This “just in” from the Eurozone: Greeks Aren’t Lazy

The unfolding crises spreading throughout the Eurozone continues to inflict unnecessary pain and poverty.  This pain has been continually made worse by the disastrous policies of those in charge of the Euro.  German Chancellor, Angela Merkel, is now starting to share in the pain her preferred policies have delivered to other Euro nations.  Today, Reuters is reporting that German manufacturing sector not only shrank last quarter, but shrank fast.

As the so-called “Sovereign debt crises” has hit several European countries, those countries have been forced to increase taxes and cut government spending.  These cuts have affected everything from social safety nets to education.  They “had to” because that was the deal when they started using the Euro.

The European Union is set up in a way that guaranteed that eventually, one of its members was going to have a debt crisis.  What makes the Euro so unique is that it was setup almost like a gold standard.   Each nation in the Eurozone does not issue it’s own money.  Money is always borrowed.  That borrowing must come from someone who has Euros.  This is very different from most other modern countries like the U.K., United States, Canada, or Japan.  The reason this becomes important is not during economic booms, but during the busts.  From my last Euro tirade:

During an economic bust – or recession – people are out of work and pay less taxes.  Therefore the nation brings in less tax money.  Additionally, the increasing unemployed add to the costs of the social safety net.  Therefore as the recession goes on, countries bring in less tax dollars, but are obliged to pay out more benefits.  This becomes a problem when you cannot have a budget deficit.  The U.S. states are having that problem right now.  Greece and other Euro zone nations aren’t supposed to have budget deficits greater than 3% of GDP.  That is impossible during a deep enough recession.

During a deep recession, a Sovereign nation like Japan or the United States could run a large budget deficit to counter-act the recession.  Eurozone nations cannot do that.  They must cut back along with the rest of their private sector.  Well, when a recession is caused by people cutting back, and then the government cuts back… it’s only going to make the recession worse!

Sure enough, as nations like Greece, Italy, and Ireland cut back their spending, it only exacerbates the problems with their economy.  No matter how much they cut, they still find themselves with large budget deficits.  And each time, the other Eurozone nations – especially Germany – have forced more austerity on them to try and enforce fiscal discipline.

Now those years of bad policy are coming home to roost in Germany.

Markit’s manufacturing Purchasing Mangers Index (PMI) fell sharply to 46.3 from March’s 48.4, according to a flash estimate released on Monday, well below the 50 mark which would sign al growth in activity.

It marked the fastest rate of contraction since July 2009 in the sector, which has been hit by a decline in some exports as the debt crisis in the euro zone has choked demand from key trading partners.

Wow, years of recession and forced austerity on their trading partners is hurting German imports.  Who could’ve predicted that?(answer: anyone with a brain)  I wonder when Germany starts hurting if Chancellor Merkel will try to enforce the same amount of austerity. I also wonder if there will be a vicious campaign to call German factory workers “lazy” and “overpaid” like there was against Greek workers during the early days of the Greek crises.

I don’t blame the German people for their predicament.  Even on their government I cast only partial blame.  The root of the cause is bad economic policies driven by really bad economic theory.

Ireland’s Suicide-by-Austerity Continues

This isn’t fun to report:

Ireland’s economy contracted faster in the third quarter than at any time over the past two years, calling into question its ability to recover while implementing harsh austerity measures.

Gross domestic product fell by 1.9 per cent from July to September compared with the previous quarter due mainly to falling personal consumption and a steep decline in investment as the eurozone crisis deepened.

Austerity is an auspicious sounding term for paying down government debt by cutting spending and/or raising tax rates.  Considering that Ireland has been doing nothing but austerity plan after austerity plan for the last 3 years,  some neoliberal economists would eventually take a look at the results and realize that they aren’t working(even I’m able to do that).

The only way Ireland and other European Zone countries are going to recover is by increasing demand until people are put back to work and people and businesses are more confident about making future investments.

Greek Week Rush – Analyzing the Euro Crisis

A lot of news over the weekend on the Euro ‘crisis’.  As I write this, but before I publish it – Greece may even have a new government.  That’s how quickly things are changing.  Because of all the news, I’m pretty sure all my posts this week are going to concentrate on Greece, the Euro, and the Modern Monetary Theory(MMT) economic approach to understanding what is happening.  Note that I do not call it the Greek crisis.  It is a crisis of the European Union and the single Euro currency.

First, a brief overview of the problem and the dealings.  The European Union, when it switched from all having independent currencies to the Euro, it required all participating countries to have(among other things) a budget deficit that was less than 3% of gdp and total debt less than 60% of gdp.  For example, if a country has a trillion euro economy, its budget deficit can only be 30 billion euros, and it’s total deficit 600 billion euros.  If a country violates those numbers, it must come up with an economic plan to resolve the issue and it was subject to fines by the European Central Bank – yes, even for Sovereign governments banks punish you for not having money by charging you more money.  As you can imagine, this eventually caused some problems.

The first problem to come up was, what to do about recessions and economic downturns.  France and Germany learned about this problem in 2003, when their recessions put them in violation of the 3% rule and made it difficult to deficit spend out of their economic crisis.  The treaty was changed so that fines could be postponed on defaulting countries as long as they submitted a reasonable plan to get back under the deficit requirements.  It is under this agreement that the other countries can force Greece into these so-called “bail-out” packages.  Greece is in violation of the debt and deficit rules so it must come up with these plans to implement economic suicide austerity and other nations must approve it or Greece will face fines and penalties.

Within the last couple years, the rest of Europe has imposed several austerity programs on Greece one after another.  Each of the plans has resulted in massive economic hardship for Greece.  In addition, Greece continues to find itself unable to reverse it’s budget deficits.  Any economist or follower of MMT could tell you why.  Hell, anyone who took a 3 hour course in Keynesian macroeconomics could tell you why the austerity budgets didn’t work.  When you raise taxes and cut government services you put millions out of work.  Those who still have work get freaked out and raise their savings rate in they case they get layed off next – business cut back because consumers aren’t buying and lay people off.  The newly unemployed don’t pay taxes and instead collect unemployment.  At the end of the day, all your “austerity” budget accomplishes is a few more unemployed.  But… I digress.

These so-called Sovereign debt crisis has made Europe tense.  Last week made these really tense.  Last week it appeared that Greece made a deal with the rest of Europe to eliminate some of its debt.  In exchange Greece had to agree to (surprise, surprise!) more austerity.  Knowing that this was unpopular, the Prime Minister was going to have Greek citizens vote on the dealEuropean leaders freaked out.  They said, “You mean you’re going to let your people choose between being debt slaves or not?  You can’t do that, you must force it upon them”(Note: Not actual quote, but you get the idea).  The Prime minister reversed himself.  Instead, he was going to try to get it through Greek Parliament.    Unfortunately for him, it appears that the deal isn’t very popular in parliament either and his whole government appears to be on the verge of being toppled.  This all happened between last weekend and this morning.  A “this just in” is that they may have just approved the bailout and formed an interim government with the existing prime minister still at the head of it.

Well, that’s where things stand.  Coming up this week I’ll go over the MMT analysis of why this debt crisis was inevitable, why this latest deal won’t make it go away, why it’ll happen to other countries in the Euro, and options for Greece and Europe to prevent it in the future.

 

Ireland’s Budget Cuts: A Case Study on the rewards of Austerity

For those who don’t know, austerity is “a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided. Austerity policies are often used by governments to reduce their deficit spending while sometimes coupled with increases in taxes to pay back creditors to reduce debt”.

In the United States, our government is now beginning to understand the importance of Austerity and how its the responsible thing to do when in hard economic times.  Therefore, I though I’d review all the good things that happened to Ireland as it pursued its own austerity.

In late 2008, as the world financial markets were crashing and burning, Ireland, like other nations, saw tax revenues dip, money disappear overnight, and the economy quickly contract.  As you can imagine it caused huge budget deficits and it’s debt started rising.  Unlike most other nations in the EU, it did the responsible thing and declared that Ireland would not take part in EU stimulus plans.  Ireland continue to reap the rewards of it’s responsible actions.

September, 2008.  Ireland cuts spending by another 1.5% or a total of 4% less from the year before.

With September tax returns expected to be very bad and the economic climate rapidly deteriorating, a further 1.5% reduction in 2009 spending is now up for debate. This would bring planned cutbacks in current expenditure for next year to more than €2bn.

April, 2009.  Ireland announces more emergency budget cuts and this time, income tax increases as well.

