Southern Delusions

'Like the Coming of the Messiah'

by Pater Tenebrarum

Apparently politicians in the Southern European periphery are the victims of some sort of mass delusion. Their shared hope is that Germany's chancellor Ms. Merkel will somehow be transmogrified by her likely reelection and become a kind of Teutonic Santa Claus overnight. According to a press report

“Like the coming of the messiah, depressed southern Europe nations await Angela Merkel's likely victory in Germany's September election with a mixture of hope and trepidation.

Four years into the euro zone debt crisis, people in debt-laden Spain, Italy, Greece, Portugal and Cyprus are deeply worried that a third term in power for the conservative chancellor may only bring them more austerity and pain.

The five countries that implemented Merkel's anti-crisis recipes and cut spending massively in areas such as health and education, have been in or close to recession since 2008. Unemployment tops 27 percent in Spain and Greece.

Their leaders, however, disagree. Confident that Merkel will tone down her budget cutting mantra and accept more burden-sharing within the euro zone, they are positioning themselves as close allies of Europe's main paymaster.

"I think we will see a different Mrs Merkel after the elections," said Cypriot President Nicos Anastasiades, echoing a view shared by most of his fellow southern European leaders.

In Greece, where crunch time for plugging a budget gap with a third bailout of the country starts at the end of September, hopes are high that debt issues can finally be sorted out after the German election, maybe through a new debt write-off.

In Italy and Portugal, where austerity has not yielded many positive results, policymakers believe Merkel will accept a more balanced model for managing the economic crisis if she wins. In Spain, where banks were rescued with 42 billion euros of European money, expectations are that the chancellor will lean towards common euro zone debt issuance and accept a full-fledged banking union, unlocking credit in the recession-hit nation.”

(emphasis added)

Before commenting any further, we simply must point out again that all this yammering about 'austerity' is quite pointless. One cannot expect to turn the economy around by imposing a slew of additional taxes on the private sector and not do anything to actually shrink the government. There simply have not been any 'massive spending cuts to health and education' as alleged in the article above. There have been almost no spending cuts at all. We say 'almost' only because the completely bankrupt governments that have lost access to market financing have indeed been forced to accept the odd cosmetic spending reduction. Otherwise, what politicians in Europe like to call 'austerity' is really a slowdown of the rate at which government spending increases.

There is neither theoretical nor empirical proof that the intensity of the bust has any causal connection to this minor slowdown in government spending growth. It is simply absurd to make such an assertion. No government produces any wealth whatsoever. Every single cent governments spend must be taken from the private sector in one form or another: either by taxation, by borrowing or by monetary inflation.

There is no other way to fund government spending. All that governments do is redistribute existing wealth, in the most inefficient manner possible. It is akin to pumping water from the deep end of the pool to the shallow end, using a leaky hose (hat tip to Steve Saville for this trenchant metaphor).

Once and for all: so-called 'austerity' is not at fault. This is not to say that the policies that have actually been implemented are not at fault. They most definitely are, at least in the sense that they have unnecessarily deepened and lengthened the bust. The fact that the bust was rather intense is as such not remarkable: it was to be expected to be a mirror image of the preceding boom. The proper way of dealing with the bust would have been to remove as many obstacles to the market's adjustment process as possible. This would have required radical free market reform and the fearless tackling of vested interests. Neither has occurred.

A Corrupt and Incompetent Ruling Caste

Politicians in Europe – and populations coddled by decades of goulash socialism – have come to view the giant European welfare state with its endless bureaucratic vistas as a kind of birthright. It isn't, but they have still not understood this. Moreover, the true cause of the boom-bust cycle – credit expansion by the banking cartel aided and abetted by the ECB and the euro-system of central banks – has not received the attention it deserves. In fact, it has not received any attention at all.

Quite on the contrary, in order to cover up its incompetence, the political caste nearly everywhere is crying for more inflation. We recently reported on the ideas presented by Spain's government in this regard, its attempt to 'challenge German doctrine on the ECB'.

It is certainly true that the ECB's statutes were written with the Bundesbank's conservative traditions in mind. However, all the nations that have acceded to the euro have accepted this from the outset – along, we should add, with the limits imposed on deficit spending and public debt agreed in the Maastricht stability pact. No nation wanted to become responsible for the debts of others. From the point of view of the peripheral countries, there was a very enticing trade-off, in that they experienced a marked decline in interest rates. This would not have been possible if the market had not regarded the ECB as more conservative and independent than the national central banks that previously issued the currencies of these countries. In other words, now they suddenly want to have their cake and eat it too.

The idea that Mrs. Merkel will be in a position to shower them with German taxpayer funds (what else is expected of her?) after her reelection is misguided, as the excerpt below underscores:

“Many people are waiting for the elections then hope, expect … a change in the German position. This is not what I would expect," German European Central Bank executive board member Jörg Asmussen told Reuters in an interview this month.

Noting that other countries such as the Netherlands, Finland, Slovakia and Estonia shared Berlin's doubts, he said: "It's easy to hide behind Germany… It's a group of countries, it's not only Germany."

What's more, a good part of Merkel's post-election crisis response will depend on which party she needs to team up with to secure a majority.”

(emphasis added)

We should add that within this group, there are at least two countries, namely the Netherlands and Finland, which are on the cusp of suffering major economic problems as well.

The problem as we see it is that for one thing, both the political and bureaucratic classes in many of the crisis countries are irredeemably tainted. Spain's government has stumbled into a major corruption scandal, one half of Italy's government practically has one foot planted in jail, in Greece the entire 'old guard' of politicians as well as the bureaucracies are so reviled for their corruption that people liken paying taxes to paying protection money to Al Capone (they are definitely on to something; this is not only true for Greece). In Portugal and Ireland, the political class may not be quite as tinged by corruption, but its competence certainly has to be questioned as well (at least Ireland's politicians successfully defended their low corporate tax rates against the EU's 'harmonizers', that counts in their favor).

As far as we are concerned, the competence question extends well beyond the countries deemed to be in crisis.  Politicians in Europe with the sole exception of those in the Baltics (and there are special reasons for that) don't have  the guts to actually do what needs to be done in terms of reform. Moreover, their understanding of the wealth creation process and economic laws is in many cases completely distorted, if it exists at all.

A recent example is the steadfast refusal of Spain's government to listen to a rare piece of really good advice from an institution that is central to the eurocracy, namely the ECB. We are not often siding with central bankers, given that we think central banks should be abolished as quickly as possible, but we are making an exception in this case, due to the nature of the advice. The ECB told Spain's government that it should use the 'breathing room' it currently has due to the absence of acute financial market crisis conditions to think about cutting spending and lowering taxes concurrently. That would be an excellent way of reviving Spain's economy. In fact, were the government to pursue such a course, its revenues would very likely increase in spite of the tax cuts, as it is far better to receive a smaller share of a growing pie than a bigger share of a shrinking pie.

And yet, Spain's government doesn't want to hear about it – and mind that this is actually a conservative government, and as such is falsely suspected of being in possession of a small slice of economic competence or at least a smattering of common sense.

Another glaring example is of course the socialist government of president Hollande in France, which is probably the most business-unfriendly government in all of Europe. The conceit of life-long bureaucrat-politicians like Hollande is especially pronounced. He and his colleagues really seem to believe that wealth is somehow conjured into being by governments – we simply have no better explanation for why they pursue the policies they have embarked on. It is downright depressing to watch this bizarre spectacle.

Conclusion:

There will be no German Santa Claus after the election. There is only one way forward: radical reform. Accept that the promises of the old-style welfare state cannot be funded. Deregulate, cut spending, lower taxes. Don't allow special interests to continue to have their way. Take their privileges away. Shrink the State. It is as simple as that.