Standard&Poor’s, one of the leading US-based ratings agencies, on Friday (20 December) downgraded EU’s rating by one notch to AA+, citing concerns over how the bloc’s budget was funded. “In our opinion, the overall creditworthiness of the now 28 European Union member states has declined,” Standard&Poor’s said in a note to investors. Last month, it downgraded the Netherlands, one of the few remaining triple-A rated EU countries. In the eurozone, only Germany, Luxembourg and Finland have kept their top rating.
Not surprising. The Netherlands experienced a very tough budget fight in 2012, with a resigning prime minister, upsetting elections and, during 2013, a close encounter with harsh austerity policies. This was not exactly what the Dutch had expected that they would be subjected to. Or, as I explained the situation in March 2013:
The Dutch government, which has been clearly in favor of tough austerity measures on southern European economies where the deficit exceeds the three-percent limit, now suddenly recognizes that austerity is bad for GDP growth. To play on another American proverb, life is not as fun when the austerity chickens are coming home to roost.
Evidently, the Dutch austerity measures did not prevent a credit plunge. Back now to the EU Observer story about the Standard & Poor downgrading:
The agency noted that “EU budgetary negotiations have become more contentious, signalling what we consider to be rising risks to the support of the EU from some member states.” EU talks for the 2014-2020 budget took over a year as richer countries – notably the UK and Germany – insisted on a cut, while southern and eastern ones wanted more money.
And herein lies the gist of why S&P is worried. The EU budget fight is about countries with better government finances wanting to pay less to countries with troubled or outright catastrophic government finances. If there is a cut in EU funds to Spain, Portugal or Greece, those recipient countries will have to take even tougher measures to try to comply with the budget balance targets set by the EU and the ECB. Given that they are already chronically incapable of doing so, it is not hard to see why S&P is very concerned with cuts in the EU budget.
This message, though, seems lost on some Eurocrats:
The news struck just as EU leaders were gathering for their last day of a summit in Brussels. European Commission chief Jose Manuel Barroso dismissed the rating downgrade. “We have no deficit, no debt and also very strong budget revenues from our own resources. We disagree with this particular ratings agency,” the top official said in a press conference at the end of the EU summit. “We think the EU is a very credible institution when it comes to its financial obligations,” Barroso added. … EU Council chief Herman Van Rompuy downplayed the S&P decision. “The downgrade will not spoil our Christmas,” he said.
Perhaps we should not expect anything else from them. After all, the Eurocracy in Brussels has proven, over and over again, that it lacks insight, interest and intelligence to successfully deal with Europe’s perennial economic crisis. This is in itself a troubling fact, as the signs of a continuing crisis are everywhere for everyone to see. A good example, also from the EU Observer:
The number of people unemployed in France rose 0.5% to over 10.5% in November, figures released Thursday show. The statistics are a political blow for President Francois Hollande who had pledged to bring the rate down by the end of 2013. The figures for December will be released end January.
The Eurocracy’s refusal to see the big, macroeconomic picture is also revealed in their delusional attitude toward the EU’s crisis policy:
The EU says Spain’s banks are back on a “sound footing,” but one in four Spanish people are still unemployed. Klaus Regling, the director of the Luxembourg-based European Stability Mechanism (ESM), made the statement on Tuesday (31 December) to mark the expiry of Spain’s EU credit line. He described the rescue effort as “an impressive success story” and predicted the Spanish economy will “achieve stability and sustainable growth” in the near future.
The only problem is that the crisis in the Spanish banks was not the cause of the economic crisis. The welfare state was the cause. Europe’s banks actually suffered badly from the crisis by having exposed themselves heavily to euro-denoted Treasury bonds: when Greece, Italy, Portugal, Spain, Ireland and even countries like Belgium and Netherlands started having serious budget problems, Treasury bonds lost their status as minimum-risk anchors in bank asset portfolios.
With trillions of euros worth of exposure to government debt, Europe’s banks rightly began panicking when in 2012 Greece forced them to write off some of the country’s debt. The debt write-off was directly linked to a runaway welfare state, whose spending promises vastly exceeded what Greek taxpayers could ever afford. The same problem occurred in Spain where the government’s ability to pay its debt costs have been in serious question for almost two years now.
To highlight the Spanish situation, consider these numbers from Eurostat:
- In 2007 the consolidated Spanish government debt was 382.3 billion euros, of which financial institutions owned 47 percent, or 179.7 billion euros;
- In 2012 the consolidated Spanish government debt was 883.9 billion euros, of which financial institutions owned 57.5 percent, of 507.9 billion euros.
In five short years, Spanish banks bought 382.2 billion euros worth of government bonds. During that same time, the Spanish government plummeted from the comfortable lounges of good credit to the doorstep of the financial junkyard.
It was also during this period of credit downgrading that the Spanish government began subjecting the country to exceptionally hard austerity measures, the terrifying effects of which I have explained repeatedly. However, as today’s third EU Observer story reports, those effects are of no consequence to the Eurocracy, whose praise for austerity will soon know no limits:
He also praised the EU’s austerity policy more broadly, saying: “The people’s readiness to accept temporary hardship for the sake of a sustainable recovery are exemplary … The Spanish success shows that our strategy of providing temporary loans against strong conditionality is working.” Spain will officially exit its bailout later this month, after Ireland quit its programme in December. Unlike Cyprus, Greece, Ireland and Portugal, the Spanish rescue was limited to its banking sector instead of a full-blown state bailout. It saw the ESM put up a €100 billion credit line in July 2012. In the end, the ESM paid out €41.3 billion to a new Spanish body, the Fondo de Restructuracion Ordenado Bancaria (FROM), which channelled the loans, most of which mature in 2024 or 2025, to failing lenders.
So all that has happened is that European taxpayers have been put on the hook for failed Spanish bank loans – loan defaults that Spain’s banks could have dealt with had they not chosen to lend a total of half-a-trillion dollars to their failing government.
Nobody seems to ask how this debt restructuring will help the Spanish government end its austerity policies. Such an end is a must if the Spanish economy is ever to recover. That does not mean a return to “business as usual” under the welfare state – on the contrary, the welfare state must go – but what it does mean is some breathing room for the private sector to regain its regular, albeit slow, pace of business.
Instead of connecting the dots here, the Eurocracy continues to look at the European economic crisis through split-vision glasses, and Spain is no exception. The EU Observer again:
For its part, the European Commission last month warned that the Spanish economy is still in bad shape despite the good news. It noted that “lending to the economy, and in particular to the corporate sector, is still declining substantially, even if some bottoming out of that contraction process might be in sight.” Meanwhile, the latest commission statistics say 26.7 percent of the Spanish labour force and 57.4 percent of its under-25s are out of work. The labour force figure is second only to Greece (27.3%) and much higher than the EU’s third worst jobs performer, Croatia (17.6%). … A poll in the El Mundo newspaper published also on Wednesday showed that 71 percent of Spanish people do not believe they will see any real benefit from Spain’s recovery until 2015 at the earliest.
All this ties back to the Standard & Poor downgrading of the EU. There is, plain and simple, a lot of concern that nothing is going to get better in the EU. There are good reasons to believe this: the persistent message from Brussels over the past two years has been that the next austerity package will be the last, that it will turn things around and put depression-stricken economies back on track again. As we all know, that has not happened, which raises the question if the EU is going to have to actually increase its bailout efforts toward fiscally troubled member states.
This blog’s answer is “yes, very probably”. Europe’s only way back to prosperity and growth goes through the structural elimination of the welfare state.
Sometimes it is easy to gauge the level of desperation over the crisis in Europe. The EU Observer provides two good examples, the first on unemployment:
Unemployment in the eurozone fell for the first time since February 2011, according to figures released on Friday (29 November). The jobless rate fell to 12.1 percent in October 2013, according to EU statistical agency Eurostat, down from 12.2 percent in September, leaving 19.3 million people out of work.
That sounds good until you start looking at the actual numbers from Eurostat. The truth is this:
As these seasonally adjusted monthly figures show, the American unemployment rate has come down 0.6 percentage points since the beginning of the year. During that time the EU has been practically stalled at eleven percent. The Euro area is not going anywhere either from its 12-percent level.
What the EU Observer elevates to a “fall” in unemployment is literally the reversal of the euro zone’s temporary uptick in September. To call this a fall in unemployment is about as honest as to use the warm weather at noon as a sign of global warming.
As always, we should also check in on youth unemployment:
Again, the U.S. economy handily beats Europe with a decline by 1.7 percentage points since January. If there is any trend in the European numbers, it is for the worse, a very good reason for Europe’s political leaders to not let themselves be blinded by the non-fall in total euro-zone unemployment.
As for the worst performers in this division, Greece has not reported youth unemployment since August (artificially holding down the euro number) when their rate was 58 percent. The October number from Spain is 57.4, the highest monthly Spanish rate thus far this year. Croatia reported a rate of 52.4 percent in September, also the highest for the year. Let us pray that when their October rate comes in, it bucks the trend.
Now for the second example of desperately promoted “good” news in the EU Observer story:
Meanwhile, on a mixed day for the eurozone economies, the Netherlands became the latest eurozone country to lose its triple-A credit rating from rating agency Standard and Poor’s. Germany, Finland and Luxembourg are now the only remaining countries to hold the top-rating. However, there was better news for Spain and Cyprus. Standard and Poor’s uprated Spain’s economic outlook to “stable” after data showed that its economy grew in the third quarter of 2013 after more than two years of recession.
That growth was over the previous quarter, and not in seasonally adjusted numbers. In short, it says nothing about what is happening on the ground. To find that out we have to compare the third quarter of 2013 to the third quarter of 2012, which gives us a Spanish GDP growth rate of -0.7 percent. In other words, it is still shrinking. It is the “best” figure in two years, but until we see an actual growth number in year-over-year quarter numbers there is no reason to believe the economy has turned a corner. Furthermore, with unemployment in general stuck at its high level and youth unemployment still climbing it is pointless to even think about an economic recovery.
I understand perfectly well that the Europeans want to get out of their deep, endless economic recession. But you do not get out of it by clinging to superficial economic data. You get out of it by turning a real macroeconomic corner. That, in turn, requires substantial reforms to the role that government plays in the European economy.
Back in February I asked if Europe can stop rising nationalism within its borders. I concluded:
Europe in general is so deeply entrenched in the defense of big government that its leaders have a very weak gut reaction to authoritarianism. This is especially true on the socialist flank, but it applies almost as strongly to nationalism.
Right after World War II the countries of Western Europe started building and expanding welfare states. Originally they followed slightly different paths, with Scandinavia going for the full-blown socialism-light model while Germany and Britain kept their welfare states more in line with what has often been classified as “social conservatism”. Over time, though, the differences between the various welfare states have been blurred and almost vanished. Today, Europe is little more than one big mess of income redistribution, decaying socialized health care, destructive entitlement dependency and widespread hopelessness.
Life under this slowly declining welfare state is not much different than life under the late-stage Communist dictatorships in Eastern Europe. Europeans can still vote for nominally dissenting parties for their legislatures, but the most important pillar of parliamentary democracy – freedom of speech – is slowly withering away. The immediate motive for reining in free speech is to expand tolerance, but in reality the purpose is to thwart debates about the increasingly devastating effects of austerity and attempts at preserving the welfare state.
When 20 percent or more of the young are unemployed in 20 member states, and when entitlement dependency has created large areas in Europe’s big cities, filled with pacified immigrants, crime and religious extremism, it is not far-fetched to see what explosive forces are at work. But instead of breaking a vicious, downward spiral of industrial poverty, despair, crime, social disintegration and surging political radicalism, Europe’s political leaders double down on their path to the economic wasteland. Instead of opening up an honest, informed debate about where Europe is actually heading, they create new, draconian restrictions on freedom of speech.
The reaction from regular Europeans is going to be as predictable as the idiotic commitment of the Eurocracy to an ever expanding, ever more authoritarian “democratic” government. As the political elite of the EU and the member states continue to grow the super-state; as they continue to centralize power to Brussels and put more and more invasive measures in place to rein in the lives of Europe’s already heavily regulated citizens; an ever growing number of those citizens will look for simple-solution delivering political movements.
As the political elite blurs the distinction between democracy and totalitarianism, the ability of democracy to resist totalitarianism will rapidly become weaker. This was my conclusion in February of this year, and I continue to stand by that conclusion.
I have received a few rather snotty comments on this matter. I have only one thing to say to the simple-minded “enlightened” political elitists behind those comments: Never bark at the big dog. The big dog is always right. From the Christian Science Monitor:
Extreme, neo-fascist groups in Spain are preparing for a show of force during this weekend’s nationalist holiday, and Spanish authorities are keeping a close eye on the situation. But experts worry that the real fascist concern in Spain is not from small extremist groups, but rather from growing public displays of fascist sympathies by a small part of the conservative government’s constituency – and even among elected officials.
With the exception of Greece, Spain is the country in Europe that has suffered the worst as a result of the economic crisis. Their overall unemployment rate is nearing Greek levels and their youth unemployment is only a few ticks behind Greece. Middle-class Spaniards have become food scavengers to survive, wages are falling for those who still have jobs, the crisis is still deepening, austerity policies have driven up taxes to a point that inflation in this unemployment-ridden country is actually on the rise, home-owning Spanish families default in droves on their mortgages, and the overall economic, social and political situation is becoming downright explosive.
Is there any wonder that wealthier provinces are considering secession as a last-resort attempt at preserving whatever they can of their prosperity?
The sensible response to this would, of course, be that the national government abandons the current path of trying to save the welfare state in the midst of an ever deeper economic crisis. But that notion is not even on the political radar screen in Europe – let alone in Spain. Instead, the only alternative to the current policies that seem to have any legs is apparently Franco fascism.
Spain was ruled by a fascist dictator for 40 years. There are still millions of Spaniards who remember Franco, just as there are millions upon millions of East Europeans who remember the bad old days of the Soviet era. When parliamentary democracy fails to deliver a prosperous future, people are more inclined to consider alternatives even if those alternatives are loaded with totalitarianism. When unemployment among the young exceeds 50 percent, selective memories of a bygone era become dangerous challengers on the contemporary political scene.
So far, the radical fascist and Nazi groups in Spain are not within reach of the influence that Golden Dawn has achieved. But that could easily change – and change quickly. Christian Science Monitor again:
An alliance of radical right groups – including violent neo-Nazi ones – have mobilized to travel from around the country to Barcelona to protest Catalonian nationalism on the October 12 ”Día de la Hispanidad,” or “Hispanic Day,” holiday. Authorities said Thursday they plan to prevent violent groups from entering Catalonia. The holiday march is held annually, and is normally small and peaceful. But the nationalist undertones of Hispanic Day – which originally commemorated Christopher Columbus’s discovery of the American continent until was renamed in 1958 by the fascist regime of General Francisco Franco – make it a flashpoint. Five groups – including violent neo-Nazi cells and a political party that the Supreme Court is considering banning – in July formed a common platform called “Spain on the March.”
And you thought the welfare state would build a bulwark against totalitarianism? Precisely the opposite is true. The welfare state is the inevitable pathway to totalitarianism.
The weekend march is not an isolated incident. As Catalonian plans to hold a referendum on independence move forward, the extreme right has re-energized, even if it remains small compared to the resurgent movements in Greece, France, and elsewhere. Last month, a dozen radicals forced their way into a library where Catalonians were commemorating their own national day, injuring several people and tearing down Catalonian symbols. Police arrested them in the aftermath.
