Like a piston in its downwards cycle, the intergenerational wealth pump turns again – get ready for your pocket to be picked now in the name of your own salvation. If what you want to do is benevolently unwind government services and encourage the growth of a thriving private sector that meets people’s needs without the use of state coercion funded by massive taxation – an outcome that’s desirable from a libertarian perspective – you do not start by first looting the public treasury, slashing the public sector to the bone, and handing public services and infrastructure over to cronies, corrupt banks, and public-private ‘partnerships’ in a sort of free-for-all fire sale. But this, unfortunately, is the approach to ‘austerity’ that you can likely expect to see in the coming years. So-called conservative governments are notorious for replacing the welfare state with corporate welfare, which if anything is worse.
But global economies have now painted themselves into a corner, and Merkel’s approach is to be favoured over Krugman’s. But only just barely. The moral thing to do would be to default on the public debts held by central banks, created as they were by fraudulent derivative securities in the Keynesian casino system. When the house has got the game rigged and they own all the chips, the only thing you can do is scotch the entire system and decentralize currency trading. Perhaps it could be done in a graduated series of steps. This, of course, would introduce a different kind of austerity as the virtual bubbles of Keynesian monetary policy deflated to a steady state. But at least it wouldn’t result in people being chained by debt and increased taxes in perpetuity to the financial system that created the problem in the first place. Further collapse and the attendant social upheaval are coming anyways, so we may as well get it over with in a way we can rebuild from as free peoples and free nations. Delaying the inevitable will only make it worse.
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Toby Helm, Ian Traynor, Paul Harris, The Observer
June 13, 2010
Eurozone finance ministers were still committed to spending their way to recovery only a few months ago. Then came the Greek debt crisis, which threatened to engulf the continent. Despite warnings from the US, Britain and its EU neighbours are braced for unprecedented public sector cuts
When Angela Merkel talks about budget cuts these days she likes to invoke the “Swabian housewife” — Germany’s equivalent of the parsimonious Scot. In that part of south-west Germany they have a reputation for scrimping and saving. Famously, Swabia’s cooks make hearty soups out of all the leftovers in the kitchen. To the German chancellor they are the embodiments of good housekeeping.
“You can’t keep living beyond your means,” says Merkel. “One should simply ask the Swabian housewife.”
By extolling the virtues of old-fashioned thrift, Merkel hoped last week to go some way towards explaining to ordinary Germans why they must suddenly swallow the most painful austerity pill administered by their government in generations. Last Monday, with some trepidation, she announced massive cuts of Ãƒâ€šÃ‚Â¤11.2bn in 2011 and plans for a total of Ãƒâ€šÃ‚Â¤80bn by 2014. Yesterday, in Stuttgart and elsewhere, the inevitable protests began on the streets.
Even for a country painfully aware, because of its history, of the danger of debt, the extent of corrective action came as a shock. “Germany has never agreed to an austerity package to this extent, but these cuts have to be made in order for the country to establish a stable economic future,” Merkel said.
Across Europe other governments, scared by the Greek debt crisis, the repercussions of which imperil the very existence of the euro, have been doing the same, raising the spectre of mass layoffs in public services in the name of European unity.
On Monday, David Cameron said the state of the public finances was far worse than he had expected as he prepared Britain for the worst. “The decisions we make will affect every single person in our country. And the effects of those decisions will stay with us for years, perhaps decades, to come.”
Elsewhere, Italy has approved austerity measures worth Ãƒâ€šÃ‚Â¤24bn over the next three years. There will be public sector pay freezes and salary cuts of up to 10% for the highest earners.
Spain has ordered cuts of Ãƒâ€šÃ‚Â¤15bn this year and next to reduce its deficit by more than 4%. Crowds gathered outside Madrid’s economics ministry calling for the prime minister’s head. “Zapatero resign!” they shouted. Spain’s biggest unions have threatened a general strike. The axe is falling, too, in Hungary, Portugal, Ireland and in Greece, where the government has been bailed out by Brussels and the IMF.
In total, EU governments have announced public spending cuts of around Ãƒâ€šÃ‚Â¤200bn, as well as patching together a mammoth Ãƒâ€šÃ‚Â¤500bn safety blanket for the euro.
“We’re entering a long period of economic stagnation,” said Guy Verhofstadt, the former Belgian prime minister who leads the Liberal caucus in the European parliament. “That will be the main problem for years. Europe is the new Japan.”
To an extent it is the speed and suddenness of change in their governments’ approach, as well as the effects on their pockets and job security, that has most worried Europeans.
Just a few months ago, before they had fully digested the implications of the Greek crisis, Europe’s G20 nations remained, for the most part, wedded to Keynesian stimuli (maintaining government spending) as the way to nurture their economies back to growth. Olli Rehn, the European commissioner for economic and monetary affairs, admitted last Monday, at a meeting of EU finance ministers in Luxembourg, that the turnaround had been very abrupt.
“One can feel the change of tone in the G20 from fiscal stimulus to fiscal exit, and our policies are an example of this,” he said.
In this country, also, political leaders have changed tack with extraordinary speed as Gordon Brown has ceded control of policy to the Cameron-Clegg coalition. Before the election on 6 May, Brown regularly taunted Cameron, saying he was the only politician in Europe calling for cuts at this stage of the economic cycle. At his spring conference in March, Nick Clegg declared: “We think that merrily slashing now is an act of economic masochism. If anyone had to rely on our support, and we were involved in government, of course we would say no.”
Now, citing Greece as the reason why everything has changed, Clegg is fully signed up to the Tory-Lib Dem coalition’s initial Ãƒâ€šÃ‚Â£6.2bn of cuts for this year and embryonic plans for far worse to come. On Monday, when Cameron warned that the economy was in a far worse state than he had imagined, he felt able to say that he was now part of the international economic mainstream. “Almost every major country in the world is focusing on the need to cut their deficits,” the prime minister said.
But to suggest there is international consensus is way wide of the mark. Across the Atlantic there is, in some quarters, dismay that EU governments are now taking action in direct contradiction to the approach that the G20 settled upon at the height of the global economic crisis.
Last week the message from the US Treasury department was clear: too much austerity, too fast, could damage the word’s fragile economic recovery. Treasury officials circulated comments made by the US treasury secretary, Timothy Geithner, at last weekend’s G20 meeting. Geithner had made clear that the US did not want to see big European countries, such as Germany, slashing spending too much lest it damage domestic demand. “The core nations of Europe, the strongest, richest countries in Europe, [should] keep active to help support recovery,” Geithner said.
His language was couched in the soft tones of diplomacy. But it was backed up by a chorus of approval from economists and newspaper columnists. From the left and right, leading voices echoed American officials’ concerns that Europe’s sudden conversion to fiscal austerity would hurt the American economy and strangle Europe’s own faltering steps to recovery by killing off global demand for products.
“The wrong message on deficits”, thundered an editorial in the New York Times. The piece went on to point out: “The sudden fierce enthusiasm for fiscal austerity, especially among stronger economies, is likely to backfire, condemning Europe to years of stagnation or worse.” The New York Times top columnist, Paul Krugman, who has won a Nobel prize for economics, took the same line. He has been a trenchant critic of a rush to austerity, believing that only government stimulus to boost consumer demand will pull the American — and global — economies out of the mire.
Krugman took to his blog to ram home the point. “The right thing, overwhelmingly, is to do things that will reduce spending and/or raise revenue after the economy has recovered — specifically, wait until after the economy is strong enough that monetary policy can offset the contractionary effects of fiscal austerity. But no: the deficit hawks want their cuts while unemployment rates are still at near-record highs… not because the markets are currently demanding it, not because it will make any noticeable difference to their long-run fiscal prospects, but because we think that the markets might demand it (even though they shouldn’t) some time in the future. Utter folly posing as wisdom. Incredible.”
