Ambrose Evans-Pritchard writes of European austerity policies in The Telegraph:
“Spain must tighten by 4.5pc of GDP this year though unemployment has surged to 24.4pc — from 7.9pc in 2008 — and the public sector is not unduly large. Italy must tighten 3.5pc this year, though it is near primary budget surplus. There is no credible economic theory to justify this pace of tightening. It is beyond any known therapeutic dose.”
What is going on here? Europe is diving into recession, and yet every policy lever is being thrown in a direction to suppress growth. The ECB is not cutting rates; banks are being told to raise capital reserves so they are reducing loans and hoarding cash; and public spending is being cut back more sharply than we have ever seen.
The only reason for this is the old-fashioned Dickensonian moralist view: pain is good for you, and teaches valuable lessons. So if a country’s government has misbehaved by spending too much, its people must be made to feel pain, so that they never support such a government again. The pain will be salutary, imposing a price for past overspending and teaching lessons. Moreover, those imposing the pain (mainly German but also Dutch and English elites) feel the satisfaction of Protestant (Puritan?) leaders in forcibly imposing virtue on those they see as having strayed.
Need we say how crazy this is? People did not individually enact government policies. Ordinary workers and retirees are not responsible for rampant tax evasion by the rich or for state corruption in Greece and Italy. In Spain, moreover, the government did a better job maintaining fiscal balance than France; its problems arose form a huge property bust following loose lending by German and other European banks, not excessive state spending. Imposing pain on these folks simply leads to radicalization and the rise of extremist left and right parties, as we have seen all too well in recent elections. Imposing pain on these people leads to nationalist anger, not contrition.
The basic problem of the Euro is that banks led widely believing economic growth everywhere was as secure as in France or Germany or the Netherlands. When those bets proved wrongly placed (like bets on the endless upward price trend of American housing), someone was going to have to go bust. Yet the Euro zone gave investors the illusion that they would be bailed out by the Eurozone as a whole. It is the binding power of this illusion that is causing everyone to struggle with the fact of inescapable losses.
Worse yet (can it be worse?), the austerity policies advocated as an alternative to real Eurozone fusion have not produced a reduction in state debts. Quite the contrary; since the beginning of their efforts to impose as much austerity as politically possible, Greece, Spain, and Italy have seen their GDP’s decline and their state debts increase; the opposite of what is needed. The adoption of austerity policies has thus pushed countries further into the death spiral of rising debts and falling GDP, rather than pulling them back from the brink. Ireland and Portugal and Greece are little economies where economic setbacks could easily be managed by the EU. Italy and Spain are not; they are major pillars of the EU. Yet both economies are expect to contract by 1.5-2.5% next year, while piling up their huge debts.
We are back in the 1930s, with tottering state finances and banks facing large losses on their debts, and it is becoming increasingly clear that policy-makers have NOT learned the lessons of that period. Instead, they are pushing policies that will take us to 1936 – a sustained second-burst of recession leading into depression, and the rise of radical nationalist parties. One can only hope they see the error of their ways before we return to 1939.