A Storm Is Brewing

Tone-Deaf Eurocrats

The reaction of the European leadership to the Italian post-election predicament has been quite predictable so far: there is no choice, so the consensus, but to basically continue where Monti has left off. This seems quite odd, given that Monti actually left Italy with a new post war record high public debt relative to economic output. What has he done except raising taxes and harassing the public with his 'shadow economy' clampdown? What has been achieved in terms of genuine economic reform or slimming down of the State? Nothing. “Euro Leaders Demand Austerity” writes Bloomberg. Mind, there is nothing wrong in principle with austerity, especially not the kind that involves a lowering of the burden on the economy imposed by government spending, ideally combined with meaningful economic liberalization. This has become nigh impossible though in view of the thicket of regulations emanating from Brussels. As this article from last year argues, Brussels makes regulations tailored for big companies – but big companies only represent 0.2% of all European businesses. They love the regulatory State of course, because it kills their competition for them without them having to lift a finger. Big companies are the only ones that can actually afford dealing with all these regulations.

What Monti has left behind: the biggest debtberg since Mussolini

Mrs. Merkel is actually right with what she says below, in principle. However, the implication of what she says is that something needs to be done that actually ends up producing growth. Doing little besides trying to lower budget deficits by jacking up taxes is not going to produce any. 

“Now in Europe, after the Italian election, it seems to be a case of either austerity and savings programs or growth, but that’s a completely false premise,” German Chancellor Angela Merkelsaid at March 1 event. EU Economic and Monetary Affairs Commissioner Olli Rehn echoed those comments, telling Germany’s Der Spiegel magazine this weekend that there’s no scope for the bloc to let up on budget discipline.

Italian political instability, after last week’s election ended in a four-way split, threatens to reignite concern about the deepening of the debt crisis.Voters in the bloc’s third- largest economy revolted against German-inspired austerity measures, handing the party of comedian-turned-politician Beppe Grillo more than 25 percent of the vote with its anti-spending cut message and a call for a referendum on euro membership.” (emphasis added)

The above sounds almost as though Grillo's movement wanted to increase government spending again, but that is actually not quite true as it turns out.

As Der Spiegel reports:

“The Grillini like to point out that they too intend to cut spending. What that means can be seen in the city of Parma, saddled with €800 million in debts. For the past three-quarters of a year, Parma has been governed by Mayor Federico Pizzarotti, 39, a member of the movement who has been busy trimming the fat from the municipal budget. He rides a bicycle to work and has exchanged two official sedans for an Opel natural gas vehicle. He adheres to the rules of the movement and doesn't spend more than what he collects in taxes, but he's still not seen as the Germans' cost-cutting commissioner.” (emphasis added)

What makes Grillo suspect to the eurocratic elites is that he is an anti-establishment figure; that he doesn't regard euro membership as sacrosanct, and intends to increase the level of direct democracy in Italy. This is not to say that the man's economic policy ideas are necessarily better than what has been on tap so far, as he has a number of ideas that strike one as steeped in a kind of naïve romantic socialism.

The problem the EU faces is however that one cannot simply continue to ignore the increasing political backlash across Europe. In fact, Grillo's ascendance appears a relatively small problem compared to what could possibly happen if  a few more years with no light at the end of the tunnel pass. Desperate people will eventually flock to anyone who promises them to shake off the yoke of EU diktats, and that could well lead to the baby being thrown out with the bathwater. 
  

Massive Protests in Portugal

Another politically non-aligned protest movement seems to be forming in Portugal:

“Hundreds of thousands of people took to the streets of Lisbon and other Portuguese cities Saturday to protest against the government's austerity measures aimed at rescuing the debt-hit eurozone nation.

The rallies were organised by a non-political movement which claimed 500,000 marched in the country's capital and another 400,000 in the main northern city of Porto. There have been no official estimates of the crowds.

But the mood of the crowd was clearly political, calling for new elections with banners declaring "Portugal to the polls!" and "If you fall asleep in a democracy, you wake up in a dictatorship".

Another banner showed a picture of centre-right Prime Minister Pedro Passos Coelho with the caption: "Today I am in the street, tomorrow it will be you." (emphasis added)

The protesters do have a point.

Not surprisingly,Portugal's government is trying to wring concessions from the eurocracy – something it has in common with all the other victims of the 'first wave' of the crisis. 

“Portugal is seeking to renegotiate parts of its international bailout agreement amid worse-than-expected forecasts for an economy in recession and growing popular protest over deficit-cutting austerity measures imposed by its lenders.

On Monday, euro-zone finance ministers are expected to discuss in Brussels a request by Portugal for more time to repay its loans, a concession that would help the country finance itself after the €78 billion ($99.8 billion) bailout program expires. The request, along with a similar one by Ireland, would mirror the terms Greece obtained under its latest bailout agreement.” (emphasis added)

The problem in Portugal is essentially the same as elsewhere in the periphery:  previous overoptimistic economic forecasts are just not coming true.

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Portugal's major economic yardsticks at a glance. In all likelihood the most recent forecasts will prove just as overoptimistic as their precursors (chart via the WSJ)

Thrifty Keynesians?

