Friday, February 22, 2013

Destruction by austerity in Europe grinds on and on

Yanis Varoufakis in a post with the provocative title Europe needs a hegemonic Germany 02/22/2013 argues that Germany needs to stop acting in the current "authoritarian" way led by Chancellor Angela "Frau Fritz" Merkel and shamefully abetted by the Social Democrats and the Greens. Because, he writes, we live in a "world in which there is no room for a Eurozone that operates like an augmented Germany."

His argument is made in the context of the ways in which the United States after the Second World War promoted the recovery and growth of its wartime enemies, especially Germany and Japan, as part of its Cold War efforts confronting its former wartime ally, the Soviet Union:

Germany’s disciplinarian imposition of the greatest austerity upon the weakest of Europeans, lacking any plan for countering the resulting asymmetrical recession, is a sorry and dangerous leftover of a long-gone world order built by America. It is the result of a mental atrophy caused by a United States acting for too long as the over-protective parent. It will backfire with mathematical precision, causing higher debt-to-income ratios and lower economic dynamism throughout Europe. ...

Germany should take another leaf out of the New Dealers who put it on the road to recovery all those years ago: Europe needs its own New Deal, funded by a new class of public finance instruments. Germany can realise such a Recovery Program centred around the European Investment Bank. The EIB already has a proven track record of creating a liquid market for debt instruments that fund successful projects. In collaboration with, and supported by, the European Central Bank, an EIB-ECB partnership has the capacity to energise mountains of hitherto idle savings on pure banking principles, with minimal involvement of member-states and no need for Treaty changes.

All it will take is a German resolve to shift from panicky authoritarianism to a hegemonic, to an enlightened self-interestedness.
Given the seeming strangehold of neoliberal doctrine on Frau Fritz' Christian Democratic Union, as well as the SPD and the Greens, this is highly unlikely to occur, as Varoufakis is no doubt aware. Here is a report on the current European situation, No respite for eurozone economy this year Euronews 02/22/2013:

Sony Kapoor looks at the grim realities of Frau Fritz' austerity policies in The EU's self-defeating approach must end now Re-Define 02/22/2013:

Instead of a more relaxed fiscal and monetary policy supporting the structural reforms that were necessary, ... the EU has followed a deeply flawed policy of fiscal contraction. This is the result of the application of a 'small economy mentality' (that prevails in the German economic debate) to what is the largest economic area in the world. The current economic policy betrays a level of macroeconomic illiteracy that is shocking for an otherwise well-educated policy-making elite.

Instead of focusing on a 5-10 year strategy and a financially, politically and socially sustainable adjustment path for re-balancing, EU leaders have taken a very short-termist view of policy. At the same time that they rant against the short-termism of financial markets, their own policies have been even more myopic. What may be rational for a small country in the short-run, which is the policy lens they have used, will be self-defeating and irrational for the EU-wide economy over a longer time horizon.

Even narrow questions such as ‘what is the best policy to minimise German tax-payer exposure?’, ‘how can we reduce fiscal deficits and bring debt/GDP ratios under control?’ produce very different answers when considered over a 1-year or a 10-year horizon. [my emphasis]
Collectively, this is a sad, dark moment in the checkered history of European political leadership:

When the history of this crisis is written, there will be no heroes. It is hard to be hopeful from where we now stand. We have built a constituency of millions of people who have very little stake in society, who face a very bleak future and who have nothing to lose. This is exactly the breeding ground for social unrest at a large scale. Who knows what may happen the next time Spanish youth protest and the police cracks down, with somebody getting injured or killed? What may happen the next time yet another Spanish house holder, tragically commits suicide? We do not know and we best not find out.

The path of adjustment currently being followed by the Eurozone is not robust against political breakdown and the fracturing of the social fabric, so EU leaders better beware. The current macro-economic strategy being followed in the EU has failed the test of the real economy. It has failed even when judged on its narrow goals of reducing fiscal deficits and stabilizing debt to GDP ratios.

As the atrocious growth and jobs forecasts released today show, the EU is continuing on a strategy that is economically illiterate, politically irresponsible, socially indefensible and eventually self-defeating, even when it comes to reaching the deficit reduction targets that it seeks to achieve. [my emphasis]
Those forecasts come in the European Commission's European Economic Forecast (EUROPEAN ECONOMY 1/2013) Winter 2013. The brutal realities of high unemployment and declining real standards of living are phrased there is bureacratese:

Financing conditions remain difficult in Member States where banks are attempting to strengthen their balance sheets and/or have not yet regained access to market funding. As non-financial corporations and households are also deleveraging, weak bank lending reflects a combination of low credit demand and tight credit supply conditions. Fiscal consolidation is weighing on growth in the short-run, and so does the ongoing reallocation of resources. These factors are set to depress growth in the vulnerable Member States for the larger part of this year. ...

While the sharp recession of 2009 was accompanied by exceptional employment resilience, the recent GDP contractions are expected to result in employment losses that are more in line with past experience in similar economic environments. This is explained on the one hand by continued labour shedding in sectors that had grown unsustainably in the pre-crisis years, on the other by the fact that the scope for the adjustment in working hours has largely been used up. However, the labour-market outlook differs a lot across Member States, and much of the projected increase in unemployment is projected to occur in just a few Member States. High and persistent unemployment in turn bears the risk of becoming structural as the skills of unemployed workers depreciate. This could affect the economies' growth potential going forward.
Angienomics in action. And the austerity path is the one both Republicans and Democrats in the United States insist we should follow. The European political elite are not the only ones in the world that are currently exhibiting "a level of macroeconomic illiteracy that is shocking."

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