European voters are rejecting further fiscal restraint, showing the door over the weekend to former austerity-imposing politicians in Greece and France. In a similar spirit, European Central Bank President Mario Draghi is now calling for a "growth pact" to replace the "fiscal pact" demanded by Angela Merkel's government in Germany.
What Europe's voters and its central bank are coming to recognize is that unremitting fiscal austerity measures are the wrong prescription for what ails the European economy. Instead of curbing budget deficits, they're actually exacerbating the continent's economic problems.
Economics textbooks will tell you that hiking taxes and implementing draconian spending cuts will lead to government's running smaller deficits. But in practice, as we're seeing across the eurozone right now, those measures can be self-defeating. Rather than helping to wrestle down budget deficits, brutal fiscal austerity measures are actually choking the life out of much of Europe's economy. Since tax revenues are a function of economic activity, lifeless economies are making it that much harder for countries to stave off recession. In Greece, for instance, the budget deficit isn't getting any smaller. The only thing austerity measures are shrinking is the country's GDP.
Europe is mired in a quagmire of financial bailouts, budget deficits and austerity measures, bleak circumstances that have already fostered social upheaval and are now ushering in political change. As I argued in this space last week, sovereign debt defaults won't be far behind. To avoid this fate, Europe has its hopes pinned on a single magic bullet -- growth.
If a strong-enough economic recovery were to take hold, Europe could grow its way out of its huge fiscal deficits and save the monetary union from collapse. That's a good plan in theory, but the complication facing Europe, and indeed the rest of the world, is that it takes a lot of energy to fuel robust economic growth. What's more, the most important source of energy for the global economy is oil.
Consider the European economies in the worst shape: Portugal, Italy, Ireland, Greece and Spain. The cumulative national debt of these countries may as well be denominated in barrels of oil instead of euros, because millions of barrels of oil is what will be needed to get those economies growing again. Can those countries afford the cost of economic growth when oil is trading in the triple-digit range?
How much more fiscal punishment can the eurozone endure before countries start throwing in the towel? Without economic growth, there can be only one ending to Europe's debt crisis. Default. Judging by the newly elected socialist politicians in Greece and France that eventuality is a lot closer than financial markets might think.
(Jeff Rubin is an author and former chief economist of CIBC World Markets. His second book, "The End of Growth", comes out this week)
Follow Jeffrey Rubin on Twitter: www.twitter.com/@jeffrubin
Robert Reich: The Biggest Risk to the Economy in 2012, and What's the Economy for Anyway?
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It is not sustainable.
Society's wealth is only created and expanded by INVENTIVE and ADDED-ON manfuacturing sectors needing mental and physically hard-skills that many Western economies, in the centuries gone-by, had excelled. In today's economy the major players are aero-space, auto, high-tech, computer tech, agriculture and energy sectors.
The "PAPER (transaction) ECONOMY" adds very little to expand over-all productivity considering its high finance, legal, accounting and adminstrative costs. Many of these layers of public and private bureaucracies are a waste and a drain of societies's wealth and assets.
The increasing "SERVICE" and "HEALTHCARE" and "ENTERTAINMENT" economy adds quality but does not add value to the economy; except that they keep a lot of people employed. These type of economic activity circulates money without significantly contributing to societies' wealth.
So the time has arrived that we separate the productive economy (like manufactuÂring and those listed above) from non-producÂtive economy (like tourism, restaurantÂ, entertainmÂent, finance etc) that merely services consumers without making consumers significanÂtly expand / contribute to a productive economy.
This is the difference between the Western economic productiviÂties of the 18th, 19th, 20th century and that of the 21st century. It is also the difference in the productiviÂty of growth economies of Northern Europe and stagnating economies of Southern Europe; which are currently in fiscal crises.
Military economy of a country, while needed, should be classified as non-productive economy.
The USofA can manipulate currency, can print money, can QE1 & 2 &3. With a single currency but without a strong political union or the equivalent of the Fed, struggling individual European countries are at the mercy of the Germans, to a lesser extent to the French, and on to capital-heavy countries like China and the Oil States. If Europe continues down the current road, austerity leading to default and/or the dissolution of the EU, the Germans might just figure out that they blew it.
The creation of the Euro ( there was a failed forerunner, the ecu) was supposed to put an end to the inter European currency speculations. (The Bundesbank being a major player and very profitable for it's owner, the federal government). It remains to be seen whether and if the German people will continue on that path or look for greener pastures.
