Was just reading through some predictions for 2015 and reflections on 2014 and I saw a short blurb about how the lower price of gas is going to be a benefit to the US (overall…obviously our shale oil companies are going to take it in the shorts), Europe and China. What struck me is the prediction that this drop in the price of oil/gas is only going to help Europe/EU avoid another recession (obviously Europe is a big place and not all countries in Europe are in the same boat), while it’s going to spur fairly substantial economic growth in China and the US.
I realize this could turn into a debate, but what I want to know are the technical reasons for why Europe/EU is doing so badly overall. I know things like what happened in Greece are still affecting Europe/EU overall, and Spain and Italy are also not doing well, and I assume the issues in the Ukraine are also having a negative effect. The predictions I was reading indicated that 2015 is not going to be much better for the EU than 2014 was, but assuming that’s a valid prediction I’d like to know why that is.
Debt, mostly. Nobody except Germany wants the austerity necessary, or rather wants the austerity needed to be endured by someone else. Employment is slower to recover in the EU because labor laws make it harder to cut and therefore harder to justify hiring. The Russian rouble crisis is looming.
So, you are saying that austerity is the reason that the EU/EZ is doing so poorly? The cite you linked too seems pretty short and without a lot of detail except some (to me) obscure references. Do you think that without austerity the EU/EZ would be doing as well as or better than the US is doing, economic growth wise?
The primary answer to the OP’s question is the same it’s been for years: insufficient aggregate demand. Europe doesn’t have enough demand. They need more demand. The problem is demand. European policymakers should encourage more demand.
It’s not the only thing. Market reforms would also help. But the Economist clearly does not believe that Europe is dodging the “austerity necessary”. They believe Europe has gone too far in depressing demand with austerity policies. I don’t even necessarily agree with the magazine on this. I think there’s an excellent chance that Europe could succeed with austerity plans… if the ECB were willing to counteract the fiscal contraction with a sensible monetary response. But they’re not doing that, or anything close to that. I can’t say whether that’s out of the legal obligations of the Maastricht Treaty or the weird politics of money. (But really, the Maastricht explanation is less convincing with every passing day.)
The problem is that it was loose government overspending that got the Euro bad boys - Greece, Italy, Spain, Portugal (“PIGS”) into this mess. An article linked by the Economist article above discusses deflation and the need for government spending. However, Germany feels that “giving” the governments money to spend would mean a return to the unsustainable old ways, and wants the core problems resolved before giving more money. QE in the USA meant distributing money (by buying government bonds) to spend on bridges, roads, and public works. This gave people jobs, and the confidence to spend money, thus greasing the wheels of the economy. In Greece, the government by contrast was handing out E50,000 pensions to civil servants at age 55, was losing so much money on the national railroad that it would have been cheaper to send every passenger on their trip by taxi, and apparently more than half the owners of swimming pools in Greece were not paying high enough property taxes by the simple process of lying on their tax return (not to mention tax evasion for small business). The rest of the PIGS were not far behind. Germany wants these problems addressed before handing out more cash flow.
It’s sort of like someone going to the bank and asking for a loan to fix the leaky roof on their house before it caves in; and the banker iss askink “Vhy vould ve loan zee money if you’re going to keep spending it on beer and cigarettes? Und put out that cigarette in here.”
Spain was such a bad-boy that it ran budget surpluses from 2005-2007 and had a debt-to-GDP ratio in 2007 (depending who’s data you look at) well under 50%. :rolleyes:
The Euro has meant that the individual countries can no longer use monetary policy to help their economies. German control of the Euro means that monetary policy for the Eurozone has been much too tight and will probably stay that way.
This leaves fiscal policy as a way to help. The problem with this is fiscal policy is not nearly as effective. Also most european countries were already running deficits before the great recession and do not have a huge amount of flexibility in spending because of default concerns. This is particularly true of the nations that need stimulus the most.
As for the supply side factors, internal politics keep most european countries from doing reforms.
And in one of those PIGS (Spain), there has just been an announcement that the central government will take over the debt incurred by our overspending regions.
Consequences:
not-overspending regions are angry, but we’re the minority so fuck us.
overspending regions are seeing this as permission to go on overspending.
those debts will now be paid by everybody. I’m expecting Madrid to try to pass the bucket up to Brussels.
So long as we have a culture of “not my fault, not my responsibility, mommy come fix it”, things just can’t get better for real. The temporary mirage of the housing bubble was based on overspending and on bad credits, it wasn’t an actual improvement of previous conditions even if the numbers looked pretty. The same applies to Greece and, at least to an extent, Italy (I’m less familiar with Portugal’s conditions, Spanish news sources do their best to ignore our western neighbor).
The problem goes beyond this or that government decision, it’s in why those government decisions get taken.
It’s not useful to look only at debt as a proportion of GDP, Spain and Ireland are examples of this.
Both of these had relatively healthy looking numbers, but its not debt that’s the problem, its the ability to service it. These economies also have the problem that they do not have industrial economies to be able to expand enough fast enough to keep their debts under control.
Imagine a retired person sitting on a pile of retirement payout fund, but with a minimal pension income - the personal wealth numbers look fine, but the income from interest will never be enough to service significant borrowing - and over time the money will also be used up.
This has nothing to do with the labour market, no matter how low the cost of labour goes, if there are no customers, you cannot generate income. In effect those nations are living in the shadow of big established industrial economies and its extremely difficult to break into a market that it shrinking and already supplied.
I agree with the comments about political responsibility, but rather than look at the politicians, look at the voters who expect a free ride. The Germans, and much of the rest of Northern Europe was pretty unhappy that the largely Southern Euro states were reducing their retirement age, increasing state pensions and borrowing to do it, with a shared currency, all the while the Northies were increasing their state retirement age.
Add to that the abysmal tax revenue gathering capabilities and that tax evasion is just a endemic national pastime in the Southies and its clear that financial problems will ensue. The previous option of currency devaluation is not available any more so now those Southies must face the consequences of their profligacy - something they have never previously done.
Depends on what you mean by “austerity”. Germany implemented severe cuts in its welfare system about ten years ago, and is currently running a balanced budget. I don’t think it would be wrong to call this “austerity”.
Replace “regions” with “countries” and “Madrid” with “Berlin” and you have the Eurozone’s political problem in a nutshell.
What economic commentators (who don’t have to stand for election in Germany) see as “necessary debt mutualisation” or “Eurozone Quantitative Easing” is seen from the German perspective as “sticking responsible German taxpayers with the bill for the profligate southerners”.
Pretty much every economist agrees that at this point the Eurozone/ECB needs to do more to stimulate demand, whether by QE, increased EU spending or simple money-printing. But asking the Germans to fund a mass bail-out of the Eurozone - with no guarantee that this will fix the long-term problem - is a political non-starter, and trying to reform the PIGS to make them more “German” (fiscally and politically) against a background of crushing austerity and Depression-level unemployment is likewise a non-starter. So fudge, muddle and half-measures are the order of the day.
Spain’s budget surpluses were largely illusory. It ran surpluses on an artificially inflated housing bubble. When the bubble burst the real Spanish economic numbers were shown to the world. Surpluses or deficits were not the problem. The problem was government overspending.
In the UK we were running deficits of around 2-3% under Blair in the early/mid 2000’s. All seemed well. Economic theory suggests this level is fine. Except its not. It turns out we were still running deficits during an almighty boom, and during a period of a huge property bubble. Commodity prices were artificially booming, GDP was artificially increasing and government revenue was subsequently benefitting - until the crash. Deficits of 2-3% were not nearly austere enough during a white hot unsustainable boom.
FWIW, here is my opinion (and all the posts above are only opinions). The austerians (as I will call them) believed and still do that what is needed for a recovery is to make capital feel confident that there won’t be high inflation. That and the cheapness of borrowing will convince capital to invest, create jobs, and things will be great. They also believed that a Keynesian approach would result in runaway inflation.
The trouble with that is that capital didn’t invest because they saw no demand. In fact, they probably, overall, already had excess capacity and saw no reason to invest. So they sat on their money. This is called, incidentally, supply-side economics, aka Reaganomics. Meantime, the US applied a modified Keynesian approach. The austerians confidentally predicted that we would have runaway inflation. This has not happened, although they are still predicting it. The US did go into austerity mode although not as seriously as Europe. And the US is actually starting to recover. Slowly.
That is my (well, actually Paul Krugman’s) take on it, FWIW.
It is simply not an opinion that the Southies could not service their debt, nor is it an opinion that this meant that interest rates for those economies were rising because of the increased risk that they represented, nor is that any debate that if there had been a default, the common currency - The Euro - was in dire trouble to the extent that various Euro states had made plans to deal with a reversion back into their own currencies.
The only opinions to be debated are the means to get out of the mess, but the reality is that the mess came about through fiscal irresponsibility, there isn’t much opinion how that came about either.
In the UK, which is outside the Euro, there is real debate about how much Austerity is necessary, and how much is due to a political philosophy, my own view is that its the wrong balance completely - its much more trending toward reduction of the state and expansion of the private sector. The problem here is that the reduction of the one, does not automatically lead to increase in the other. My OPINION, is that what we have is politically imposed austerity, rather than economically required austerity.
What you have in the Southies is economic austerity any other choice would lead to a huge increase in debts and servicing, by nations that are singularly ill equipped to deal with it. Inflating these economies wold be fine, if there were something worth investing in, such as projects that would lead to growth, the point being that these nations do not have the industrial capacity to justify large scale infrastructure spending. They have been spending as if they were wealth producers, without the means to produce it, and there is no prospect of such capacity increasing in the medium term.
They cannot devalue, as thy traditionally used to do, and if they default and revert to their own currencies, what they are dealing with will seem like a walk in the park.
What bizarro world do you live in that a surplus constitutes government overspending? This idea that the PIIGS countries were all recklessly spending is nonsense. Greece was, of course. Portugal wasn’t all that great, but it was hardly being reckless. Spain and Ireland were running surpluses and slashing their debt load. Italy had a high total overall debt because of overspending in previous decades, but they were doing a decent job of managing their yearly deficit as well.
This is misdiagnosing the problem and trying to pretend that every country was Greece. If I can disprove your theory by looking up data on Eurostat, then your theory is bunk.
There is nothing magic about an industrial economy. Despite the unprecedented adjustment of the last 6 years, Ireland’s GDP growth (which is the highest in the EU) far exceeds its cost of borrowing (which is lower than that of industrial countries such as the UK). Your view that Ireland is unable to service its debt may turn out to be correct, but it is not shared by the bond markets.