Wednesday, June 6, 2012

Austerity versus Growth in Europe

In my last post I discussed the immediate lesson we could learn from the “austerity” programs occurring in Europe today. In this post I want to talk about some of the events in Europe and suggest some future results.

No doubt my readers aren’t really taken in by the emphatic declaration by European socialist politicians that the government planning must include growth, and not just reductions of government spending, otherwise known as “austerity.” All of this is government speak, that is, none of these terms mean what they rationally means when it comes out of the mouth of the European politician or bureaucrats. It reminds me of Clinton’s first term, when someone convinced Bill that investment was a vital element in the economy. For the next year or so every government initiative that Clinton proposed was called an investment. Every action that the European politician wants to take will be called a growth program.

We should know that the Europeans do not know and go out of their way to evade what it is that causes increases in production and wealth. In their minds the cause of all that is good is the government. They do not understand why their economies aren’t performing as they want them to. They don’t understand that all of their laws have cut down economic activity. In the way of what they are calling reforms they have done very little to make actual growth possible. I read somewhere recently that Greek bureaucrats require an overwhelming amount of stuff form someone applying for a business license, including a stool sample. On the episode of “No Reservations” filmed in Lisbon, I leaned that Portuguese agriculture was forced to stop profitable farming in several crops by EU protectionist regulations (protecting the French and Italians). The number of regulations and interference in business in Europe on the EU, country, and state level is many times what it is in the U.S. None of this is being addressed. What has been “reformed” to some small degree in a few countries is a few regulations that made it impossible to fire someone. There is probably more, but minor, and unreported in the general media.

Austerity has been the watchword in Europe recently. Let’s be clear on what that means. It means that the national government’s budget deficit has to be kept below a certain percentage of the country’s GDP, on the order of three percent, according to the recently passed EU law. It doesn’t actually mean that a surplus has to be achieved or that the country’s government debt has to be reduced. It only means that the debt can’t grow at more than a certain rate, which is deemed to be a level that an economy can comfortably service (which probably assumes interest rates kept artificially low). If a country was actually productive, keeping government spending to that level might not pose much of a problem, until the economy wasn’t productive any more. However, for different reasons in each country, with the exception of Germany and the smaller northern euro zone countries, they have been spending much more and driven their debts much higher (Italy’s debt wasn’t that high, but its deficit was, driving interest rates higher). Since their economies are very dependent upon government spending, when the spending slowed the economy began to contract, people’s income dropped, and greater numbers became unemployed. People became unhappy.

Within this context it makes sense to want to see the economy grow. Economic growth would create more jobs and ultimately move the economy to prosperity. Growth basically comes from letting people produce and seek higher income and wealth. That is not what the European politician calling for growth has in mind. He still sees the government as the prime mover. He wants to increase government activity and government spending. He wants to move away from austerity toward what was going on before this mess. He wants to pretend that the mess doesn’t exist. He wants that favorite of all government boondoggles and fountain of spoils, infrastructure projects. But building a bridge is not growth. (BO wants to fix schools and put in wiring for the internet.) So far, the programs that I have heard proposed will not cause economic growth.

The populations in Europe are apparently supporting these “pro-growth,” socialist politicians. France just elected one. Greece will at least come close to pushing out the politicians who voted in austerity. The Greek alternative is someone who wants to renege on the country’s sworn commitments. Spain is trying, but failing to reign in its spending and the population is angry about the results of that attempt. And in a recent German state election, a couple of socialist parties opposed to austerity won a solid election against the person leading Europe away from government spending, the German PM. Even one of the most emphatic pro-austerity governments in northern Europe, the Netherlands, has announced that it isn’t able to keep its spending below the required cap. They are going to have new elections soon and may become an over-spender.

We are faced with the amazing scenario in which the leading, European, social welfare, big party politicians are trying to keep their countries from going into bankruptcy, which is to say that they are at least paying attention, and the voting public is rejecting them and voting in complete, not just partial, idiots. Who would have expected the politicians to show some responsibility?

Why isn’t it working? Why can’t the politicians convince the public to go along with the “austerity?” There are two reasons. First, the public has been taught for years, by their parents, their schools, their churches, and their politicians that the government is the fount of all that is good and that private enterprise is evil. They believe that the government can just make things up and provide them with the long life of leisure and pleasure that they have been promised. They just don’t understand why things should change now.

One wonderful example of that is the apparent conflicting poll results in Greece. According to polls taken after the last election and the realization that no government could be formed from the relative strength of the parties, the Greek public wants to put into power a person who will reject all of the agreements connected to the bailout that result in “austerity” (the polls have fluctuated as to who is leading). On the other hand, the Greeks by a large majority want to keep the euro, which they would have to give up if they elect the guy they seem to like.

Then, you ask, why do the Greeks want to stay in the euro zone? Again there are two answers, a bad one and a better one. The bad reason is that the Greek prosperity of the last decade began with their entrance to the euro zone. Having the same currency as the Germans, the Greeks were able to borrow to support the government’s crazy spending at very low rates. Their wages climbed to become thirty percent higher than German wages. They think the euro lays golden eggs!

The second, better reason for wanting the euro is that the common currency does facilitate trade. If governments behaved at all sensibly, a common currency in open trading blocs is an excellent idea. The problem in Europe is that each country insisted on having certain protections. It isn’t actually a free market but a highly controlled one. Really, the common market, the EU, is an illusion.

Getting back to the initial discussion, the second reason why the voters want to reject the “austerity” candidates is that “austerity” as a government program is a failure. It is a failure because all it is doing is collapsing their economies. As I have implied above and in my last post, their economies have insufficient capacity for the readjustment of prices and wages and to move assets into productive endeavors. In short, their economies are not capitalistic but controlled.

We have seen the European politicians struggling for an extended period of time to cope with their problem. We have seen several announcements that they have taken major steps and that things would be better only to see the exact same problem continue: concern by lenders that they aren’t going to be paid back. Hundreds of billions of euros have been given or committed to several different countries. The European Central Bank injected nearly one trillion euros into the banking system in loans at 1% interest which resulted in almost no new commercial lending and about five months of better terms for loans in Spain and Italy. The collapse of inter-bank lending, which was supposedly the justification for the loans, has continued to be a problem. Interest rates controlled by the European Central Bank continue to be near 1% and yet the entire bloc is heading into recession, including Germany. Nothing that has been done has dented their problems. Covered them over for a short period of time, perhaps, but done nothing to move the European Community toward growth and prosperity.

The voters do not understand the importance of capitalism, but they do see that with “austerity” their prospects are very poor. Jobs of all kinds are disappearing, wealth is leaving the country when it can, and no one has the leeway to do anything about it. There appears to be a fatalism about their daily lives. They foresee nothing good happening in the foreseeable future. Unfortunately, that is what happens when you give government all the power.

So we see that Europe seems to be faced with the alternative of severe recession with “austerity” with no real way out and going back to the government spending that got them into trouble in the first place. Surely, this problem will be blamed on capitalism and politicians who want to have greater control will be successful. Ignorance of capitalism will lead to contraction, probably bankruptcy, and further reduction of freedom. The effects of decades of social welfare state policies will become obvious.

I am not one for disaster scenarios. When people write about upcoming collapse of our economy I tend to yawn. Yet very bad things are happening. Greece is in a depression, although no one else is willing to say so. Spain isn’t that far away from a depression and they haven’t even gotten to the bottom yet. Neither of those countries are particularly large and so far they have had friends who have been able to keep them afloat. Then we must realize that Italy and France are tittering. Italy has set a course that will keep it going for a while, but France has just rejected “austerity” and has already begun new commitments for ongoing spending. Their choice seems to have been made. It isn’t good. I suggest we all reread The Ominous Parallels by Leonard Peikoff to get an idea of what could happen.

So, then the question becomes, what are we going to do? We don’t want to live through the same thing here. Obviously, in order to avoid it people will have to learn what capitalism is, in some detail. I think that many people are willing to listen. ARI has several good programs and books that do that. Let’s help them. The more voices explaining capitalism the better.


  1. One thing that I had meant to add is about some of the proposals being offered in Europe. Several suggestions involve euro bloc organizations or bloc wide communal actions. One suggestion is that the bloc sell common bonds to raise money. Another is that the European Central Bank bail out failing banks. Usually this suggestion is intended for Spain, but the French have suggested that course of action to help their own banks. A third is to have a bloc based financial authority. What is implicit in all of these ideas is that someone other than the country that ran up the debt pay for it. Spain or France gets into trouble and the entire region has to pay. But there is only one strong economy of any size in the bloc. Remember that France is the second largest economy and Spain is the fourth. (Italy is the third.) So if the larger countries can’t cover their debts, who is left to do so? Germany. All of these proposals amounts to calls for Germany, its taxpayers and its assets, to pay for the others failures. And when Germany says stoutly that it doesn’t want to do so, it get attacked. That is altruism for you. The German’s fear that they are going to be forced to bail everyone out and be attacked while doing so, is one reason that they are voting against “austerity”. It isn’t necessarily their own austerity, but the idea that if the other countries practice “austerity” the Germans will have to pay.

  2. So, what makes the Germans so wealthy compared to everyone else?

  3. Steve, that is an interesting question, isn’t it. I have not seen a study of the German economy, nor have I made one myself. However, I can suggest a couple ideas. There is a cultural element that values technology, efficiency, and industrialization in Germany that you don’t find in southern Europe. They are still very concerned with price inflation (re: Weimar Republic). In comparison with the rest of Europe, Germany has also moderated its social welfare obligations and laws, including employee wages. Greece’s wages are 30% higher than Germany’s. On the other hand, German’s growth rates aren’t particularly spectacular, it isn’t on the forefront of most technology, it has some residual problems with the absorption of East Germany, and it is a welfare state. It just does better than the other larger European countries and has real income and asset accumulation.

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