Wednesday, May 9, 2012

Euro Crisis: Do I Have to Care?

On my long run last week I ended up listening to a This American Life episode about the European financial crisis, titled The Continental Breakdown. They started off the episode asking the question regarding the crisis, "do I have to care about this?" And what follows is a really great breakdown and analysis of all the things that have been going wrong in Europe lately, and what binds everything together.

The crisis is basically this: For many years, people in Europe have been clamoring for a United State of Europe type venture that would bring together all the countries of Europe. Victor Hugo pleaded for this many years ago, and apparently this is something that many people in Europe have been wanting for a long time. There are a number of things that keep Europeans separate from each other, but there was a major development in the last 10 years that made it so that they did become united in a very significant way - the Euro.

And herein lies the problem with the Euro. Although all of the countries now share that common currency, the economies of Europe push and pull on the value of the Euro while their financial markets remain in flux as well. It's really interesting. for the main question of this post, do I have to care? The answer, obviously, is yes, because it whatever instability is experienced across the Atlantic is also going to be felt here. That's one of the things that I find most interesting about all of these developments. Because Greece is floundering, major financial players move their money away from the country, and without that liquidity, the Greeks can't maintain their system, and if they can't, then that puts into question other countries in Europe, including Spain, Portugal, and even Italy.

Now there's a question if the Euro is sustainable, and will other major players follow suit with other countries and default on their debts, or will they reign in spending. Some writers here contend that the European governments that have slashed spending have not seen any improvement in their financial lots, but there are major questions about whether that is true or not, mainly if they have actually cut their spending.

In any case, I bring all of this up because France just elected a socialist as their newest President, and it seems that he will only increase government spending. So whatever unrest France has seen in the last few years, will probably be dwarfed by what will come in the next few.

Anyway, others, smarter than myself, have written on this subject. At Powerline in this post, they had this to say:

In France and Greece, voters have rejected “austerity”–the idea that European governments should live within their means. In Italy, too, anti-austerity candidates are currently leading in the polls. French Socialist François Hollande vows to continue running huge deficits so that he can hire more public sector workers; in a burst of stupidity, he announced that “My real enemy is the world of Finance.” I suppose there could be a surer way to impoverish your country than to declare war on the flow of capital, but I can’t think of one offhand.

What does it all mean? Two things, in my opinion. First, Southern European voters are determined to go over the waterfall in a canoe as long as there are politicians who will promise to keep paddling. One might think it obvious that no country can live beyond its means forever by borrowing money which it can’t possibly pay back. But voters in countries like Greece and France apparently think: it has worked so far, why not keep it up?

Realistically, it will work until creditors–Germany, mostly–decide to pull the plug. Then there will be default, some form of bankruptcy, some degree of chaos. That evidently is what many European voters want. In one sense, you can’t blame them: why not live on someone else’s money as long as you can?

But something more profound is going on, too. As I have written here more than once, the fundamental question raised by the current economic crisis is whether Europe is a country. If Europe is a country, it is not so unreasonable for profligate Southern Europeans to expect their more responsible fellow-citizens in Germany, and to a lesser extent Great Britain, to bail them out. But the fact is that Europe is not a country, despite the imaginings of its political class. Germans and Englishmen will not forever support Greeks, Italians, Spaniards, and now perhaps Frenchmen. At some point–and I think that point is drawing very near–they will go their own way, and the European Union, most probably, will collapse.

And the editors at NRO had this to say in their piece about the French election:

François Hollande has become the newly elected president of France more by luck than by any quality he might possess. Almost anonymous, he has no ministerial experience. His platform nonetheless raised expectations mightily that he would be able to find employment and entitlements where Nicolas Sarkozy had failed to do so. Voters could conclude that there are jobs for all and everyone richer than them will pay more taxes. He likes to promise that France is not doomed to austerity, because he still believes that socialism is the magic formula for growth, and can simply be ordered up.


Poor and insincere as Sarkozy’s campaign was, in reality the Euro-crisis left him without a chance. No present head of government can hope to win an election in a Europe irrevocably tied to the single currency and the political structure erected in Brussels to enforce it. In the gathering climate of economic and political disaster, Sarkozy is the eleventh in a succession of office-holders in one nation after another to go down in electoral defeat.

Germany sets the terms for Europe, and François Hollande now has to discover whether Chancellor Angela Merkel, the architect of austerity, is willing to permit a forlorn attempt at socialist-induced growth. She had let it be known that she wanted the like-minded Sarkozy to win. But then she herself has already lost regional elections, and until and unless something changes with Brussels and the euro, she too is likely to join the lengthening list of rejected European office-holders.

And then in this piece found in the UK's The Spectator, the author writes about the one country who did actually manage to slash spending and what resulted of that:

When Europe’s finance ministers meet for a group photo, it’s easy to spot the rebel — Anders Borg has a ponytail and earring. What actually marks him out, though, is how he responded to the crash. While most countries in Europe borrowed massively, Borg did not. Since becoming Sweden’s finance minister, his mission has been to pare back government. His ‘stimulus’ was a permanent tax cut. To critics, this was fiscal lunacy — the so-called ‘punk tax cutting’ agenda. Borg, on the other hand, thought lunacy meant repeating the economics of the 1970s and expecting a different result.

Three years on, it’s pretty clear who was right. ‘Look at Spain, Portugal or the UK, whose governments were arguing for large temporary stimulus,’ he says. ‘Well, we can see that very little of the stimulus went to the economy. But they are stuck with the debt.’ Tax-cutting Sweden, by contrast, had the fastest growth in Europe last year, when it also celebrated the abolition of its deficit. The recovery started just in time for the 2010 Swedish election, in which the Conservatives were re-elected for the first time in history.

All this has taken Borg from curiosity to celebrity. The Financial Times recently declared him the most effective finance minister in Europe. When we meet in his Stockholm office on a Friday afternoon (he and his aide seem to be the only two left in the building) he says he is just carrying on 20 years of reform. ‘Sweden was a textbook case of European economic sclerosis. Very high taxes and huge regulatory burden.’ An economic crisis in the early 1990s forced Sweden on the road to balanced budgets, and Borg was determined the 2007 crash would not stop him cutting the size of government.

‘Everybody was told “stimulus, stimulus, stimulus”,’ he says — referring to the EU, IMF and the alphabet soup of agencies urging a global, debt-fuelled spending splurge. Borg, an economist, couldn’t work out how this would help. ‘It was surprising that Europe, given what we experienced in the 1970s and 80s with structural unemployment, believed that short-term Keynesianism could solve the problem.’ Non-economists, he says, ‘might have a tendency to fall for those kinds of messages’.
He continued to cut taxes and cut welfare-spending to pay for it; he even cut property taxes for the rich to lure entrepreneurs back to Sweden. The last bit was the most unpopular, but for Borg, economic recovery starts with entrepreneurs. If cutting taxes for the rich encouraged risk-taking, then it had to be done. ‘In most cases, the company would not have been created without the owner,’ he says. ‘There would be no Ikea without [Ingvar] Kamprad. We would not have Tetra-Pak without [Ruben] Rausing. They are probably the foremost entrepreneurs we have had in the last few decades, and both moved out of Sweden.’

But they were not rich, I say, when they were starting out. ‘No, but they were becoming rich. If you have a high wealth tax and an inheritance tax, people emigrate because it becomes too costly to own a company. Ownership is a production factor. Entrepreneurs are a production factor. Yes, these people are rich and you can obviously argue that we want to encourage social cohesion. But it is also problematic if you drive out entrepreneurs from your country, because they are the source of job creation.’

It's a lot of reading, but it's worthwhile. 

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