And we are not talking some fringe group here:
Police estimate there are about 10,000 members involved in violent extreme right groups. They lost political representation in parliament in 1982, seven years after Franco died. But they didn’t disappear. They melded into the now governing PP. The concern is not so much over the very small group of violent groups, which authorities constantly monitor. These are mostly contained, experts agree. The real problem is in from those within the government’s ruling party that sympathize ideologically – even if they condemn the use of violence.
The “trains-ran-on-time” myth about fascism has never quite died in Europe. And again, today’s democratically elected leaders in Europe are lending a hand to those who have kept that myth alive. The Eurocracy and their errand runners in national parliaments are carving away at parliamentary democracy, little by little. First they shoved austerity down the throats of Greek, Spanish, Italian, Portuguese and French voters; when voters protested, the political elite appointed their own leaders in place of elected ones to govern austerity-ridden countries. And now the same elite is putting barb wire around free speech. The Monitor again:
The political heirs of Franco merged with the PP [now governing Spain], which is ideologically a center-right party. And amid the eurocrisis, they could gain more political clout that could be significantly more dangerous than the violent groups, experts warn. The government has been criticized by the opposition, regional governments, and human rights groups for condoning fascist public support among its own followers – which even if small in number, were unheard of until recently – even if violent groups are suppressed. Such criticism arose again on Thursday, when PP legislators voted down a motion like that in the Catalonian parliament to criminalize public support for fascism, Franco, and the Nazis.
As abhorrent as fascism is, have speech bans elsewhere in Europe killed that ideology? Obviously not. Such speech bans seriously under-estimate the citizenry. The only thing they do is put on full display the arrogance of the political elite, including their bizarre belief that every aspect of society can be politically engineered.
You would think that seven long decades of Soviet Communism would be evidence enough. You would think that by now they had learned to attack the underlying reasons why people turn to radical, totalitarian ideologies. But while the political and cultural elite in Europe is quick to explain away radical Islamism with social and economic factors, they still believe that a simple speech ban can keep people from turning to other versions of oppression.
Evidently, Europe’s biggest deficit is in political adulthood.
But there is more. The story in the Christian Science Monitor gives chilling examples of a Franco resurgence in Spain, of proportions that should send a chill down the spine of every freedom-minded individual on the Iberian peninsula – and elsewhere. Click here and read it all. It is well worth your time.
Economic despair is widespread in Europe today. But there are also signs of emerging economic desperation. That is, desperation among politicians that their prescribed medicine – austerity – is not doing the trick. Unemployment keeps rising while budgets do not balance despite years of spending cuts and tax hikes.
No wonder some politicians put their faith in even more desperate measures, such as widespread pay cuts for private-sector workers. From The Guardian:
Wages have fallen across Spain in the past year as the government tries to cheapen labour for employers just as austerity measures cut back the welfare state. Salaries fell by an average of 0.6% in the year to the first quarter, with inflation pushing the real loss in the purchasing power of those Spaniards in work to 2%. Private sector salaries were harder hit than those of public employees.
The Spanish unemployment rate is still rising and is now 27 percent. This puts a massive downward pressure on wages, but also rapidly extends jobless lines.
There is nothing inherently wrong with wages taking a nosedive in a recession: the wage is the price of labor and if labor is in excess supply the price needs to fall as part of the free-market adjustment process to restore full employment. But when wages are pushed down as part of a policy package to save big government, then there is no free market at work here, only cynical politicians:
Falling wages are seen as good news by prime minister Mariano Rajoy’s conservative People’s party government, which believes wage devaluation is one of the few options left to Spain now it is part of the euro and can no longer devalue its own currency. “This will help us become more competitive,” the country’s employer’s federation said.
Spain is in the middle of a multi-year process of trying to close its budget deficit by means of austerity. The national government is putting its faith in tax hikes and cuts in government spending, hoping they will close the deficit, thereby push interest rates down and as a result increase private-sector investment.
The theory behind austerity is flawed, and that is clearly visible in the Spanish, Greek, Italian, Irish, French and Portuguese economies. In 2012 alone these countries lost a total of 49.4 billion euros worth of GDP as a result of austerity. This is money that is not spent in the private sector – sales lost by European businesses – roughly equivalent to 700,000 private-sector jobs. And that is before we even consider the multiplier effects.
So if the purpose of austerity was to balance the government budget and thus push interest rates down, what is so wrong with this leading to wage drops?
Here is the problem. There is a goal embedded in the budget balancing itself. It is not explicit, but implicit and visible only in the fact that the budget balance, not the size of government, is the target of austerity policies. If austerity was all about shrinking government the policies would be designed to achieve that goal, but they are not. There are no terminations of spending programs in austerity, and the quantitative goals in each austerity package, from Greece to Italy to Spain and on, are set in terms of reduction of the deficit, not reduction of the size of government.
This means that austerity is an instrument to preserve the welfare state. The premise behind austerity is that the welfare state intrudes on private-sector activity with its budget deficit. Therefore, the goal with austerity is to make sure the welfare state can continue to exist without imposing an extra burden on the private sector through higher interest rates.
Since austerity has dramatically increased Spanish unemployment, and since unemployment is driving wages down, the real reason for the wage drop is that the government wants to preserve its welfare state – not that it wants an economy where free-market principles rule. It has already increased taxes and cut government spending, thus imposing massive explicit and implicit tax hikes on Spanish families; the wage drop, forced upon workers by austerity, is the redeeming instrument, so to speak, that government employs in order to help the economy recover some of the jobs it has lost.
Needless to say, for this to work the Spanish economy has to turn to the world beyond its borders. The combination of higher taxes and lower wages is a strong guarantee that domestic demand, especially consumer spending, will remain depressed for years to come. The Spanish government is aware of this and therefore chooses to rely on export demand to pull the economy out of its perennial crisis.
All this while the government manages to preserve the welfare state and shield government workers from some of the tougher pay cuts that private-sector employees have to take.
It is difficult to say how far the European crisis can continue in its current state. When an economic crisis reaches a boiling point it usually spills over into massive social unrest and leads to radical political changes. Those changes are usually not for the better and would certainly do a lot of harm to Europe, but with the economy inching further down into the abyss one has to ask how much worse things could actually get.
The broader scope of that question is for another day, another article. Today, though we have noted yet another absurd twist to the crisis, namely the Spanish wage cuts that aim to preserve big government and make workers in the private sector pay yet another bill for an over-bloated welfare state.
Perhaps it is not surprising that the debate over austerity in Europe is intensifying. From the Economics Blog at the leading British newspaper The Guardian:
Another month, another dismal set of jobless figures from the eurozone. Unemployment was up by 95,000 in April and if the trend of the past three months continues, an unenviable milestone will be reached by Christmas. At that point, there will be 20 million on the dole in the 17 nations that use the single currency. Europe now faces a triple crunch: an interlocking human, economic and political crisis that will have devastating consequences if left unattended.
Absolutely. The destruction now being done to Europe is unprecedented because it is coordinated, deliberate and rationally (as in “planned” and “legislatively driven” – not “reasonable” or “smart”) enforced by governments across the continent.
The phrase “lost generation” can be over-used: on this occasion it is entirely appropriate to describe what is happening in Greece, where the youth jobless rate is approaching two-thirds of the young population.
And not just there. As I reported yesterday, in both Greece and Spain youth unemployment is above 50 percent. Four other European countries, Croatia, Portugal, Italy and Slovakia, record youth unemployment above one third. A total of 19 European states have unemployment rates above 20 percent for the young.
Back to The Guardian’s Economics Blog, which makes an astute observation:
The eurozone’s prolonged slump has forced some modest changes to deficit reduction plans, giving some member states longer to hit their targets. But Europe still appears a long way from embracing the sort of strategy that would start to bring the jobless total down. In part, that’s because there is still a belief that the impediments to growth are all structural and have nothing to do with a deficiency of demand.
Indeed. Higher taxes, increased net drainage of money from the private sector to government, and falling wages all conspire to reduce total demand in the economy. Thereby the continuation of the recession, even its deepending, is essentially written in stone.
The pressing question now is: when higher taxes and lower wages don’t do the trick, what will the desperate governments of Europe’s ailing welfare states do next?
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.
By now, everyone around the world has probably heard that Spain is de facto in fiscal default – i.e., bankrupt. The IMF, whose report Fiscal Monitor number 1301 presented the numbers showing that Spain is practically in default, does not offer an explicit analysis of the default scenario itself, but it gives a very illuminating background to the proliferating economic tragedy in Europe.
I will do an analysis of the Fiscal Monitor report later; for now, let’s return to Spain and the notable fact that the country has gone into effective bankruptcy despite the commitment by the European Central Bank to buy up every euro’s worth of Spanish treasury bonds. This commitment meant two things:
- owners of Spanish bonds would always be able to sell them, thus putting a mild downward pressure on the interest rate; and
- the Spanish government would be able to finance its own debt in perpetuity – all it would have to do would be to issue more debt, i.e., to ask the ECB to print more money.
This is a slight simplification, as the Spanish government would still have to meet certain fiscal criteria, such as continued austerity. But at the same time, if a central bank issues a guarantee to buy all bonds that its government issues in order to bring down the interest rate on those bonds, you cannot condition your promise on fiscal austerity. As soon as the government must take fiscal steps to maintain the central bank’s purchasing guarantee, the guarantee loses its inherent value. It is no longer worth any more than the bonds it is supposed to guarantee.
In other words, meaningless.
Assuming that the ECB does not make meaningless promises, the Spanish de facto default is all the more remarkable – and comes with serious warnings to everyone with money in Spain: get out or face a Cypriot Bank Heist seizure of your assets.
Here is what Jeremy Warner said in the Daily Telegraph a couple of days ago:
Next year, the [Spanish] deficit is expected to be 6.9 per cent [of GDP], the year after 6.6 per cent, and so on with very little further progress thereafter. Remember, all these projections are made on the basis of everything we know about policy so far, so they take account of the latest package of austerity measures announced by the Spanish Government.
Which means that we can expect an increase in the deficit ratio in the future, as forecasters often forget to incorporate the negative effects of austerity on GDP.
The situation looks even worse on a cyclically adjusted basis. What is sometimes called the “structural deficit”, or the bit of government borrowing that doesn’t go away even after the economy returns to growth (if indeed it ever does), actually deteriorates from an expected 4.2 per cent of GDP this year to 5.7 per cent in 2018.