From May 1, a 2 percent “income levy”—effectively a pay cut—is to be imposed on all those earning between €15,028 and €75, 036. This doubles a levy first introduced last October and reduces the tax threshold to incorporate large numbers of low paid workers. Those on higher incomes will be levied at 4 percent and 9 percent of their income.

A health levy is also to be increased to 5 percent. This, as with other levies, is to be taken directly from the pay packets of workers whose tax payments are collected by their employers. This will be added to the pension “levy” also extracted from public sector workers in February.

The government also announced there will be no Christmas welfare payment for social security claimants in 2009. More damningly, childcare allowances for pre-school children are to be halved immediately and abolished by the end of 2009. Child benefit, currently paid to all parents, is to be means tested.

Payments to unemployed workers under 20 are also to be halved and rent support payments reduced, while new punitive measures will be introduced against welfare claimants. Mortgage interest relief will now only apply to the first seven years of its commencement.

December, 2009.  More drastic budget cuts are announced.  This time an additional 4 billion euros were being cut out of their budget.  All the cuts came out of wage cuts on public workers, reduced benefits for the unemployed, other reduced social welfare programs, and less spending on infrastructure

Public sector workers bore the brunt of cutbacks in Lenihan’s Budget with €1 billion in pay cuts ranging from 5 per cent for those on average pay to 15 per cent for those at senior level.

The rest of the €4 billion in savings will come from a €760 million reduction in the social welfare, a €980 million cut in day-to-day spending programmes and €960 million in savings on capital investment projects.

Cuts to Child Benefit will see a €16 euro per month reduction with the lower and higher rates now €150 and €187 per month respectively. Families on social welfare will be compensated with an increase of €3.80 a week in qualified child allowance.

At the same time, unlike previous budgets, taxes were heroically kept the same or lower.

VAT will be cut by half a percentage point from January for 12 months, while the corporation tax rate will not change from 12.5 per cent.

In February 2010, a levy(tax) was placed on the generous pension plans of government workers to save the government even more money.

In March 2010 , public sector wages were cut again, despite freak out from the greedy public sector unions.

Tax revenues have collapsed, the government has run out of money, we can’t afford to pay state workers as much as they have been getting.

In fact tax revenues here have now fallen to the 2002 level. But since then, the payroll for state workers has increased by 35%.

So far the government has cut them back by an average of 12% over two budgets. But the state workers won’t accept it.

By April 2010, Ireland’s bold moves were rewarded by the financial industry, praised by the EU Central Bankers, and declared a model for Greece.

As a result, the country’s government and taxpayers have been rewarded. The “spread” the bond markets charge to hold Irish 10-year debt over the German “bund” equivalent is now 139 basis points, less than half as wide as this time last year. The Greek spread over the bund, meanwhile, is 316 basis points – more than twice as high as that of the Irish – with Athens now paying far, far more than Dublin to service government debt.

“Greece has a role model and that role model is Ireland,” said Jean-Claude Trichet last week, the European Central Bank president singling out the Emerald Isle for praise. “Ireland had extremely difficult problems and took them very seriously – and that’s now been recognised by all.”

Despite all these spending cuts and increased taxes on the public sector employees and middle class, Ireland still found itself facing another deep budget hole in October 2010.

DEEP welfare cuts loomed last night as ministers began a marathon session thrashing out how to bridge a €5 billion black hole in the budget.

A property tax and specific projects like the Dublin Metro North line were under discussion, as was cutting welfare which is set to take a hit of some €2bn. The Greens are keen to save Metro north and some ministers fear cutting the capital building programme too far will damage the economy in the medium term.

Education is also expected to be a big loser.

Last week, the outcome of the cuts were announced to be another 6 billion Euros cut from spending.
Irish Finance Minister Brian Lenihan plans to slash the budget deficit by 6 billion euros (US$8.5-billion) in 2011 as he fights to save the nation’s economic independence.
How did the financial markets respond to these even more drastic budget cuts?  It rewarded them with higher interest rates.
Brian Lenihan, Ireland’s Finance Minister, described the country’s borrowing problems as “very serious”, as the yields on its bonds hit yet another all-time high. The yield on 10-year bonds peaked at 9.26 per cent yesterday, almost four times the yield that is demanded by investors in equivalent German bonds.
The ultimate outcome of 2 years of fiscal austerity?
Senior officials in Ireland and the European Union yesterday moved closer than ever to conceding that the indebted country may now have no choice but to seek a bail-out.
Queue the Trombone: