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"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

it's more than Euro wobbles « Previous | |Next »
December 2, 2011

The financial and economic crisis in Europe is getting worse. The eurozone appears to be unravelling under the weight of sovereign debt and many eurozone banks are now too weak to function. There is a need for both debt restructuring and bank recapitalisation.

Britain faces a decade of austerity due to the Cameron Government's politics of austerity to enforce fiscal discipline. Italy's debt is unsustainable and the policy to reduce it will make matters worse. Both countries face a future of minimal economic growth, as does Europe with the more vulnerable countries facing a downward spiral of fiscal austerity, weakening demand, higher unemployment, poor fiscal outcomes and then even more austerity.

RowsonMUKgrowth.jpg Martin Rowson
Waynne Godley in Maastricht and All That in the London Review of Books provides us with a historical perspective on the why of this crisis.

In this article, which was written in 1992, he says:

The central idea of the Maastricht Treaty is that the EC countries should move towards an economic and monetary union, with a single currency managed by an independent central bank. But how is the rest of economic policy to be run? As the treaty proposes no new institutions other than a European bank, its sponsors must suppose that nothing more is needed. But this could only be correct if modern economies were self-adjusting systems that didn’t need any management at all.

As a Keynesian, Godley didn’t believe in self-adjustment. He took it as axiomatic that what had prevented another Great Depression was the worldwide adoption of counter-cyclical policies. Faced with the onset of a recession, governments typically relaxed fiscal policy and devalued their currencies to make their exports more competitive, he pointed out. But inside a monetary union, policymakers wouldn’t have either option available, and the outcome could well be disastrous.

Godley ended his essay with these prophetic words:

If a country or region has no power to devalue, and if it is not the beneficiary of a system of fiscal equalisation, then there is nothing to stop it suffering a process of cumulative and terminal decline leading, in the end, to emigration as the only alternative to poverty or starvation. I sympathise with the position of those (like Margaret Thatcher) who, faced with the loss of sovereignty, wish to get off the EMU train altogether. I also sympathise with those who seek integration under the jurisdiction of some kind of federal constitution with a federal budget very much larger than that of the Community budget. What I find totally baffling is the position of those who are aiming for economic and monetary union without the creation of new political institutions (apart from a new central bank), and who raise their hands in horror at the words ‘federal’ or ‘federalism’. This is the position currently adopted by the Government and by most of those who take part in the public discussion.

Te euro-project is flawed yet Germany continues to insist that fiscal discipline is all that matters; and the European Central Bank (ECB) continues to affirm its belief that budget cuts in a depressed economy will actually promote expansion, by raising business and consumer confidence.

| Posted by Gary Sauer-Thompson at 7:23 AM | | Comments (8)


Osborne's measures in the UK were heavily regressive, taking money away from families on low incomes and public sector workers in order to fund tax breaks for small businesses and the construction firms that will benefit from the extra spending on the infrastructure.

His plan A – cutting spending to bring down the deficit – is not working out as he hoped. The better days are over the horizon.

" European Central Bank (ECB) continues to affirm its belief that budget cuts in a depressed economy will actually promote expansion, by raising business and consumer confidence."

Just like the Republicans in the US. They hold that the way to increase revenue is to cut taxes on corporations and the wealthy, and slashing government spending is a job-creation strategy.They also view the welfare state as immoral, a matter of forcing citizens at gunpoint to hand their money over to other people. B

The neo-liberal fantasy is that unleashed from overbearing regulations companies will race to invest and employ, while the public, crushed and fearful as their living standards fall, are clamouring for holiday loans and new cars if only credit were a little looser.

The elephant in the room is that the British banks are heavily exposed to Europe and are fearful of sovereign and bank defaults rippling across the continent.

With all this talk of a "Eurozone crisis", would I be right to assume the GFC MkI has been fixed and that particular glitch had been solved? Is it fair to see this current upheaval as unique and distinctly European? We're facing an entirely NEW problem, completely unrelated to the American disease, right? Or are we victims of some fancy slight-of-hand...?

It is interesting to see Dean Baker (a well-known liberal US commentator) saying:

"Those who have access to data on government debt know that the debt-burdened countries (except Greece) actually had modest budget deficits or even surpluses prior to the collapse of housing bubbles across Europe and in the United States. So there was no pattern of runaway spending that needs to be tamed".

In other words, Greece is the exception, not the rule.

At some point the German and French people will say No More.

Rowson has such fun with George Osborne.
Why is Rowson the only good thing to ever come out conservative economics?

If anybody is interested in looking at the numbers on public debt (Government debt) worldwide, Prof. Krugman has a blog post with a link to an IMF database which gives long historical series up to 2010 for just about every country I can think of: