The stagnant European economy does not need more bad news. Unfortunately, there is more coming. Business Insider reports:
The amazing collapse in German bond yields is continuing. Today, five-year bonds (or bunds) have a negative nominal return for the first time ever. That means that investors buying a 5-year bond on the market today will effectively be paying the German government for the privilege of owning some of its debt. This has been happening for some time now. In 2012, people were amazed when 6-month bund yields went into negative territory. In August, the two-year yield went negative too. Less than a month ago, the same thing happened with the country’s four-year bunds.
While there is a downward trend in bond yields in most euro-zone countries, there is a clear discrepancy between first-tier and second-tier euro states. Ten-year treasury bond yields, other than Germany:
- Austria, 0.71 percent, trending firmly downward; France, 0.83 percent, trending firmly downward; Netherlands, 0.68 percent, trending firmly downward; Italy, 1.87 percent, trending firmly downward.
A couple of second-tier examples:
- Ireland, 1.24 percent, trending weakly downward; Portugal, 2.69 percent, trending weakly downward.
Greece is the real outlier at 9.59 percent and an upward yield trend. But Greece is also a reason why Germany’s bond yields are turning negative. Although the Greek economy is no longer plunging into the dungeon of depression, it is not recovering. Basically, it is in a state of stagnation. Its very high unemployment and weak growth is coupled with an ongoing austerity program, imposed by the EU, the ECB and the IMF.
Add to that the political instability which, in late January, will probably lead to a new, radically leftist government. Syriza’s ideological point of gravity is the Chavista socialism that has been practiced in Venezuela over the past 10-15 years. They are also vocal opponents to the EU-imposed austerity programs, an opposition they would have to deliver on in case they want to stay relevant in Greek politics.
If Greece unilaterally ends its austerity program, it de facto means the beginning of their secession from the euro. That in turn would raise the possibility of other secessions, such as France, where a President Le Pen would begin her term in 2017 with a plan to reintroduce the franc. When that happens, the euro is history.
There is no history of anything similar happening in modern history, which makes it very difficult for anyone, economist or not, to predict what will happen. Europe’s political leaders will, of course, want to make the transition as smooth and predictable, but without experience to draw on there is a considerable risk that the process will be neither smooth nor politically controllable. Add to that the inability of econometricians to forecast the transition; based on the numerous examples of forecasting errors from the past couple of years, there is going to be little reliable support from the forecasting community for a rollback of the euro.
That is not to say the process cannot be a success. But the window of uncertainty is so large that it alone explains the investor flight to German treasury bonds.
This uncertainty is also throwing a wet blanket over almost the entire European economy, an economy that desperately needs growth and new jobs. Since 2010 the EU-28 economy has added 800,000 new jobs, an increase of 0.37 percent. For comparison, during the same time the American economy has added eleven million jobs, an increase of a healthy 8.5 percent.
Standard&Poor’s, one of the leading US-based ratings agencies, on Friday (20 December) downgraded EU’s rating by one notch to AA+, citing concerns over how the bloc’s budget was funded. “In our opinion, the overall creditworthiness of the now 28 European Union member states has declined,” Standard&Poor’s said in a note to investors. Last month, it downgraded the Netherlands, one of the few remaining triple-A rated EU countries. In the eurozone, only Germany, Luxembourg and Finland have kept their top rating.
Not surprising. The Netherlands experienced a very tough budget fight in 2012, with a resigning prime minister, upsetting elections and, during 2013, a close encounter with harsh austerity policies. This was not exactly what the Dutch had expected that they would be subjected to. Or, as I explained the situation in March 2013:
The Dutch government, which has been clearly in favor of tough austerity measures on southern European economies where the deficit exceeds the three-percent limit, now suddenly recognizes that austerity is bad for GDP growth. To play on another American proverb, life is not as fun when the austerity chickens are coming home to roost.
