Fringe Politics in Europe
I was on RT’s Capital Account with Lauren Lyster last night talking about what else, Europe. As I have been saying, the present European policy response to its sovereign debt crisis is deflationary and it has caused the economy there to go into recession. With private debts high in Europe, there is the potential for a systemic banking crisis. In the periphery in particular, the events are driving politics to the extremes, a predictable outcome.
Dylan Grice of SocGen wrote last April:
Many smaller eurozone countries have seen extreme political parties now either on the fringes of – or set to enter – coalition governments (e.g. the Netherlands, Austria and Finland). But the trend is growing. A recent article in ‘The Economist’ reported that a Catalonian politician, Xavier Garcia Albiol who is running for mayor in Badalona, just north of Barcelona, is gaining local support and national notoriety for his hard-line stance. He told the newspaper, "When people stop me in the street, 80% of the time it is to do with immigration or crime."
I think Dylan is onto something. Nationalism is rising throughout Europe, not just in the periphery as we are expecting far-right parties to now enter parliaments in greece and france to add to the fringe parties in Finland, Austria and the Netherlands. In Germany, the Piratenpartei, another fringe party more geared to government transparency and without overt nationalist tendencies, is also poised for huge gains. These changes could make the politics of Europe unpredictable if the economy continues to suffer and therefore increase the likelihood of worst-case outcomes.
That said, of the politicians coming on the scene, it is actually socialist Francois Hollande who could change things the most – and to the degree he moves Europe toward growth, it could be for the better. I am not optimistic about Europe, but I am still hopeful.
Video below
Lauren is right that the real cause of the crisis is the levels of debt. I would disagree with you that Austerity is okay. No what you do when things are good is cut counter cyclically, not when the economy is weak and will only get weaker because of the cuts. The UK has fallen into a recession because of the minimal cuts that have already been presented. Most of the cuts were backloaded and even before the fall back into recession the government basically admitted that the deficit will still be an issue right up to 2017.
As for France nationalising the banks, I suspect that they will either be nationalised as losses in the periphery come home and are accounted for. The same will also apply to the Netherlands and Germany. Though that will be a mistake. Better to let the banks collapse and then nationalise them after creditors have taken their losses.
Also the level of asset prices need to fall substantially actually make business creation easier. As it is if asset prices are held too high then the costs to start new businesses becomes too high and become a burden on job creation.
It is not austerity or cuts per se that is the problem, it is the context of these cuts. If the economy were on the right footing, you could implement austerity as the UK proved in the mid 1990s:
https://www.guardian.co.uk/commentisfree/2012/may/04/cameron-lamont-recession-early-cuts-hurtBut government economic policy is not meant to be procyclical. The problem is procyclicality, particularly in the face of high private debt.
As for Hendry, he may eventually be proved right but I doubt it will be within the year. Perhaps I’m wrong. But this crisis has managed to drag on for longer than most analysts would have thought.
It’s my view this is a secular event, a private sector credit bubble that’s just too big for governments to counter using their own debt and credit worthiness. As such I find the austerity / spending argument a bit of a red herring. For me the austerity / spending argument is useful in the context discussing counter cyclical policy as applied to the normal business cycle. This isn’t a normal business cycle event. When people argue against austerity I ask what’s their alternative, when people argument against stimulus I ask what’s their alternative. I see little evidence that either will work without address the problem of debts that cannot and won’t be repaid/serviced.
It’s clear to me that the UK and much of Europe’s problems are not going to be solved by austerity (at least in the short term and without causing a lot of damage). It also seems clear to me that the “stimulus” seen in the US is equally not going to solve the problem – a recall recently seeing on ZH that for every two and a half dollar increase in debt the US is seeing one dollar of growth, thats not sustainable.
Some kind of non-debt based stimulus a la Steve Keen’s QE for the public I think would be a step forward but given the current politcal/economic intellectual inertia I see their being zero chance it happening. I also worry about the the long term financial implications of allowing politicians think they should have hand on the printing press.
Sadly it seems to be that governments (particularly in Europe) have wasted a lot of their fire power trying to avoid the necessary debt restructuring. Moderate stimulus with serious attempts to address the private sector debt issues is the best I would hope for at present.
On the EZ, it’s my view this wasn’t sustainable even in the good times it just would have been a whole lot less painful for it to be dissolved when the times were good..
That makes sense, Dave. The private sector debt is simply too high to be solved by government stimulus. It’s the same in Australia now. When their property bubble bursts, stimulus/fiscal stabilisers simply won’t be able to offset the economic destruction that credit contraction will bring. The best a government can do is let the automatic stabilsers do their job of attenuating the downturn and preventing worst case outcomes. The goal should be private deleveraging. Austerity i.e. adding public cuts to private ones doesn’t make sense in that context at all.
Clearly if we hadn’t tried to gin up growth via excess credit during the past boom-bust cycles, we wouldn’t be here.
If you look back at what happened in the thirties. You would see that the debts were wiped out very rapidly by the rapid downturn. That left many economies relatively debt free. Private debts were lower and government debts were considerably lower except possibly for Europe with its WW1 debts. This time around the Fed did everything to stop the fall in asset prices that would have forced a debt wipeout. So what we have now is the worst of all possible outcomes. High debts and high asset prices that discourage reinvestment. That is why I think the world will have twenty plus years of high unemployment, economic stagnation, and instability while nations deleverage at all levels.
Private deleveraging will take decades as many simply do not have the excess income to clear debts quicker. Look at Japan for example of how long it can take. We really needed regulations to stop the total level of debt becoming an issue in the first place. If that had happened then deleveraging would be minimal and bank losses would also be minimal. The risk to the sovereign would be nil and asset prices would be sensible.
There was no austerity in the mid 90’s here. There wasn’t even a slow down in government spending during the recession of the early 1990’s. There may have been efficiency drives but that does not constitute austerity. Cuts can be a big problem depends where they happen. If cuts are made in the back office area then these can be beneficial as they lower overheads and increase efficiency. Though if they impact the front line services then they can be detrimental. For example the current Uk government have asked for 25% cuts claiming that these will not impact front line services yet the scope for savings is far less than the government expect. So frontline services are being demolished. This is why the UK is volatile right now.
Tax increases are austerity too.
Yes but tax increases can be used to reduce the deficit, or spent completely so that they have a net zero impact on the economy. It is the net outcome that is important. Also if you taxed capital gains and spent the money only in areas with high multiplier effects like unemployment benefits then it can be stimulative overall. That is why the US is doomed. No tax increases will not help the deficit, but even larger spending cuts will harm the economy. The tax fixation of the US will be its undoing. As long as government provides good services then higher taxes are tolerated, look at Scandinavia for examples. Then look at low tax crappy level of government economies. They might leave money in the hands of consumers but the hidden costs are higher. Take Somalia, no taxation of any kind but the costs of protecting what you own, are much higher. Look at Yonkers New York. Slashing their fire service and so when there is a fire the chance of loss is now greater, so the insurance rates will climb. In the end you get what you pay for one way of another. Slashing government spending is a false economy much of the time. Getting value for money should always be the priority.
I’m not a fan of blatantly left or right wing arguments. Are you seriously comparing Scandanavian countries with Somalia? Your left wing bias is dripping from the page. Why didn’t you choose Hong Kong or Singapore as your low tax model? You remind me of right-wingers who claim advocates of left-wing ideas want to take us down the path of the Soviet Union. Strawmen like these undermine the credibility of otherwise good arguments.
Singapore, Hong Kong are not necessarily suitable examples. Both are small compact nations with industrial policies, that does not apply to most of Europe. They both have trade surpluses which again does not apply to most of Europe. They also have little political freedom. The Economist magazine a regularly banned in Singapore for criticising the government. Both are also tax havens so really should not be compared with full sized economies. Ireland is also a tax haven and look at the mess they are in. I picked Somalia as an example of the extreme where there is no tax and no government. In the end businesses do not necessarily want to trade there because of the lack of legal protection. As for European socialists being anything like the old Soviet communist party that is a description that is also wide of the mark. Most Europeans are in favour of a mixed economy where private enterprise operates freely and state enterprises operate in areas where there are natural monopolies or strategic policy to have such industries, such as the coal and steel industry when they actually had industrial policies.