Monday, June 11, 2012

European crisis on Monday: voodoo economics for Spain, economic shrinkage for Italy

"Die meisten Bürger ahnen es noch nicht, doch das Endspiel um den Euro hat begonnen" ("Most citizens don't know it yet, but the final act of the euro has begun.") - Wolfgang Münchau, Ahnungslos in die Euro-Dämmerung Spiegel Online 06.06.2012.

Joseph Stiglitz gained quite a bit of attention for his comment in an interview Friday that called the EU's rescue plan for Spanish banks "voodoo economics", as reported by Tiziana Barghini in Spain bank deal may not work, bolder reforms needed: Stiglitz Reuters 06/09/2012:

If requested in full by Madrid, the bailout would add another 10 percent to Spain's debt-to-gross domestic product ratio, which was already expected to hit nearly 80 percent at the end of 2012, up from 68.5 at the end of 2011. That could make it harder and more expensive for the government to sell bonds to international investors.

With Spanish banks, including the Bank of Spain, the main buyers of new Spanish debt in 2011 - according to a report by the Spanish central bank - the risk is that the government may have to ask for help from the same institutions that it is now planning to help.

"It's voodoo economics," Stiglitz said in an interview on Friday, before the weekend deal to help Spain and its banks was sealed. "It is not going to work and it's not working."
This is a Euronews report on Spanish bank bailout, Little relief in bank bailout for Spain's jobless 06/11/2012:

Stiglitz, like Paul Krugman and numerous other economists, are sending panicky signals to the EU and Berlin that they need to get their heads together on this thing, and quickly:

What the European Union has done so far has been minimal and wrong in its policy direction because austerity measures to restore risk have the effect of reducing growth and increasing debt, he said.

"Having firewalls when you're pouring kerosene on the fire is not going to work. You have to actually face the underlying problem, and that is, you're going to have to promote growth," Stiglitz said.
That kerosene-on-the-fire metaphor was the same one that former German Foreign Minister Joschka Fischer used recently, shocking some commentators and the incivility of it, which is one small measure of how much in denial the European elite is about the depression and the disastrous failure of Angela Merkel's austerity economics.

Italy's economy is shrinking, thus making it vulnerable to banking troubles, because the weakness of the banks in Europe is real proximate cause of the current euro crisis.

In an article that seems to be entirely credulous of the claims of austerity economics, Monti Fights to Reshape Italy in Shadow of Euro Crisis New York Times 06/11/2012, Liz Alderman and Elisabetta Poveledo report on how Italy is vulnerable to contagion from other crisis in the eurozone, and listing some of the "painful changes" that have already been imposed in Italy, the "painful changes" of which respectable conventional wisdom is so approving:

Italy’s pressing issues include the fact that Spain’s acceptance of a bailout means Madrid can no longer serve as a guarantor of one of Europe’ financial firewalls, the European Financial Stability Facility, which is meant to quarantine the debt crisis. That means Italy, with the third-largest European economy, after those of Germany and France, will have to shoulder a larger portion of the bill — even as Italy grapples with its own sharp economic downturn.

Bankers say Rome will now have to guarantee 22 percent of the fund, instead of around 18 percent currently. But because Italy does not have enough economic growth to generate the money itself, the government will have to borrow it at high interest rates, adding to an already heaving debt load.

Few question Mr. Monti’s competence: Within the first six weeks of coming to power, he managed to pass more economic measures than Italy had seen in a decade, including increasing the retirement age, raising property taxes, simplifying the operation of government agencies and going after tax evaders. And still pending is his legislative slate of economic changes meant to revitalize growth, including an effort to overhaul Italy’s notoriously inflexible labor rules.
Monti's EU-imposed government is enacting the neoliberal austerity ideal: worse retirement, cutting government services, charging higher regressive taxes, reducing workers' wages and job security and rights on the job (the latter being the actual meaning of overhauling "notoriously inflexible labor rules").

But squeezed in between credulous praise of austerity economics and its bad assumptions, they do spell out some of the real world consequences of the policies Italy is implementing:

Since he came to power, the Italian economy — like most of Europe’s — has grown weaker, expected to contract 1.5 percent this year and increase just 0.5 percent in 2013. Italian banks have sharply curtailed lending, pushing thousands of small and midsize Italian businesses into bankruptcy.

The country’s unemployment rate is rapidly marching toward 10 percent, well above Germany’s 5.4 percent, according to the International Monetary Fund.

Nervous investors in the bond market have pushed Italy’s borrowing costs above 6 percent at times recently amid fears that the Italian economy cannot grow fast enough to pay down a mountainous national debt. The 10-year bond yield was 5.96 percent in late trading in Europe on Monday, up 0.22 percentage point.

The government debt, already at 120 percent of gross domestic product, will almost certainly continue to rise, especially if Italy must foot a larger portion of the bill for shoring up the monetary union. [my emphasis]
This dismal economic prospect for 2012-13 comes five years after the depression started in 2007. Europe and the United States are facing a "lost decade", maybe more than one, at this rate.

As I keep saying, it was once commonly understood, or at least I thought it was, that depression could gin up some nasty politics. In Greece, a spokesman for the Greek party Golden Dawn (Χρυσή Αυγή), that now sits in Parliament and is often plausibly described as a neo-Nazi party, assaulted a female Communist Party politician on TV. Now he's suing her and a Syriza coalition politician he threw water at on the same show. They provoked the poor guy, you see. (Greek New Dawn's Ilias Kasidiaris sues women over TV row BBC News 06/11/2012) A caption in the article notes dryly, "Golden Dawn spokesman Ilias Kasidiaris was apparently provoked when his alleged involvement in an armed robbery was mentioned."

Greek elections are on Sunday. Expect to see more and more nervous speculation leading up to that. Here's a Euronews report on Greece, Greece - broke but not broken 06/11/2012:

Luke Baker also reports for Reuters on the contingency planning for a Greek exit from the euro in Euro zone discussed capital controls if Greek exits euro: sources 06/11/2012.

BBC News provides a piece on the same subject: Mark Pragnell et al, Five ways the eurozone could break up 06/03/2012.

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