The question then becomes why is there no light at the end of the tunnel and what can be done about it. The eurocrats in Brussels assert that they reject increased deficit spending as a 'solution' (but only, one presumes, because neither the markets nor the EU's paymasters let them indulge). Olli Rehn for instance said:

“We all want to see sustainable growth and job creation. But we cannot solve our growth problems by piling new debts on top of the old ones. In light of an average national debt ratio of 90 percent of gross domestic product (GDP) in the European Union, I see no maneuvering room for abandoning the path of budget consolidation.”

This is however the very same Olli Rehn who in the same breath asserted:

“While I am not sure if Keynes himself would be a Keynesian today, I am in fact a Keynesian myself"

We can assure Mr. Rehn that Keynes himself was indeed a Keynesian, as Murray Rothbard has gleefully pointed out a long time ago. However, in Rehn's contradictory statements, one can immediately sense where the problem lies. What Rehn is telling us is really: 'I'm a believer in big government' – and so are a great many of his fellow eurocrats.

Roger Garrison briefly describes the views of the 'uninterpreted Keynes' as follows:

“Keynes favored monetary manipulation and fiscal activism, deficit finance and income redistribution, all for the purpose of spending our way out of depression. When his attention turned from short-run policy to long-run reform, his enthusiasm for these stop-gap measures gave way to his anticipations of a future utopia — and to schemes for ensuring and hastening its arrival.

The inherent uncertainty of the future, in his view, gave centralized decision making a clear advantage over the decentralization that characterizes market economies. Keynes advocated the "socialization of investment" and the "euthanasia of the rentier." The rate of interest, which "rewards no genuine sacrifice," could and should be driven to zero, at which point capital would cease to be scarce and the distribution of income would be more equitable. In a matter of two generations, the economic problem of scarcity can be solved, such that our grandchildren can occupy themselves with questions of aesthetics rather than questions of economics.” (emphasis added)

Given that interest rates have indeed been driven to zero in the meantime and the promised scarcity-free Utopia has failed to arrive in any of the places where it is today pretended that the optimal cost of capital should be nada,  we hold with Garrison that

“It is one thing to proclaim that Keynes was a Keynesian, (again) as Rothbard so often did; it is quite another to treat Keynes's vision as a relevant or fruitful reflection of economic reality.”

The error of the eurocrats is in fact not dissimilar from the error that informs the actions of French president Hollande and his colleagues: they think it can all be planned by them, that they can 'order nature around' as Fred Sheehan has put it, that economic laws will bend to their will.

They don't trust the free market to be able to handle the economy's problems. If they did, they would immediately throw out at least 90% of the regulations they have thought up in recent decades. France would seriously reconsider the wisdom of government spending making up 56% of all economic activity. The  EU's regulatory juggernaut has seemingly unstoppable momentum – it moves in a kind of parabolic curve, in a seemingly never-ending bubble trajectory: by 2008, almost 17,000 EU Acts existed, of which nearly 10,000 were put into place in just the decade 1998-2008.

The growing jungle of administrative law that is the major output of a likewise ever-growing bureaucratic Moloch is akin to a poison injected by a parasite into the body of his host. Eventually the host will be killed. It happens faster when additional taxes are imposed, as has been the case throughout the 'austerity' regime.

Like all good Keynesians, Rehn and his colleagues continue to view the activities of the central bank with equanimity. However, the 'stabilization' policy pursued by the world's central banks is the main reason for the boom-bust sequence that has brought us to the current juncture. The economy simply is not a machine the workings of which can be centrally planned – unless one is willing to impose a far lower living standard on the population, but even then a  command economy can only survive for a very short time before the division of labor breaks apart at the seams; the socialist calculation problem ensures it.

We actually agree with those who say that the best way to deal with the crippling debt load of the European welfare states is to pursue an agenda that aims to increase economic growth. Replacing the euro with national currencies would do away with the 'one size fits all' approach of the ECB's policy, but it would certainly not truly solve the underlying problems (central panning would then occur over smaller areas, but nothing would be altered in principle). It is in any case difficult to see how anyone can possibly 'profit' from devaluing his money; such ploys have only ever temporary effects and leave those who try them ultimately in a worse state than before.

The central problem is then how exactly to achieve economic growth, and it can certainly not be achieved by deficit spending or manipulation of the money supply. There can be only one way: radical pro free market reform. Rehn and his colleagues in the eurocracy in the broader sense (i.e., including the national political leaders) must be prepared to surrender control and let the market economy work in as unhampered a manner as possible. The questions they should be asking themselves are: 'How can we do less? What regulations should be dismantled first? Which taxes and what spending can we cut as quickly as possible? What is the quickest way of replacing the the central bank directed banking cartel with free banking?'

Everything else is essentially a waste of time and effort, even if it should prove possible to kick the can down the road repeatedly. The current course is certainly fated to end in tears – eventually the political backlash will produce chaos, and usually chaos doesn't end well. As the protesters in Portugal have correctly intuited, it only tends to bring even worse snake oil sellers to power.