By the way, the European nations are not going to go away. It is now generally accepted teaching that wars are expensive and counterproductive, even for the winner.
Germany is in a precarious situation.It depends on energy from Russia.
Some of the Club Med nations depend on oil from Iran. Importing oil from other sources requires the readjustment of a couple of refineries. a time consuming and expensive undertaking. Besides, Iran trades oil for Euros and all kinds of stuff made in Europe.
While I'm not a great fan of the Fed, it does give us the ability to act in extraordinary circumstances. If it would keep its fiddling around during 'ordinary' times to a minimum, its actions would carry more weight in a crisis. If the Europeans can create a laissez-faire Fed, they would be ahead of the game.
It's disheartening that TPTB and mainstream media basically ignore the fact that we have passed a point where fossil fuel resources can adequately meet demand. With a population over 7 billion, more and more gadgets that require electrical energy, and dwindling resources the species is basically screwed as long as we continue down the path of requiring exponential growth in our economy to meet our 'needs'!
The lack of respect for the human population in this current environment is staggering to me. The most vulnerable are the least recognized. What was once the backbone of the western industrialized world has come to mean so very little as to be forgotten. We all must remember that technology is a tool. A wrench that is designed to make life more efficient and less troublesome. If taught to utilize the tools properly the forgotten masses will lead the world into a strong and profitable future.
Take away the potential for learning the use of tools that were and are designed for human utilization and you have lessened the single most energizing commodity in the world.
Human spirit.
disgruntled Borg
In the Euro the banking industry (German & French) is in control and their only concern is getting paid. The "bail out" of Greece was actually a bail out of German and French banks. There are some signs that the people have had enough of predatory capitalism and are voting out those politicians that supported the policies.
Unfortunately in the U.S. both parties are thoroughly corrupted and the corporate MSM keeps the public uninformed.
Finance is not dire; the bond market is good for France.
The issue really is where will they be in 10 years, how do they counter the Chinese in manufacturing?
This has been done before it is not impossible but it will surely take some great minds to pull it off.
I have every confidence in France on this issue.
We should look at the Conservation Corp's from FDR.
Fix and preserve many valuable things, from roads to
parks and schools, while teaching youths skills.
Or 3-400,000 part time tutors for at risk schools.
About $ 5-10 Billion ...which helps make these kids
more productive, fewer eating up tax money in jail,
more becoming taxpayers !
If anything the Pres and Congress has been way
too timid and slow. If he were anything near a
real socialist much more would have been
accomplished, and some crooks put in jail.
Spending cuts lead to less demand. Less demand leads to job cuts. Job cuts lead to less spending and therefore less demand. And so forth and so on. All the while revenue from taxes keeps shrinking thereby requiring more spending cuts to keep up.
"Economics textbooks will tell you that hiking taxes and implementing draconian spending cuts will lead to government's running smaller deficits."
It's nice to bring this up but only half of this theory has been put in play so they aren't even fulfilling textbook advice. Then in reality taxes need to be raised on the prosperous portion of the economy, not the ones struggling, so the rich who are making more money than they will ever need and are just sitting on it and starving economies, and the corporations that have trillions of dollars in the bank with nothing to do with it because demand is too low, need to be taxed more and much higher.
If only Americans were more educated and well informed so we could learned from Europe's mistakes and throw these ridiculous conservatives out of office. Unfortunately the opposite is more likely to happen.
As I've also said, the Super Rich helped in WW 2 [ even if
forced to ....].....did they disappear, did they not own many
homes and car's still.....nope....so what's the big deal ?
An annual wealth tax, applied as much world wide as possible
to prevent cheating, of say 3-5 % would bring in an easy
$ 50+ Billion a year just in the US. Starting at maybe
$ 10-20 Million, it would be relatively painless to
a fairly small number.
The US can still borrow very cheaply. To spend an extra
$ 50-100 Billion a year on infrastructure would be a major
effort and something even conservatives should understand.
To fix bridges before they get worse generally saves money !
And slowly phasing in a few pennies on the gas tax to help pay
for it also fairly painless....say a penny every 2-4 months for
a few years.
In tough times the Super Rich has often helped more [usually
forced to eventually ! ] A stronger and more stable society
is in their long term interest. It's sad that so many of them
only have a short sighted greed !