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Saturday, October 1, 2016

Eurozone Follies: Confusing Callousness For Courage

European elites pushing austerity are repeating the mistakes they made during World War I and the Great Depression. The question is whether they’ll realize it before it’s too late.

As Spain (momentarily?) reels again as rates rise over doubts it can roll over its debt, it is time to step back and note that the eurozone can almost surely solve its problems in the medium term if it truly wants to. Surprise? It shouldn’t be. But rarely has there been such poor management of economic affairs since the Great Depression. Readers should know this: there is a path to successful resolution. Yet one would be forgiven for thinking there is not after reading or watching the media.

The best piece of evidence that something could indeed work is the action beginning in December from the constructively crafty Mario Draghi, new head of the European Central Bank, the successor to the arrogant and stubborn Jean-Claude Trichet. Trichet, remember, raised interest rates in mid-2011 for fear that inflation was on its way back.

As is by now widely celebrated, Draghi was able to inject up to a trillion in euros to banks at low interest cost, which in turn they used to buy sovereign debt. Suddenly, the markets calmed, rates on debt for Spain and Italy fell, and there was breathing room. Perhaps as interest charges fell, they could pay off the debt coming due with room to spare. In such an environment, Europe even came to terms with Greece on a new bailout — albeit onerous ones for the Greeks.

This all could have been done earlier and more directly had the ECB been run by far-seeing people. But German bankers and politicians kept the ECB from being more aggressive back in early 2010, when it should have been doing what the U.S. Federal Reserve had done back in 2008. There should be more from Draghi going into the spring, but of course there are new fears he may cut back.

What should be clear is that the big reason why countries like Spain and Greece may not be able to pay their debt are those high rates, not public spending profligacy. Greece had even run a surplus. The average deficit compared to GDP in the eurozone was 0.5 percent in 2006. Then the recession devastated tax revenues and burst property bubbles. Even so, Italy, for example, has a rather tame deficit even today. But because it has a high debt to GDP ratio, much of it short term, a rise in rates spearheaded by speculative fears becomes very expensive in the near term. Indeed, if governments made an error, it was taking on too much short-term debt that needed constant rolling over, and the U.S. is no exception. Remember when the Clinton administration, with the encouragement of Alan Greenspan, eliminated its 30-year benchmark Treasury bond?

  • bstockinger

    People in the United States should read this article. If we are not careful with our debt, budgets, and trade relations, we could end up where Europe is. Politicians in the United States have created a similar mess by not taxing us when the economy is good oa there are tax surpluses and then creating massive amount of new debt when the economy goes bad and tax revenues drop.

  • CommonSensePatriot

    Good economics is not a choice between austerity and national deficits/debt. There are legitimate functions of government that cost money and that should be pursued, with a strong central bank that takes timely action to control inflation but is also willing to step in and expand or contract the money supply as the U. S. Federal Reserve does — along with taking quick action to provide liquidity and assistance as needed. No one has a magic formula. If they did, economies would always run smoothly. I’m an strong admirer of the Fed in their management of monetary policy, and their willingness, under extreme circumstances, to vastly expand the money supply and liquidity, as well as a form of credit when the Banks essentially froze the market. I am NOT an admirer of Keynesian economics. In the long run, government can not spend it’s way into prosperity. The only reason the Fed’s actions were even necessary is because of the unbridled greed and lack of adequate regulation by the Fed, the SEC, state regulators, and others, that let unsound, wild speculation treat business investments and the mortgage market like a drunken spree in Vegas. Sooner or later, you’re going to lose everything you’ve got. And that happened to us. The first stimulus was absolutely necessary, along with the Bank and Wall Street bailouts, or the whole economy would have collapsed. But let us not forget what got us there in the first place. A Congress quite willing to undo the Glass-Steagall protections, lax regulatory enforcement, and a Congress that also pushed for mortage lending ona basis that not even a drunken sailor would consider reasonable. No credit checks. Guarantees sold to Fannie and Freddie without due diligence and with outright fraud. And a government already spending and in debt practically up to its limit. We need austerity. But that’s not a switch you can turn on and off. It’s a dial and should be gradually implemented to where government spending is brought into line and the national debt is eliminated. Then you can have confidence in bonds and securities. The answer then or now is not to throw tens of thousands of government workers out of jobs when we already have 26 million unemployed, underemployed or who have given up looking for employment. But over time, a balanced budget shoudl become the norm. The second stimulus, which should have been more carefully administered, was largely wasted. And the businesses helped were not given conditions that required some limits on executive pay/bonuses and excessive perks. Nor were they forced to pursue some austerity within limits but still hold on to a lot of people that are not among the long term unemployed. We need to reform unemployment so that it also includes job training in partnership with business for the real jobs that actually produce something. We have to think in a world economy where we can’t compete on cheap labor but we can compete on innovation, high tech and the most educated/well trained work force in the world. Too much austerity for Europe will cause problems, but they can’t be allowed to continue to purse socialistic policies that allow government to create non-productive jobs and high pay for little labor and early retirement, as well as inflated benefits. Capitalism and free enterprise works, but only when it functions within reasonable limits and has a watchdog in the government that keeps it from letting greed, fraud and undue risk rule the day.