Evidently, the Dutch austerity measures did not prevent a credit plunge. Back now to the EU Observer story about the Standard & Poor downgrading:
The agency noted that “EU budgetary negotiations have become more contentious, signalling what we consider to be rising risks to the support of the EU from some member states.” EU talks for the 2014-2020 budget took over a year as richer countries – notably the UK and Germany – insisted on a cut, while southern and eastern ones wanted more money.
And herein lies the gist of why S&P is worried. The EU budget fight is about countries with better government finances wanting to pay less to countries with troubled or outright catastrophic government finances. If there is a cut in EU funds to Spain, Portugal or Greece, those recipient countries will have to take even tougher measures to try to comply with the budget balance targets set by the EU and the ECB. Given that they are already chronically incapable of doing so, it is not hard to see why S&P is very concerned with cuts in the EU budget.
This message, though, seems lost on some Eurocrats:
The news struck just as EU leaders were gathering for their last day of a summit in Brussels. European Commission chief Jose Manuel Barroso dismissed the rating downgrade. “We have no deficit, no debt and also very strong budget revenues from our own resources. We disagree with this particular ratings agency,” the top official said in a press conference at the end of the EU summit. “We think the EU is a very credible institution when it comes to its financial obligations,” Barroso added. … EU Council chief Herman Van Rompuy downplayed the S&P decision. “The downgrade will not spoil our Christmas,” he said.
Perhaps we should not expect anything else from them. After all, the Eurocracy in Brussels has proven, over and over again, that it lacks insight, interest and intelligence to successfully deal with Europe’s perennial economic crisis. This is in itself a troubling fact, as the signs of a continuing crisis are everywhere for everyone to see. A good example, also from the EU Observer:
The number of people unemployed in France rose 0.5% to over 10.5% in November, figures released Thursday show. The statistics are a political blow for President Francois Hollande who had pledged to bring the rate down by the end of 2013. The figures for December will be released end January.
The Eurocracy’s refusal to see the big, macroeconomic picture is also revealed in their delusional attitude toward the EU’s crisis policy:
The EU says Spain’s banks are back on a “sound footing,” but one in four Spanish people are still unemployed. Klaus Regling, the director of the Luxembourg-based European Stability Mechanism (ESM), made the statement on Tuesday (31 December) to mark the expiry of Spain’s EU credit line. He described the rescue effort as “an impressive success story” and predicted the Spanish economy will “achieve stability and sustainable growth” in the near future.
The only problem is that the crisis in the Spanish banks was not the cause of the economic crisis. The welfare state was the cause. Europe’s banks actually suffered badly from the crisis by having exposed themselves heavily to euro-denoted Treasury bonds: when Greece, Italy, Portugal, Spain, Ireland and even countries like Belgium and Netherlands started having serious budget problems, Treasury bonds lost their status as minimum-risk anchors in bank asset portfolios.
With trillions of euros worth of exposure to government debt, Europe’s banks rightly began panicking when in 2012 Greece forced them to write off some of the country’s debt. The debt write-off was directly linked to a runaway welfare state, whose spending promises vastly exceeded what Greek taxpayers could ever afford. The same problem occurred in Spain where the government’s ability to pay its debt costs have been in serious question for almost two years now.
To highlight the Spanish situation, consider these numbers from Eurostat:
- In 2007 the consolidated Spanish government debt was 382.3 billion euros, of which financial institutions owned 47 percent, or 179.7 billion euros;
- In 2012 the consolidated Spanish government debt was 883.9 billion euros, of which financial institutions owned 57.5 percent, of 507.9 billion euros.
In five short years, Spanish banks bought 382.2 billion euros worth of government bonds. During that same time, the Spanish government plummeted from the comfortable lounges of good credit to the doorstep of the financial junkyard.
It was also during this period of credit downgrading that the Spanish government began subjecting the country to exceptionally hard austerity measures, the terrifying effects of which I have explained repeatedly. However, as today’s third EU Observer story reports, those effects are of no consequence to the Eurocracy, whose praise for austerity will soon know no limits:
He also praised the EU’s austerity policy more broadly, saying: “The people’s readiness to accept temporary hardship for the sake of a sustainable recovery are exemplary … The Spanish success shows that our strategy of providing temporary loans against strong conditionality is working.” Spain will officially exit its bailout later this month, after Ireland quit its programme in December. Unlike Cyprus, Greece, Ireland and Portugal, the Spanish rescue was limited to its banking sector instead of a full-blown state bailout. It saw the ESM put up a €100 billion credit line in July 2012. In the end, the ESM paid out €41.3 billion to a new Spanish body, the Fondo de Restructuracion Ordenado Bancaria (FROM), which channelled the loans, most of which mature in 2024 or 2025, to failing lenders.
So all that has happened is that European taxpayers have been put on the hook for failed Spanish bank loans – loan defaults that Spain’s banks could have dealt with had they not chosen to lend a total of half-a-trillion dollars to their failing government.
Nobody seems to ask how this debt restructuring will help the Spanish government end its austerity policies. Such an end is a must if the Spanish economy is ever to recover. That does not mean a return to “business as usual” under the welfare state – on the contrary, the welfare state must go – but what it does mean is some breathing room for the private sector to regain its regular, albeit slow, pace of business.
Instead of connecting the dots here, the Eurocracy continues to look at the European economic crisis through split-vision glasses, and Spain is no exception. The EU Observer again:
For its part, the European Commission last month warned that the Spanish economy is still in bad shape despite the good news. It noted that “lending to the economy, and in particular to the corporate sector, is still declining substantially, even if some bottoming out of that contraction process might be in sight.” Meanwhile, the latest commission statistics say 26.7 percent of the Spanish labour force and 57.4 percent of its under-25s are out of work. The labour force figure is second only to Greece (27.3%) and much higher than the EU’s third worst jobs performer, Croatia (17.6%). … A poll in the El Mundo newspaper published also on Wednesday showed that 71 percent of Spanish people do not believe they will see any real benefit from Spain’s recovery until 2015 at the earliest.
All this ties back to the Standard & Poor downgrading of the EU. There is, plain and simple, a lot of concern that nothing is going to get better in the EU. There are good reasons to believe this: the persistent message from Brussels over the past two years has been that the next austerity package will be the last, that it will turn things around and put depression-stricken economies back on track again. As we all know, that has not happened, which raises the question if the EU is going to have to actually increase its bailout efforts toward fiscally troubled member states.
This blog’s answer is “yes, very probably”. Europe’s only way back to prosperity and growth goes through the structural elimination of the welfare state.
After Italian voters voiced their anti-austerity sentiments in the election recently, the EU leadership has vowed to double down on their supprt for austerity. The Eurocrats want more of the same combination of higher taxes and lower spending that has destroyed one quarter of the Greek economy, that has driven scores of Spaniards to become food scavengers and brought the Italian economy to its knees.
It is going to be increasingly difficult for the Eurocrats to continue to push for these reckless policies. The Italian protest vote was just one example of the frustration felt by up to a hundred million low-and-middle income Europeans, who depend critically on the welfare state and are forced by austerity policies into the dungeons of poverty. There will be more protests.
In fact, there already are more protests. According to Reuters, the Portuguese are marching again:
Hundreds of thousands of Portuguese poured into the streets of Lisbon and other cities on Saturday to demand an end to austerity dictated by an international bailout and the resignation of the center-right government. The rallies, which follow the introduction of the biggest tax hikes in living memory, mark the greatest public show of discontent since demonstrations last September forced the government to adjust some of its austerity measures.
I reported on those tax hikes in January. In September I noted that the Portuguese economy has effectively been at a GDP growth standstill since at least 2008. I also explained how the widespread spending cuts already enacted in Portugal were contributing to social unrest. Therefore, I am not surprised to see this story from Reuters, which continues with reports large numbers of protesters:
More than 200,000 protesters in Lisbon packed the vast imperial Praca do Comercio square, home to the Finance Ministry, and surrounding streets, chanting: “It’s time for the government to go”. Organizers said as many as 500,000 people took part in the rallies around Lisbon, which would make the protest bigger than in September, but the numbers could not be independently confirmed. Police, as is customary, would not provide estimates. Many carried banners with slogans such as “Austerity kills” and “Screw the troika, power to the people!”, aimed at the so-called troika of lenders from the European Commission, European Central Bank and International Monetary Fund.
A good part of the frustration expressed in these mass protests has to do with the terrible job market. The Portuguese economy was leaving more and more people behind already before the recession: according to Eurostat labor market data, the rate of employment among 15-64-year-olds fell from 74.1 percent in 2002 to 70.5 percent in 2010. In 2011 youth unemployment stood at 30.1 percent, compared to 17 percent in the United States.
In its latest GDP growth forecast, Eurostat has downgraded Portugal from a previously expected 0.3 percent growth in 2013 to a full percent decline in GDP.
Welcome to austerity paradise.
Reuters again – and this is worth taking seriously:
“Grandola”, the signature tune of the 1974 “Carnation revolution” that overthrew the fascist dictatorship of Antonio Salazar after the army rebelled, reverberated through the crowds in Lisbon, which has a population of about 3 million, and elsewhere where protesters gathered. Many cried as they sang. Protesters have used the song increasingly in the past month to interrupt government ministers speaking at public events. “We are in a new dictatorship. Everything that the revolution achieved is being destroyed,” said one elderly protester in Lisbon who did not give his name.
First you make people dependent on the welfare state. Then you destroy their opportunities to feed themselves independently by raising taxes to pay for the welfare state. Then you use austerity to destroy the welfare state.
And then you are surprised when people set your government on fire.
Back to Reuters, which reinforced my point that the forecast for the Portuguese economy is being adjusted downward – only this one is even worse, predicting almost twice the contraction in GDP that Eurostat published earlier this year:
The forecast 1.9 percent decline will further deepen the worst recession since the 1970s, already in its third year.
Actually, the Portuguese economy came to a screeching halt in 2008 with a perfect zero in GDP growth.
Tax hikes and spending cuts ordered by the terms of the 78 billion euro ($101.3 billion) bailout agreed in mid-2011 have slashed consumer demand and pushed unemployment to record levels of 17 percent, causing thousands of small businesses to go bust. … Veronica Pereira, an unemployed mother who says she has no means to send her daughter to college said: “Our people have the habit of letting things happen, but I think this is changing radically now. We need to protest to change things,” she said. … Portugal had shown a tolerance for austerity compared with countries like Greece with its frequent protests and strikes, but opposition has begun to rise in recent weeks as the economic outlook has worsened.
The question is not whether these protests will lead to a radicalization of politics in the countries hit by austerity. It is quite clear that they will. Greece is already at a point where anti-democratic parties are on the doorstep of executive political power. The Italian people, who voted against austerity, are probably going to get tricked into more austerity by crafty coalition welders. In response they may throw their votes after increasingly radical alternatives. In Portugal, radical socialists already have a strong opposition role in parliament and could easily leap to power, riding on the massive dissatisfaction with austerity.
Again, the question is not whether there will be a political radicalization in austerity-hit nations. The question is what country is next on the list.
The Netherlands? Hardly! It’s such a stable, sensible, tolerant smiley-face kind of a country.
Well, don’t hold your breath on that. The Financial Times reports that the Netherlands is in some persistent fiscal trouble, resembling a south European crsis opening:
The Netherlands will make no attempt to bring its 2013 budget deficit under the EU limit of 3 per cent of gross domestic product, an ironic outcome for a country that was one of the toughest proponents of the deficit limits at European summits during the euro crisis. After seeing its economy shrink nearly 1 per cent in 2012, one of Europe’s wealthiest countries is now poised to miss the very deficit target it backed.
As we say here in America: “kharma is a bitch”.
