Skiing Season

February 18th, 2013
in Op Ed, syndication

Written by

Europeans On A South-east Slope

It's the skiing season, folks, and appropriately enough Europe is on a slope, gliding gently south-east, and the USA is not doing much better, according to our worthy guide at Eurostat

The race to the bottom is led by Greece, -6%, Portugal, -3.8%, Hungary, -2.8%, Spain, -1.6%, Finland, - 0.9%, the Netherlands, -0.9%, and France, -0.3%.  Even Germany, which was positive, just turned in a dismal fourth quarter with GDP down 0.6% (-2.3% annualized rate).

Follow up:

The following shows the European overall numbers with skis pointed straight down the fall line.  See GEI News for more details.

Europe's performance is owed to the theory that in the absence of political, economic and banking union, the members of the single currency Euro system there is no alternative for member states with high budget deficits and debt to GDP ratios: each must pursue a contractive fiscal policy, and never mind that the private sector is deleveraging - restoring its financial position by reducing debt - at the same time This guarantees recession, perhaps not for ever but certainly for quite some time.

Each member state will then become more competitive against the other member states and soon all will be running a current account surplus as their exports rise.

Too bad of course that in getting to this point some countries will be expected to live with unemployment rates of 25% or so. And when the process is complete the Euro zone will have a huge current account surplus against the rest of the world, which looks good on a CV, but is absolutely pointless for any other purpose.

Meanwhile the consequence of austerity is to drive the debt ratio to GDP even higher as output shrinks, so the most highly indebted countries can look forward to debt enslavement indefinitely.

The simple lesson for historical observation is that debt reduction does not happen unless there is an increase in output. So the alternative to austerity is a coordinated fiscal expansion, extremely difficult to organise in the absence of an economic and political union, but not impossible. It just requires a realisation that austerity will not work.

To learn more about why the great recession is proving even stickier than the 1930's recession, a lot can be learned from Claude Borrio, BIS ( Working Paper Paper 395, 'The financial cycle and macroeconomic policy', Dec 2012,  and for the short version Martin Wolf,' The Case for Helicopter Money,' at The Financial Times, February 12 (with lots of helpful links).

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