This is important, because it shows that there is a structural change going on in the Spanish economy. People are paying permanently higher taxes and get permanently less back from government for that money. The private sector has been permanently diminished and an entire generation of young Spaniards has been sentenced to a life on welfare.
By 2018, Spain has far and away the worst structural deficit of any advanced economy, including other such well known fiscal basket cases as the UK and the US. So what happens when you carry on borrowing at that sort of rate, year in, year out? Your overall indebtedness rockets, of course, and that’s what’s going to happen to Spain, where general government gross debt is forecast to rise from 84.1 per cent of GDP last year to 110.6 per cent in 2018. No other advanced economy has such a dramatically worsening outlook.
But Greece did, and they ended up losing one quarter of the GDP.
Unfortunately, Jeremy Warner does not see the damage done by austerity:
And the tragedy of it all is that Spain is actually making relatively good progress in addressing the “primary balance”, that’s the deficit before debt servicing costs.
The “progress” consists of increasing taxes and reducing spending in an entirely static fashion. There is no analysis behind the austerity efforts of the long-term effects they will have on the economy. For example, the increase in the value-added tax that was enacted last year reduced the ability of consumers to spend on other items. This reduced private consumption and forced lay-offs in retail and other consumer-oriented industries. The laid off workers went from being taxpayers to being full-time entitlement consumers. As they did they reduced the tax base and cut tax revenues for the government in the future.
This point aside, Warner explains well the bankruptcy side of the issue:
What’s projected to occur is essentially what happens in all bankruptcies. Eventually you have to borrow more just to pay the interest on your existing debt. The fiscal compact requires eurozone countries to reduce their deficits to 3 per cent by the end of this year, though Spain among others was recently granted an extension. But on these numbers, there is no chance ever of achieving this target without further austerity measures … it seems doubtful an economy where unemployment is already above 25 per cent could take any more. … All this leads to the conclusion that a big Spanish debt restructuring is inevitable.
Debt restructuring, of course, being the same as bankruptcy. In a matter of speaking, Greece did a “bankruptcy light” when they unilaterally wrote down their debt. In the case of Spain it would probably mean a much bigger debt writedown than in Greece.
Back to Warner:
Spanish sovereign bond yields have fallen sharply since announcement of the European Central Bank’s “outright monetary transactions” programme. … But in the end, no amount of liquidity can cover up for an underlying problem with solvency. Europe said that Greece was the first and last such restructuring, but then there was Cyprus.
And toward the end Warner issues a fair warning about a repetition of the Cyprus Bank Heist:
Confiscation of deposits looks all too possible. I don’t advise getting your money out lightly. Indeed, such advise is generally thought grossly irresponsible, for it risks inducing a self reinforcing panic. Yet looking at the IMF projections, it’s the only rational thing to do.
Spain is the fourth largest euro-area economy, with ten percent of the euro zone GDP. If we add Greece, Cyprus and an all-but-certain Portuguese de facto bankruptcy, we would now have 14 percent of the euro area economy declared practically insolvent. As Jeremy Warner so well explains, the point where this bankruptcy becomes a fact is one where the macroeconomy in a country is permanently unable to bear the burden of government.
This means that 14 percent of the euro-zone economy will be at a point where it is acutely unable to fund the welfare state.
What conclusions will Europe’s elected officials draw from that? It remains to be seen, though it is not far fetched to assume that no one will be ready, willing or courageous enough to remove the welfare state.
That is too bad, because it means – again – that Europe is stuck in a permanent state of industrial poverty. Hopefully, America’s elected officials will watch, learn and do the right thing.
This is a bit disturbing. As a direct result of EU-enforced austerity policies there are now signs of inflation in the troubled Spanish economy. From the Spanish issue of The Local:
You might have heard of the Big Mac Index which compares product prices around the world using the average cost of a McDonalds hamburger as its chief indicator. Now La Nueva España newspaper in Asturias has given this a Spanish twist: the Tortilla Index. The paper reported on Thursday that inflation is biting into the humble Spanish tortilla. Consumer price index figures show costs for the three main ingredients in the tortilla have gone up in the last 12 months. Potatoes are up a third on February last year, oil is 19 percent more expensive, and customers are having to fork out an extra 12 percent for eggs. The cost of living has gone up 2.8 percent in the last year, Spain’s national stats office the INE reported on Wednesday in its latest consumer price index report. Food prices have climbed 2.7 percent in the same period. Other items which have risen in price include electricity and gas — up over 7 percent in the last year — and medicines, up 12.9 percent in real terms according to the INE.
In September last year the Spanish parliament raised the tax rate in two of the nation’s three value-added tax brackets:
Super-reduced rate: will remain unchanged at 4%. This rate includes basic foodstuffs such as bread, eggs and milk; books and newspapers; medicines. Reduced rate: currently 8% will be raised to 10%. This is charged on transport, tourism, restaurants, water and foodstuffs (except alcoholic beverages). General rate: currently 18% will be increased to 21%. This group includes items not included in the previous two groups such as clothing, footwear, electronics and furniture.
Although there was no increase in the rate charged on food, the increase in the middle tier has direct implications for the cost of, e.g., groceries. Furthermore, since this is a value-added tax and not a straightforward sales tax there is always the risk that tax hikes further back in the product chain affect the price of a product even if the rate on that product has not been raised. This is not supposed to happen, but the value-added tax model is notorious for causing inflation as a result of tax hikes on inputs. In this case, the increase in the tax on transportation would cause an increase in prices of groceries, even though transporters pay their own value-added tax.