Then comes an interesting little observation:
That became clear after a report by the Netherlands’ official Central Planning Bureau on Thursday projected the country’s budget deficit will come in at 3.3 per cent of GDP in 2013, with the economy expected to contract by 0.5 per cent. The government, a coalition between the centre-right Liberals and the centre-left Labour party, had been waiting for the CPB report before deciding whether to pursue further austerity measures to meet the 3 per cent limit. With the report out, the parliamentary leaders of both parties ruled out any further budget cuts or tax rises for 2013, while leaving the door open for further austerity in 2014.
Did you catch that? The Dutch government, which has been clearly in favor of tough austerity measures on southern European economies where the deficit exceeds the three-percent limit, now suddenly recognizes that austerity is bad for GDP growth. To play on another American proverb, life is not as fun when the austerity chickens are coming home to roost.
Before last year’s parliamentary election the socialists stood to make significant gains on their anti-austerity campaign. Mainly because of some crafty coalition building, more EU friendly politicians were able to build a flood wall to protect their austerity policies from popular criticism. But not even a “wealthy”, tolerant and “stable” country like the Netherlands can endure round after round of austerity. In fact, the attempts by the Dutch government to avoid more austerity in 2013 is a sign that their country may be much more vulnerable to harsh austerity measures than Greece or Portugal.
If this is the case, then what we have seen in terms of political fallout from austerity in southern Europe is only child’s play compared to what could happen further up north.
The outcome of the Dutch election was, as I predicted, an affirmation of the country’s commitment to austerity and continued EU bailouts. This will reinforce the politicians and Eurocrats who are pushing for a more centralized – and politically more unaccountable – Europe. It was becoming clear already yesterday that this was going to be the result, and therefore it comes as no surprise that Eurocrats who are eager to continue to build a European super-state are capitalizing on the Dutch election as quickly as they can. The chief of the EU Council (think of him as the president of the EU), Mr. van Rompuy, is no exception. Yesterday he put forward a paper that pushes for an even stronger centralized government in Europe. The EU Observer has the story:
EU Council chief Van Rompuy on Wednesday (12 September) tabled an ‘issues paper’ on how to further integrate the eurozone, including a common budget, limited debt mutualisation and a parliamentary assembly. … This is supposed to “get member states out of the closet on the most sensitive issues,” one EU official told this website. Drafted with the heads of the EU commission, European Central Bank and Eurogroup of finance ministers, the paper proposes “a central budget for the euro area” in order to “deal with asymmetric shocks and help prevent contagion.”
Never mind their illogical motives for a centralized budget. The real story here is that once the EU becomes a formal government with the right to tax and spend, it will do exactly that: tax and spend. And when it taxes and spends, it will claim full jurisdiction over the parameters that guide its spending. Since most of government spending in the EU – like in the United States – is for entitlements, the EU will automatically centralize jurisdiction over all the variables that determine entitlement spending. This means:
- a centralized unemployment system with centralized reimbursement rates and equally centralized workforce participaton requirements;
- a centralized health care system where Brussels dictates how many doctors a country, or a part of a country, should have, where the EU tells doctors what reimbursement rates they should be getting, and where the EU controls what medical procedures you can or cannot have;
- common euro-denominated treasury bonds issued on the good credit of Germany to fund bad credit for Greece; and, of course,
- a centralized tax system where the EU imposes its own taxes either in replacement of, or more likely on top of, those already levied by national governments.
None of this will solve the fundamental problem underlying the European economic crisis: the welfare state. All it will do is to elevate the crisis to the EU level and thereby force taxpayers in more wealthy countries to fund the welfare state in less wealthy EU states – but fund it on a permanent basis through taxes, and not through a bailout as is done today.
Back to the EU Observer story, which makes clear that this new, formalized EU government is not a pie-in-the-sky idea. On the contrary, the tracks have already been laid out for this new super-government:
An EU summit on 18-19 October is set to endorse the parts of the paper which are doable without changing the EU treaties, while the more long-term goals of political union needing a convention, new treaty and referendums will be left for the December summit. An attempt to deal with the German taboo of debt mutualisation and France’s no-go area of further sovereignty transfers to Brussels was made in June when Van Rompuy first tabled a plan for deeper eurozone integration. The only possible compromise at the time was to endorse common banking supervision in return for the German concession of granting troubled banks direct access to the eurozone bailout fund (ESM), a deal ultimately meant to help Spain lower its debt. But as the crisis continues and markets doubt the results of each EU summit, more steps are needed towards further eurozone integration.
In other words, the bank crisis – not caused, but seriously aggravated, by the welfare state crisis – is being used as an accelerator for the process toward a formal, full-fledged EU government.
Every time politicians want to expand government, and to it fast, we are well advised to put a foot down and ask ourselves: what is really going on here? I know of no one better suited at answering that question than Mr. Nigel Farage, MEP for the United Kingdom Independence Party:
A fiscal crisis is being used as a door opener for a European super-state – a super-state that won’t solve, but will deepen, the fiscal crisis; that won’t expand, but will contract democracy; and that will increase, not decrease, tensions between member states.
There is an eerie silence in Europe right now. The continent is catching its breath after some turbulent events recently:
- In the Greek election voters narrowly re-affirmed their support for status quo but gave authoritarian parties 40 percent of the votes;
- French voters redesigned the country’s political landscape by handing both the presidency and the national parliament to the socialists;
- Spain has just received new austerity marching orders from the EU and is just about to start cutting spending again; and
- There is rapidly growing resistance in, e.g., Germany to more bailouts for the worst-run welfare states in the EU.
Over the past year a clear divide has opened up across Europe. On the one hand we have the eurocracy and its support cadre of austerity-minded governments. They are relentless in trying to bring the continent’s fiscal house into order by means of spending cuts and tax increases. On the other side of the divide are the voters, taxpayers and consumers of government services who feel increasingly shortchanged. They see government take more of their money while giving less back.
Right now, this divide is not rocking Europe in either way. But recent events in Spain indicate which way things will be going in the near future. There is a rift growing between the central government and the provinces, and it is a direct result of EU-dictated austerity policies. This rift could actually have very serious consequences for Spain as a nation: just yesterday there was a massive rally for Catalonia to secede from Spain, with hundreds of thousands of protesters pointing to the austerity measures as the immediate reason for independence.
Waves of riots and unruly protests Spain, Italy and Greece have given voice to a widespread weariness with austerity. This weariness has also spread to less volatile countries, such as The Netherlands, where today on September 12 voters go to the ballots to elect a new parliament. The previous prime minister and his cabinet lost power in August after losing a critical parliamentary vote on austerity policies. As a reaction to such policies, Dutch voters – who realize that the austerity measures are dictated by the EU – have become increasingly friendly toward the socialists. They and other EU-skeptical parties have been gaining ground on an anti-austerity agenda, which has put the two dominant political parties – social democrats and center-right liberals – in a difficult position. They are both pro-austerity and strong supporters of the EU as a whole, but in order to secure an election victory they have to come across as skeptical to domestic austerity and bailouts for other countries.
This tactic seems to be working. According to the British think tank Open Europe, the most probable result of today’s election is a pro-EU coalition that will preserve political and fiscal-policy status quo:
The most likely outcome remains a centrist, pragmatic coalition, which clearly is the preferred option in Brussels and Berlin. The Dutch elections are therefore unlikely to radically change the immediate political dynamics of the eurozone crisis in the short-term.
EurActiv reaffirms the forecast, suggesting that the two centrist parties, the Social Democrats and the center-right VVD, will form a coalition:
Dutch Prime Minister Mark Rutte of the liberal VVD and the Labour (PvdA) leader Diederik Samsom were neck-and-neck heading into today’s general election, the latest polls showed. Polls put the VVD and PvdA at around 35 seats in the 150-seat parliament, indicating a coalition involving both parties may be inevitable.
This will, again, mean a return to austerity for the Netherlands and support for further EU-enforced austerity in other, more troubled member states. This means that the new Dutch government will support more bailouts, despite what the report from Open Europe suggests:
The country is likely to continue to oppose more bailout cash for Greece or any topping up of the eurozone’s bailout funds and remain a steadfast supporter of austerity in the struggling eurozone economies.
If you support austerity in your own country, you support it elsewhere. It means that you don’t see an alternative way to close a budget gap.
Furthermore, the dominant Dutch parties are firm believers in further centralization of political and fiscal power in the EU. The only thing that can hold them back is a surge in support for EU-critical parties, such as the socialists which are likely going to come in third in the election. The Open Europe report is skeptical toward that, at least when it comes to the socialists who rose in the polls in August:
In the medium to long term, however, the Netherlands could well be on the path to becoming a more assertive – and far more complicated – EU partner. With future decisions on potential eurozone debt pooling to come and the prospect of more EU powers over national budgets (including the Netherlands’), Dutch public opinion and the EU-critical parties such as the Socialists and PVV are likely to shift the country in a more sceptical direction. Although the EU-critical left-wing Socialist Party has had a strong election campaign, recent polls have seen a shift back towards the centre with the centre-left Social Democrats (PvdA) overtaking the Socialists (SP) to become the main challengers to Prime Minister Mark Rutte’s VVD party (centre-right).
The prevailing notion in EU-friendly circles in Europe is that both the political power of the EU and the currency union are in jeopardy if they stop forcing countries in bad fiscal shape to implement austerity policies. According to them, the only alternative to a continuation of austerity is the French route, meaning that instead of combining higher taxes with spending cuts, you combine them with spending increases.
The next Dutch government is not going to accept a shift in domestic fiscal policy in the French direction. The VVD party was part of the pro-austerity coalition that fell in April, and it is inconceivable that they have changed their minds since then.
This does not prevent them from paying lip service to the EU skepticism that has lifted primarily the socialists to a challenging third-place position in the polls:
Dutch Prime Minister Mark Rutte, the liberal party leader who is battling for re-election next week, says Greece should not get more financial aid from Europe. During a televised election debate on 4 September, the leader of the VVD stressed that Greece had already been given support twice and received loans of €240 billion and that is “enough”. “The Greeks are in a better position because of it, but I say ‘enough is enough’,” Rutte said.
No, they are not better off. The loans only provide temporary revenue toward admittedly smaller, but nevertheless permanent expenditures. The Greek economy is in a free fall, potentially shrinking seven percent this year. This means that the tax base shrinks as fast, and that demand for welfare-oriented tax-paid services from government is increasing rapidly. It does not take a Ph.D. in economics to help you realize that this means the Greek economy is worse off, not better off, as a result of the austerity policies.
Top Dutch politicians know this. They are not going to force Greece out of the euro zone, which would be the immediate consequence of the EU turned off the bailout faucet. Therefore, we can safely conclude that provided the recent polls (as reported by the Open Europe article) are correct, The Netherlands will get a new prime minister who will throw his country’s support behind a perpetuation of austerity across Europe – and with austerity, bailouts.
Down the road this means further destabilization of the EU and the euro zone. And tougher times for private businesses as well as for Europe’s families.
There is a backlash against austerity sweeping across Europe. It started in Greece earlier this year with increasing voter support for totalitarian parties. It then moved to France with a socialist election victory and to Spain with signs of social unrest. Voters are protesting austerity and asking for a return to the welfare state they perceived that they had before austerity began. This is not good on any level:
- The European fiscal crisis is caused by over-spending on entitlements, and entitlements are what define the welfare state;
- Austerity, in turn, has been put in place by politicians eager to save the welfare state by making it fit within a tax base that is constantly shrinking relative to the promises made through the welfare state.
