not take away from his reporting them:
Some of the figures that leap off the pages of the Spanish assessment are truly alarming. Spain’s budget deficit actually increased to 10.2 percent in 2012, although the data does not include the savings from spending cuts and tax rises at national and regional level in the final weeks of the year, estimated to be worth 3.2 percent. Even then, the country will still have averaged a 10 percent deficit over the last four years. By the end of 2014, its debt pile will have nearly doubled to 101 percent of GDP over the space of five years.
Well, the good old Keynesian multiplier will tell you that if you contract government spending by 3.2 percent of GDP in that short of a time period, you can expect the private sector to contract by at least as much over the next 4-6 quarters. However, a recent IMF study showed that the multiplier works faster for reductions in government spending than for any type of increase in macroeconomic activity. Therefore, the negative repercussions of these Spanish austerity measures could begin to make themselves known in the Spanish economy already in the first quarter of this year.
Such a contraction in private-sector activity will erode the tax base and increase demand for tax-paid entitlements. As a result, the deficit will bounce back up again and probably exhibit a net increase.
In other words, what Mr. Fox sees as a mysterious persistence in deficits is really a logical consequence of the economic policies of the Spanish central and regional governments.
One of the many social disasters that will characterize the permanent European decline is very high, very costly unemployment. Mr. Fox notes this:
The headline rate of 11.7 percent unemployment across the eurozone is bad enough, but it is the sharp rise in long-term joblessness that is most concerning. Forty five percent of the EU’s unemployed have been out of work for more than a year, and in eight countries this figure rises to over one in two. In Spain, Greece and Portugal, where the unemployment rate is above 15 percent and youth unemployment sits close to one in two…
That’s 50 percent youth unemployment. Consider what that means for the loyalty of the young toward their country – and its political, economic and cultural leaders.
…millions of Europeans risk being locked out of the labour market for good. In the foreword to the Winter Forecast, Marco Buti, head of the commission’s economics department, rightly acknowledges the “grave social consequences” resulting from the unemployment crisis. But it is more dangerous than that. As the commission paper concedes “long-term unemployment is associated with lower employability of job seekers and a lower sensitivity of the labour market to economic upturns.” The longer people are out of work, the more likely it is that high unemployment rates become a structural feature of the European economy.
Not to mention their proneness to support extremist political parties. Support for Golden Dawn, the Greek Nazis, does not come solely from the police and the military.
I am sometimes asked what I think Europe can do about this crisis. I have tossed and turned that question around, and I am sad to say that my answer is very short: “very little”. That said, here are some desperate measures that could at least give Europe a chance:
1. Fiscal cease-fire. Stop with the austerity measures right now.
2. Labor-market deregulation. Most of Europe suffers from very rigid hire-and-fire laws. Give Europe’s employers a chance to take on new workers without having to make a de facto life-time commitment to them.
3. Flatten the tax structure. One of Europe’s most discouraging features is the steep marginal income taxes. Give job creators a chance to keep more of their money.
4. Orderly EU retreat. Let the Euroskeptics design a plan to dismantle the entire EU project and liberate the nation states – and, most important of all, their peoples – from this authoritarian, growth-stifling, freedom-eating bureauacracy.
5. Bye, bye to the welfare state. Europe needs a long-term plan – unique to each country – to get rid of its entitlement-based welfare state. Some ideas for America can perhaps be of inspiration for Europe as well.
These are, again, some very short points. I do not see fertile ground for either of them at this point, let alone for a more elaborate plan. However, there may still be hope to save individual countries, such as Britain, if right-minded political leaders can gain more influence.
But even if Britain and a couple of other countries escape the fury of the current crisis, the political, economic and social landscape of Europe will look very different in five years than it does today. And it won’t be for the better of Europe’s suffering masses.
Update from the Economic Wasteland
Watching Europe trying to get out of its recession is like watching a man trying to ride a bike in zero gravity. No matter how hard they try to pedal forward, they are completely and utterly stuck in one and the same spot. That GDP growth spurt that was going to jolt the European economy back to life is turning into little more than a fairy tale. In fact, reality is going in the exact opposite direction. From the EU Observer:
The eurozone economy will shrink by a further 0.3 percent in 2013, the European Commission said Friday (22 February), revising down a more optimistic previous estimate that had predicted 0.1 percent growth for this year. The data also indicates that average government debt rose by 5 percent in 2012 to 93.1 percent as a proportion of GDP. The average debt level is expected to peak at 95.2 percent in 2014, well above the 60 percent threshold set out in the bloc’s Stability and Growth Pact.
Please note that the growth rate is adjusted down by 0.4 percentage points, a relatively large adjustment for such a short period of time. The reason is probably not faulty economic models, as the EC gets its data from their own statistics bureau, Eurostat. It is more likely that the reason has to do with political meddling with the non-formal forecasting process – or, to be blunt: politicians and bureaucrats have written in their own delusional beliefs in the virtues of austerity into a forecast that otherwise would show the naked truth about said austerity.