Even on the American right, there is broad sympathy for Geithner’s suspicion of austerity and backing for the Obama administration’s desire not to follow Europe’s lead. “I have sympathy for Geithner. It just seems to make no sense at all in having all countries engage in severe budget tightening at the same time when the recovery we are having is anaemic,” said Desmond Lachman, a scholar at a conservative Washington think tank, the American Enterprise Institute. “For Germany to be engaged in attempting to balance its budget right now just seems nuts,” Lachman added.
In this country, too, as Cameron and his chancellor, George Osborne, prepare to announce more details of cuts in next week’s emergency budget, there is real concern among economists as to whether the Con-Lib coalition has chosen the right course. The eminent Financial Times columnist Martin Wolf has questioned the wisdom of the strategy in recent articles, asking whether the government has a plan to sustain demand, as well as impose painful cuts. On Friday he published an open letter to Osborne.
“I have been fascinated — if appalled — by the pre-Keynesian approach you and the prime minister have taken to the UK’s fiscal challenges,” he wrote. “What Keynes called ‘the Treasury view’ that fiscal policy has no effect on activity, even in a deep recession, is alive and well in Downing Street.” Wolf ended by saying: “So remember this: the imposition of futile misery is not an act of wise policy, but rather a sign of folly.”
Former chancellor Alistair Darling, in a Guardian interview, said yesterday he also was worried that “fiscal conservatism” had taken hold in Europe. His concern was that, because the euro is not backed by full political and economic union, the effect of German fiscal retrenchment will inevitably be to worsen the plight of poorer euro members by reducing demand, rather than curing the problem.
From the US perspective, Lachman says the key is to boost the recovery in the short term with targeted stimulus spending and in the medium term make a commitment to fiscal stability and more balanced budget. “It is basically a balancing act between the medium term and the short term. We have to come up with something to address the issue of restoring medium-term fiscal stability. But if all of Europe embraces austerity now, we could really see Europe having a major recession again,” he said.
However, he doubted that Europe would listen. The dynamics of domestic policy, and the need to keep the European Union and the euro together, would dictate policy, not suggestions from the US Treasury. “They just seem to disregard the US position,” Lachman said.
Within the EU, austerity is being sold to the people as the only way to preserve Europe’s prized “social model” — the systems of decent welfare, adequate pensions, early retirement, universal health and education and long holidays that most Europeans take for granted.
“Our structural growth rate is not high enough to create jobs and sustain our social model,” warns Herman Van Rompuy, the EU president, at every available opportunity.
But even within the EU, debate rages over how, precisely, to react to a crisis that besets it in a eurozone lacking political and fiscal union — in short, how to keep the European idea alive.
Berlin is currently seeking to enshrine budgetary rigour across the EU. The Germans have amended their constitution to compel balanced budgets by 2016. Although the German deficit is far from out of control, relative to many of its neighbours, Berlin sees it as its duty to take the lead for Europe’s sake.
But the French are bridling at the German hectoring and were furious at last week’s austerity announcements from Berlin. “Dangerous because it risks killing growth,” said Patrick Devedjian, President Sarkozy’s minister in charge of responding to the crisis. “If we add austerity to austerity, we are going into recession,” Sarkozy told his aides, according to Le Figaro.
At odds over the fundamentals of economic reform in Europe, Merkel and Sarkozy had to cancel a Berlin summit last week. They meet tomorrow to try to patch things up ahead of a European summit in Brussels on Thursday that will be dominated by the euro, budget cuts, and a leaner, meaner regime of European “economic governance”. Germany, said Dominique de Villepin, the former French prime minister and bitter foe of Sarkozy, “has lost faith in France”.
This week Cameron will attend the European summit, his first as prime minister. The issue of “economic governance”, how to rein in borrowing and cut deficits, will be awkward for someone who opposed the euro all along. The US will be watching carefully.
Cameron may claim, as he did on Monday, that “almost every country in the world” agrees with his view that austerity is the answer to current woes. He can suggest, if he likes, that austerity is a “no-brainer”.
But across the world a growing number of experts would beg to differ.
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