Socialists and other authoritarian parties, including the Nazis and others now representing almost 40 percent of the voters in Greece, all want to preserve the European welfare state at any cost. Austerity is the only response that European policy makers have come up with in response to the crisis caused by the welfare state. Because austerity has disastrous consequences, and because it does not solve the underlying problem, it is unfortunately understandable that the anti-austerity left turn in European politics continues. So long as no one is presenting a truly libertarian alternative to the welfare state, Europe’s voters will cling to their entitlements for dear life.
The latest country to fall into the ranks on the left flank is the Netherlands, and again we are watching a backlash against austerity. In May I reported that the Netherlands was on the list of austerity-ridden economies, putting a total of one quarter of the euro-zone GDP under austerity pressure. If the socialists win the coming election, then as the EU Observer reports, the Dutch may very well follow in the French footsteps:
The left-wing Socialist party is expected to seize the largest gains in September’s Dutch elections, threatening to deprive German Chancellor Angela Merkel of one of her closest allies in response to the eurozone debt crisis. With Dutch voters set to go to the polls on 12 September 12, opinion polls indicated that the Socialist party, which has never formed part of a government, is running marginally ahead of caretaker Prime Minister Mark Rutte’s Liberal party (VVD). According to a survey released on Wednesday (22 August) by opinion pollsters TNS-Nipo, both parties are projected to win 34 seats in the 150 member Parliament, with the centre-left Labour party (PvdA) expected to poll in third place with 21 seats.
Needless to say, the socialists offer no rational explanation as to why country after country in Europe is having fiscal problems. This is interesting not because of the lack of explanation – after all, we are talking about socialists – but because so many voters are willing to accept the socialist alternative to austerity without question. Again, the reason is not primarily that people want the welfare state, but that there is no libertarian alternative available on the European policy scene.
Even Europe’s conservatives have de facto accepted the welfare state. Their offering is more austerity, meaning higher taxes and less spendign; the socialist alternative is higher taxes and more spending. The Dutch election is a perfect illustration of this tension. The now-defunct Dutch prime minister and his cabinet were kicked out over austerity:
Geert Wilders’ Freedom party (PVV) … toppled the Rutte administration in April by walking out of negotiations for further budget cuts demanded by the European Commission. Rutte had promised to make further spending cuts in a bid to reduce the country’s 4.7% deficit in 2011 below the 3% threshold.
And now it is time for the equally destructive socialist alternative:
A poll of polls compiled this week by the University of Leiden pegs the Socialist and VVD parties at 35 and 33 seats respectively. The election … comes after the centre-right coalition led by Liberal leader Mark Rutte collapsed in April over budget cuts. … Last week, the Socialist party leader Emile Roemer promised to hold a referendum on the fiscal compact treaty, describing it as “idiotic” to impose a 3% limit on budget deficits. The treaty, which was designed by Merkel and former French President Nikolas Sarkozy, and enthusiastically backed by Rutte, would put the deficit and debt brakes from the Stability and Growth Pact into national constitutions.
Actually, the three-percent rule has been part of the EU Constitution since the Maastricht Treaty was signed 20 years ago. Therefore, as Greece has experienced over the past three years, it is not going to be easy for an EU member state, which also happens to be part of the euro, to run excessive deficits with impunity. But even if the Netherlands would be able to do so, the deficit cap is not the cause of the fiscal problems in the country today. The root cause is structural over-spending, something that plagues every welfare state.
If the Dutch elect a socialist government and that government decides to run up bigger deficits in defense of the welfare state, the only result will be further erosion of the euro. The Dutch would be borrowing on Germany’s good credit; or, looking at it from the German perspective through Dan Mitchell’s always sharp lenses, you re co-signing a loan “for your unemployed and alcoholic cousin with a gambling addiction”. That would only accelerate the ongoing weakening of the euro as a currency. It would motivate better-run countries to exit – think Finland and Austria – and leave the Germans with an even bigger tab to pay.
What Europe needs is a huge dose of true-to-the-core libertarianism. This means:
- A set of principles that explain why individual and economic freedom are superior to collectivism and big government;
- A solid economic analysis that explains why small-government economies always do better than big-government economies; and
- A realistic plan for ending the welfare state.