As for the 60 percent debt level, it is entirely artificial without the slightest scientific foundation. It was imposed on the EU by a group of politicians and bureaucrats who designed the Stability and Growth Pact and wanted to look fiscally conservative. The 60-percent level was one of two arbitrary features of the Pact, the other being the requirement that EU member states cap their deficits to three percent of GDP. This latter feature is, by the way, the main culprit behind the panic-driven austerity assaults on the budgets in, e.g., Greece, Spain, Italy and Portugal. Needless to say, that has made it even harder for the member states to meet the goals of the Stability and Growth Pact.
Back to the EU Observer:
News on government budgetary positions was more positive. The average deficit in the eurozone had fallen by 1.5 percent to 3.5 percent, with the commission expecting a further 0.75 percent improvement to bring the eurozone average under the 3 percent threshold. Announcing the figures, Economic Affairs Commissioner Olli Rehn admitted that “the hard data is still very disappointing” adding that the progress made by national governments to cut budget deficits was “not yet feeding into the real economy.”
Yes they are. They are just not feeding in like Mr. Rehn thinks they should. Instead of making the economy grow, which is Mr. Rehn’s delusional belief, his spending cuts and tax increases are perpetuating and even aggravating the recession.
As for the improvement on the budget deficit front, it is an expected, temporary effect resulting from last year’s spending cuts and tax increases. Things will turn for the worse again once the latest austerity round proliferates through the economy.
To get the full story of what it is Mr. Rehn does not get, download this paper and check out Figure 3 on page 15. Given how obvious these macroeconomic mechanisms are, it is very surprising that Eurocrats like Mr. Rehn are still getting away with their austerity fantasies.
Or maybe they are not. Perhaps things have gotten so bad in so many countries now that people are prepared to throw out the balanced-budget requirements in order to allow for prosperity to start growing again. The Italian election will give us a big hint, explains another story from the EU Observer:
Italian voters are heading to the polls on Sunday and Monday (24-25 February) in a closely-watched race that could bring the country back to the brink of a bailout. Outgoing Prime Minister Mario Monti, a respected former EU commissioner and economics professor, may be the favourite among EU leaders watching from the side lines, but at home, he appears to have failed to convince voters that his reforms and sober politics are what the country needs today.
It is hardly a sign of sobriety when someone recommends higher taxes and spending cuts in the midst of a recession.
In a significant catch-up effort – thanks to his media empire and promises to pay back taxes introduced by Monti – former leader Silvio Berlusconi was just five percent behind [center-left candidate] Bersani in the 8 February survey. … For its part, Italy’s leading investment bank, Mediobanca, has predicted that if Berlusconi wins, the country would face an immediate backlash on financial markets and could be forced to ask for financial assistance from the European Central Bank.
For what reason? Berlusconi would in all likelihood abandon the austerity policies, and if he follows through on its promises to not only reverse the tax cuts but do it retroactively, he will in fact inject a stimulus into the economy of a kind that could get the Italian economy growing again. That in turn would ease the budget pressure and increase confidence among investors in, e.g., Italian treasury bonds.
If, on the other hand, Bersani wins he might form an alliance with Monti to please the Eurocrats. That in turn would increase the likelihood of more austerity hammering down on the Italian economy. Given its size, that will have clearly negative effects on the economy of the euro zone.
As will the continuing commitment to austerity in France, where the socialist government has been forced to adjust its budget deficit forecast. From the increasingly influential pan-European news site The Local:
The figure for this year, when France was due to get back within the EU’s ceiling of 3.0 percent of output, is worse than the 3.5 percent previously tipped, and leaves Socialist President Francois Hollande looking for special leeway from Brussels. European Union Economy and Euro Commissioner Olli Rehn told a press conference that France could be given more time to meet its commitments, much as Spain and others have been over the three years of the debt crisis. “If the expected negative economic headwinds bring significant, unfavourable consequences for public finances, the (EU’s) Stability and Growth Pact allows for the deadline (for France) to be pushed back to 2014,” he said.
This is not very surprising, given that the French government has been forced to acknowledge that the nation’s economy will not grow as fast as they had suggested it would. This concession is hardly surprising, given the harsh fiscal measures that President Hollande and his fellow socialists in the National Assembly have imposed on the French economy.
In fact, the situation is beginning to look a bit panicky in Paris. Another story from The Local:
France needs an extra €6 billion in revenues next year, the budget minister said on Monday, and the European Central Bank said it had to act fast to cut spending and retain credibility after slashing the 2013 growth forecast. … Budget Minister Jerome Cahuzac … did not specify how this would be achieved saying taxes “are already very high in France.”
