Sunday, May 18, 2014

Austericide in the eurozone

Clive Crook has a decent description of the effect of German Chancellor Angela Merkel's austericide eocnomic policies in the eurozone, Euro Illusions Force Weaker Nations Into High Unemployment Bloomberg Businessweek 05/15/2014, a more descriptive title than it bear in the print edition, where it appears simply as "Euro Illusions."

He makes a good observation about Merkel's call for "more Europe" as a solution to the eurozone's economic problems. As Crook says accurately, the kind of "more Europe" the currency zone actually needs are "a true banking union and fiscal flows across the EU comparable to those across the U.S., as well as longer-term measures to integrate the union’s labor markets." But that's obviously not what Angie has in mind: "By 'more Europe,' Merkel meant tighter restrictions on the ability of EU members to borrow, not greater cooperation in using fiscal policy to fight unemployment."

At Germany’s urging, the EU has therefore been forced to adopt an austerity-first stance. Italy and others have little choice but to squeeze public spending, since the recession has left them with insupportable public debts. The chances of a coordinated EU fiscal policy to relieve that pressure — for instance, by creating eurobonds backed by euro-area governments acting in concert — now seem close to nil. Excessive fiscal conservatism has aggravated the deflationary effects of an unduly passive monetary posture. [my emphasis]
Which means the prospects for the eurozone countries is increasingly grim.

Crook does profess more faith in the power of monetary policy than its actual historical results would seem to warrant when he writes, "In a single-currency system, policymakers lack the most powerful tool for helping individual economies adjust to setbacks: interest rates set according to national conditions." At best that is confusing. A fully-empowered central bank, with the ability to directly backstop national debt instruments and a mandate to combat unemployment as well as inflation control could have contributed more than the ECB actually has done to prevent the current prolonged depression in the eurozone.

But in depression, the ability of monetary policy to do anything much to stimulate the economy is highly doubtful. That's so in prosperous times, too, though the mystic faith in the power of central banks that is so widespread is hard to shake.

And Crook himself continues directly:

To succeed, a single-currency system needs either large fiscal transfers (so fiscal policy can do what monetary policy can't) or highly integrated labor markets (so the unemployed can move to stronger markets to find work), and preferably both. The euro area has neither, and its governments, even after an epic sovereign debt crisis, have no plans to do much about it. This leaves the EU's weakest economies with no choice but to restore their prospects through the brutality of "internal devaluation" — using high unemployment to force down labor costs [my emphasis].
Recently, there has a been a bit of a stock market bubble for European stocks. And even though the profitability of individual corporations is in many cases increasingly independent of the general prosperity in their home countries, the fundamentals aren't promising.

The eurozone appears to already be in a lowflation/deflation trap. Crook writes:

Inflation in the euro area stands at 0.7 percent, far below the European Central Bank's target of "less than but close to 2 percent." Next year the commission expects it to be 1.2 percent. Very low inflation maintains tight financial conditions by keeping real (inflation-adjusted) interest rates higher than they otherwise would be. Outright deflation would worsen that problem and further compound it by adding to the real burden of debt. The result would be prolonged economic stagnation and greater financial fragility.
And the human cost of all this is staggering:

The countries at the center of the crisis — Greece, Ireland, Portugal, and Spain — have all made heroic efforts to improve their competitiveness in the past four years, but they have more work to do. Meanwhile, their unemployment rates are 26 percent, 11 percent, 15 percent, and 26 percent, respectively. The commission expects little improvement in 2015. Two of the euro zone’s biggest economies, France and Italy, are in deep trouble as well, with unemployment above 10 percent and growth in 2014 expected to be 1 percent or less.
I normally include Cyprus and Italy in that list of "countries at the center of the crisis."

But it's also important to keep in mind that the eurozone is one economy. Despite Merkel's nationalistic policies that have spared Germany the most severe effects of her austericide policies, it's not at all immune from the economic and political effects of the crisis. Yanis Varoufakis discusses this in the appropriately titled presentation, Depression in Europe with @yanisvaroufakis 05/11/2014 - YV at his blog calls it Depressed, depressing Europe:

Portugal has officially exited the Troika program to clean up its debt situation. (Oscar Tomasi/EFE, Portugal dice adiós a la Troika, pero los ajustes y reformas continúan 17.05.2014) But under the current policies of the Merkel-dominated eurozone, they have to continue with suicidal, pro-cyclical economic policies, "pro-cyclical" in the current lowflation-deflation/depression conditions meaning policies making the depression worse. And the current conservative government under Prime Minister Pedro Passos Coelho shows no inclination to challenge continuing austericide. (Coelho's conservative party is the Social Democratic Party, PSD; the actual social-democratic party that is a member of the Socialist International in Portugal is called the Socialist Party, PS.)

Alison Roberts reports for BBC News in an article bearing the optimistic title, Portugal's economy: Two steps forward, one step back 05/16/2014:

The latest economic indicators have, however, somewhat tarnished the image of a country that has left the crisis behind.

Portugal's economic output, or gross domestic product (GDP) shrank 0.7% in the first quarter, even as euro-zone GDP swelled by just 0.2%, according to figures from Eurostat, the EU's statistical unit.

Recovery had appeared to be well under way, with the country's economy growing since the second quarter of 2013, when Portugal had the fastest growth in the EU.

Exports have been the main engine of that growth, and it was the fact that they faltered - indeed fell - in the first quarter of 2014 that send the economy into reverse.
And the human cost, of little interest to the devotees of the neoliberal faith, are huge:

Portugal's jobless rate has been falling very gradually, but at 15.2% it is still twice the level of a decade ago, and youth unemployment actually rose slightly in March - to a shocking 35.4%.

As for the kind of risk that worries investors, international ratings agencies have of late been making positive noises about the outlook for Portugal, but all still rate its sovereign debt as "junk".

While its bond yields are at their lowest levels in years, that is in part because of investors' frantic search for decent returns - and the famously reassuring words back in 2012 of the European Central Bank's president, Mario Draghi, that it would do "whatever it takes" to ensure the euro's survival.

Economist[s] differ on whether Portugal's debt mountain - which the government says will peak this year at 127.5% of GDP - is sustainable.

But they do agree that the country's ability to bear and ultimately reduce this burden will depend on the future pace of economic growth.
Actually, that level of debt is not sustainable, unless the Portuguese voters are really ready to endure another decade or more of serious economic depression.

Stefan Schultz also writes on Portugals soziale Krise: Millionenfaches Elend Spiegel Online 17.05.2014: " 2,5 Millionen Portugiesen leben in Armut oder an der Armutsgrenze, das entspricht rund einem Viertel der Bevölkerung." (2.5 million Portuguese live in poverty or on the border of poverty; that includes around a quarter of the population.") He also notes that 80% of retirees receive less than the minimum wage.

Schhultz also refers to a group called Projecto Troika, a group of artists who attempt to record and display the human face of the vicious austericide policies.

Once again: heckuva job, Angie, heckuva job!

Tags: , , , , , ,

No comments: