Wednesday, May 09, 2012

“What ‘savage’ spending cuts?”

The Eurozone monetary ‘Titanic’ sails blithely on, with new political leaders and old prancing around the decks unaware their hull is already cracked.

Meanwhile, old leaders and new—and the media who still take them seriously—talk of “austerity” as if austerity is being practiced, as if there have been dramatic reductions in spending, as if a swathe of cuts were being made across Europe to the state budgets that are sinking the Eurozone.

Take a look at this graph. Do you see anything like that at all? 

image

Is it “austerity” to keep adding to your ballooning bar bill, while promising yourself that this round you will drink slower?

The chart above comes from Veronique de Rugy of the Mercatus Centre, who notes that while European voters are said to have rejected their governments’ “savage” spending cuts, the overwhelming question must surely be “What “savage” spending cuts?”:

    Spain, the United Kingdom, France, and Greece — countries widely cited for adopting austerity measures — haven’t significantly reduced spending since 2008. As you can see on this chart:

  • These countries still spend more than pre-recession levels
  • France and the U.K. did not cut spending.
  • In Greece, and Spain, when spending was actually reduced — between 2009–2011 — the cuts have been relatively small compared to what is needed. Also, meaningful structural reforms were seldom implemented.
  • As for Italy, the country reduced spending between 2009 and 2010 but the data shows and uptick in spending 2011. The increase in spending represents more than the previous reduction.

    The most important point to keep in mind is that whenever cuts took place, they were always overwhelmed by large counterproductive tax increases. Unfortunately, that point is often overlooked. This  approach to austerity — some spending cuts with large tax increases — is what President Obama has called the “balanced approach.”
   
However, as I have mentioned previously, while this balanced approach may sound good and appeals to our sense of fairness and moderation, but it can be a recipe for disaster. That’s because it fails to stabilize the debt, and it is more likely to cause economic contractions…

Sam Bowman at the Adam Smith Insitute [hat tip Liberty Scott] observes of de Rugy’s chart:

It tells a different story to the popular narrative that European voters have tried and rejected austerity. In fact, they have hardly tried it at all, returning generally to 2008 levels of government spending. France has not cut at all, yet it has just elected the patron saint of mediocrity, Francois Hollande. Not that Sarkozy was much better. De Rugy comments:

First, I wish we would stop being surprised by what’s happening in Europe right now. Second, I wish anti-austerity critics would start acknowledging that taxes have gone up too–in most cases more than the spending has been cut. third, I wish that we would stop assuming that gigantic “savage” cuts are the source of the EU’s problems. Some spending cuts have been implemented in a few countries … [but] the overwhelming take away from the European experience is that a majority of governments haven’t really implemented spending cuts, large or small, and some have even continued to grow.

What European voters have rejected is the idea of austerity. The very suggestion that their governments should live within their means is, apparently, unacceptable to the majority of voters in France, Greece and, as seems likely, the Netherlands. Hollande may be a nonentity, but the National Front candidate, Marine Le Pen, polled 18%, and the far-left Jean-Luc Melenchon 11%. Both seem likely to do well in next month's parliamentary elections. Golden Dawn, Greece's Nazi Party, has just polled 7%, the Communists 8.5%.

This is worrying stuff.

Isn’t it just.

The Greek government will be out of money in June—whoever decides to take power there, with whatever resulting chaos and (let’s hope not) bloodshed. Popular wisdom (which to be fair, is usually neither wise nor popular) has it overnight that Greece will be out of the Eurozone in a month. In any case, it must either leave or be left. Others will and must follow.

Will popular wisdom ever, do you think, realise that the shoehorning together in a monetary union of countries as disparate as the PIIGS and the Germans was never going to work?  (In terms of economic freedom, the Heritage Foundation ranks Greece for example as "mostly unfree" and one of the most heavily stultified economies in Europe. Germany on the other hand is ranked as “mostly free” and is picking up the tab for the all the Euroweenies. See pic right.) Will the folk who matter realise that if you spun a globe and stopped your finger 12 times on 12 random countries, they just might make more sense for a monetary union than the euro zone?image

Sure, the classical gold standard operated smoothly for nearly six decades before being blown apart by war, benevolently distributing price signals and the necessary capital around a world experiencing its first industrial revolution—tying together in effective monetary union countries that changed so much over those six decades they wouldn’t even recognise themselves!

But the monetary union of the classical gold standard was not the straitjacket of the Eurozone.  Its set up allowed economies to breathe and grow. The settings of  the Eurozone on the other hand seemed designed only to encourage bad behaviour and to make them choke. On debt.

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1 Comments:

Anonymous Dolf said...

Whenever I read any analysis on the Eurozone, I am reminded of a phrase from an old "Dilbert" comic: "A pardigm shifting without a clutch". It seems appropriate.

5/09/2012 11:31:00 am  

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