Back to the moneysaverspain.com story:
One of the biggest surprises [in the value-added tax hike] has been that various products and services have been moved from the current 8% rate to the new 21% rate – a 13% increase. This is the case of the following: dentists, hairdressers, beauty treatments, funeral services, gyms, cinema & theatre tickets, theme parks & zoos. It is doubtful that companies will be able to absorb such a large increase and therefore there are some areas where consumers can save before these increases come into force.
This is a sneaky, back door way of raising taxes. It is devious because it can fly under the radar as no rates are increased. Our American sales tax is not immune to this kind of manipulation, though a value-added system is less transparent.
Here is another reason why the targeted value-added tax hikes are igniting inflation:
Utilities companies will apply the new 21% rate on bills from 1 September even though consumption was during the previous 18% period – all the more reason for you to ensure you’re on the cheapest tariff given the rises already implemented this year. Also phone & internet use in August and billed in September will have the new rate applied. Water is billed either monthly, or every 2 or 3 months depending on where you live, hence some consumers will see the new tax rate applied on a 3-month bill!
All of these products are inputs in retail business. In an economy as bad as the Spanish, nobody, from the supermarkets down to the local grocery stores, can afford to absorb tax increases on power, water, telecommunications or transportation services. Therefore, we can safely expect that this price trend will sustain. This is not good, because it is conspiring with a disturbingly high rate of unemployment and practically zero GDP growth.
Theoretically, the anemic levels of demand in the economy should not allow the retail industry to raise prices the way they do. In practice, though, taxes such as the value-added tax work as a mark-up on costs and are therefore passed on more or less in their entirety to the consumer. This means that the mark-up on prices will prevail so long as the higher tax rates remain in place.
Higher inflation and high unemployment is a particularly bad recipe for a sustained recession. We know it as stagflation, and it can do a lot of harm to an economy once it sets roots there. The United States seems to have dodged a stagflation bullet in 2012, though the alert remains in place for 2013. Right now, though, it is time to pray that Europe does not get caught in this rather nasty macroeconomic quagmire.
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.
Just as the Eurocrats thought they had managed to talk down the euro crisis and save their beloved currency union, a little Danish boy steps out of the crowd and points out that the emperor still has no clothes. From Bloomberg.com (via Zerohedge):
Lars Seier Christensen, co-chief executive officer of Danish bank Saxo Bank A/S, said the euro’s recent rally is illusory and the shared currency is set to fail because the continent hasn’t supported it with a fiscal union.
I spent six years in Denmark. Danes are serious professionals, they are upfront, free-spirited and they have no problem speaking the truth. Culturally, When you hear this from a man in this position within the private sector in Denmark, you better listen.
“The whole thing is doomed,” Christensen said yesterday in an interview at the bank’s Dubai office. “Right now we’re in one of those fake solutions where people think that the problem is contained or being addressed, which it isn’t at all.”
Exactly. The main reason why the euro appears to be stable at this point is that the European Central Bank has put a cooler on the bonfire-like debt crisis by promising to buy any euro-denominated treasury bond, anywhere, any time. Technically, the promise was limited to the most troubled eurozone countries, but by implication it extends to all member states.
This uncapped promise has allowed international investors to go back into high-yield euro-denominated treasuries from primarily Greece, Portugal, Spain and Italy. Secondarily, they can also invest with similar confidence in French treasuries, which are next on the troubled-bonds list. Thereby the ECB removed a major reason for investor flight out of the euro, temporarily strengthened the currency and created the false impression that the crisis is over.
It is not. Bloomberg.com again, which paints a picture of declining GDP and a new phase in the debt crisis:
The European Central Bank forecasts the euro-area economy will shrink 0.3 percent this year … [and while] the euro has strengthened, the economies of Germany, France and Italy all shrank more than estimated in the fourth quarter. Ministers from the 17-member euro area met during the week to discuss aid to Cyprus and Greece as a tightening election contest in Italy and a political scandal in Spain threaten to reignite the region’s debt crisis.
Greece has suffered from a shrinking GDP for years now. Since the recession-turned-depression started they have lost roughly a quarter of their economy. That is extreme, but it shows the devastating consequences of combining austerity with an entirely artificial currency union. Furthermore, it should be a warning sign to the Eurocrats as well as other member states to not adopt the same kind of fiscal policy in their countries. Yet that is precisely what seems to be in the making: the “aid” to Cyprus and – again – to Greece will consist of a buyout of treasury bonds combined with austerity requirements.
There can be only one outcome: more of the same crisis.
As Bloomberg.com continues, it illustrates the dire situation of the European economy, a situation that according to Danish banker Christensen is going to be the undoing of the euro:
France is grappling with shrinking investment, job cuts by companies such as Renault SA and pressure from European partners to speed budget cuts. While Germany expanded 0.7 percent last year…
That’s a pathetic “growth” rate for an economy like the German.
…France posted no growth and Italy probably contracted more than 2 percent, the weakest in the euro area after Greece and Portugal, according to the European Commission. The economy is on the brink of its third recession in four years and the highest joblessness since 1998. Prime Minister Jean-Marc Ayrault said Feb. 13 the country won’t make its budget-deficit target of 3 percent of gross domestic product this year as the economy fails to generate growth and taxes.
The pursuit of a balanced budget is the enemy of growth. So long as the political leaders of Europe’s big welfare states do not want to concede that their countries can no longer afford their big, onerous, sloth-encouraging entitlement programs, there will be no change in the course of the European economy. The welfare states will continue to drive up deficits and drive down growth. The EU will continue to demand austerity, which will further drive down growth and widen the deficit gaps in government budgets. Europe will stagger and stumble, but there is no chance it will ever recover under its current big, redistributive goernment.
In a nutshell, all you Europeans: this is as good as it gets.
And just to add some more salt in Europe’s self-inflicted wounds, Bloomberg. com tops off with a stark reminder of the economic reality the Europe is stuck in:
“People have been dramatically underestimating the problems the French are going to get from this. Once the French get into a full- scale crisis, it’s over. Even the Germans cannot pay for that one and probably will not.” … Spain, which plans to sell three- and nine-month bills tomorrow and bonds maturing in 2015, 2019 and 2023 on Feb. 21, faces a sixth year of slump. Output is forecast to contract for a second year in 2013 with unemployment at 27 percent amid the deepest budget cuts in the nation’s democratic history. Public-sector debt is at record levels, having more than doubled from 40 percent of gross domestic product in 2008. The European Commission, which is due to update its forecasts this week, sees it rising to 97.1 percent of GDP next year.
This is the crisis that the ECB is trying to cover with an endless monetary commitment to defend the euro. But the deficits do not go away, and economic growth does not return. In its desperate fight to save the euro and the welfare state, Europe’s political leaders will bleed the former dry and deplete the latter of any money to honor its entitlement commitments.
I stand by my verdict: Europe is in permanent decline, it is turning itself into an economic wasteland of industrial poverty that over time will be left behind by North America and Asia.
As this blog has reported, the Spanish province of Catalonia is being driven into secession from Spain because of the central government’s harsh austerity policies. On Sunday, Catalan voters were given a chance to express their views on whether or not they would be better off on their own. Predictably, the EU Observer reports that the majority favored independence:
Separatist parties were the winners in Sunday’s (25 November) regional election in Catalonia, which saw the highest voter turnout ever in Spanish regional elections. The new parliament still favours a referendum on independence, something Madrid has said it will oppose. The governing centre-right alliance party Convergència i Unio (CiU) won 50 seats out of 135 in the Catalan parliament, followed by the left-wing separatist party Esquerra Republicana with 21 seats. In total, the seats in the new parliament that favour the “right to decide” on independence from Spain is nearly two-thirds with 87 while 48 are against – only a slight change from before the election (86 to 49).
The high voter turnout and reinforcement of a pro-independence majority are clear signs of where a referendum might end up. There is no doubt that the Catalonians believe they will be better off economically on their own.
Before we get there, though, let us make a brief note on the Catalonian relationship to the EU. Many people seem to believe that this is the key issue as far as independence goes. The EU Observer suggests that:
The potential road to independence is unlikely to be straightforward, however. Madrid is against a break-up and the Catalans themselves are cautious when it comes to a change in relations with the European Union. If Catalonia were to become independent, it may have to re-apply for EU membership – a long and cumbersome process.
Scotland is facing a similar problem. However, in their case as well as with Catalonia the formal relations to the EU are merely a superficial issue compared to the underlying economic situation. A month ago I observed that…
…attempts from Brussels to suppress this reactionary force could easily raise tensions even further: the advancement of nationalism in Greece and separatism in Spain are examples of how regular Europeans respond not to the democratic deficit in the EU – that has been around for two decades now without stirring conflicts – but to the ever tougher austerity policies that Europe’s leaders are shoving down the throats of more and more member states. Austerity bites harder than lack of representation. This does not mean that the democratic deficit is of no consequence. It is – in fact, the lack of working parliamentary democracy is precisely what has brought about Europe’s current crisis. But people have a tendency of not caring about how to influence, or not influence, government until government makes their lives miserable. That is happening with austerity.
Even if an independent Catalonia, or Scotland, would be able to negotiate a good membership deal with the EU (and thus surrender the independence they would just have been granted) they would still have to subject their economies to the same austerity policies that have done so much harm already. This is especially likely in the case of Catalonia where, in the case of independence, it is very likely that voters would want to preserve the same old welfare state that has brought Spain to its knees. Consider the following hint given by the EU Observer:
Catalan President Artur Mas will continue to lead the northeastern region in Spain, but his victory was a bitter one, as his party lost 12 seats compared to the election in 2010 when CiU came into power. Mas called for snap elections to give legitimacy to his plan for a Catalan referendum on independence from Spain. He had hoped his party would be elected as the clear leader for such a process. Although parties in favour of the “right to decide” on independence have been legitimised, the governing CiU failed to get the absolute majority (68) they had hoped for. Instead, Mas has paid for the severe cuts in public spending – especially in health and education – his government has made in the last two years.
It is unclear how the pro-independence movement plans to run a welfare state in a sovereign state of Catalonia without ending up in the austerity trap where Spain finds itself right now. If the left gets to decide, then Catalonia will be Greece before the ink on their new constitution is dry.