Really…? Does that mean that even socialists acknowledge that a 75-percent hate tax on high incomes is a bad idea? Or is 76 percent the “very high” limit?
Regardless of whether the French want to have stupidly high taxes or very stupidly high taxes, the pressure is on them to keep the austerity pressure on the economy. The Local again:
French ministries have been informed how much to cut spending in order for the government to generate €2 billion in savings this year. “Economies in public spending are inevitable,” Cahuzac said. “We have started to do it, we will continue to do it,” he added. Benoît Coeure, a Frenchman who sits on the managing board of the European Central Bank, said on Monday that Paris had to take strong action to convince its European Union partners that it was serious about keeping to the EU’s deficit norms.
Surprisingly, in the midst of all this, President Hollande does not want more austerity…
arguing they would only slow growth and further aggravate the country’s finances.
But a 75-percent hate tax on the “rich” does not slow growth, right? Regardless, it seems like the French government is now forced to walk a thin rope. On the one hand, budget minister Coeure says that:
“As for credibility on the short-term, France must absolutely respect its commitment to cut the structural deficit,” … “In the medium-term, it has to take quick and concrete decisions to achieve spending cuts, so that France reassures its European partners,” he said.
On the other hand we have president Hollande’s realization that austerity might not be such a good idea after all. What to do? Well, the Eurocracy is going to maintain its pressure on Hollande and the French government, especially now that Mr. Rehn has made clear that he believes the crisis is basically over and Europe has austerity to thank for it. He is not going to let go of his story that easily, which means he will keep Hollande in check and force him to “pet the horse” as the Danes say, i.e., do as he is told.
If at the same time the Eurocrats’ favorites form the next administration in Italy, the forces of austerity will continue to prevail. Under their boot, Europe will solidly establish itself as an economic wasteland, mired in industrial poverty. The balanced budgets will shine their glory over rusting steel mills, crumbling hospitals and the masses of the unemployed.
Another Downturn in Europe
Never bark at the big dog.
Last spring I published a research paper explaining how Europe’s austerity policies would take the economy from a bad crisis to a worse crisis. Recently I have specified what this next stage will look like: a permanent decline where large parts of the continent turn into an utter economic wasteland, and industrial poverty becomes the new way of living in Europe.
I have been right all along. Already in October last year Gulfnews.com saw the new downturn coming:
Dwindling new orders and faster layoffs marked a worsening decline for euro zone companies last month, according to business surveys that dent hopes the economy will return to growth before 2013. Wednesday’s purchasing managers indexes (PMIs) suggested it was almost inevitable the euro zone returned to recession in the third quarter. A good gauge of economic growth, Markit’s Eurozone Composite PMI fell to 46.1 in September from 46.3 in August. … “Rather than clearing, the cloud of uncertainty hanging over business investment and spending got notably darker in September,” said Chris Williamson, chief economist from Markit, which compiles the data. “There therefore seems little scope for a return to growth in the fourth quarter.”
Then in December Bullfax.com reported:
Eurozone factory output continued its steep fall in autumn this year, underscoring the feeble domestic demand that risks prolonging the bloc’s recession. Industrial production in the 17 countries sharing the euro fell 1.4% in October after falling sharply in September … That was much worse than the modest growth expected by economists in a Reuters poll. Factories had proved surprisingly resilient over the European summer, posting two months of moderate gains, but the new data supports forecasts of a third quarterly contraction in the eurozone’s economy in the October-to-December period. After three years of a debt crisis that has driven unemployment to a record level and pushed governments to slash spending, the economy is caught in a spiral: households are not spending and so companies are not selling, forcing them to cut staff which then further weakens consumption.
A week ago 4-traders.com claimed they saw a light in the tunnel:
Business activity in the euro zone shrank at its least severe rate in 10 months in January, adding to signs that while the crisis-hit economy is still weak, it may have passed its worst point. Resilience in the currency bloc’s economy was largely thanks to solid growth in Germany, a survey from data firm Markit showed Tuesday, whereas activity among French businesses fell at its sharpest rate in almost four years. “The euro zone is showing clear signs of healing, with the downturn easing sharply in January and the region moving closer to stabilization in the first quarter,” said Chris Williamson, Markit’s chief economist.
Today, though, it looks like the light in the tunnel is an oncoming train. The EU Observer reports:
Eurozone economic data due this week is set to show the worst quarterly decline in output for almost four years, reports Bloomberg, citing GDP estimates that the economy shrank 0.4%. It would be the biggest decline since the first quarter of 2009, when GDP fell 2.8%.
We will of course take a close look at those numbers as soon as they are available. For now, suffice it to say that the outlook for Europe is not good, and that the continent as we know it won’t survive another deep economic crisis.
