Tuesday, April 3, 2012

European Austerity is Defeating Europe – The Wrong Policy for the Wrong Policy Goal

No They Are Not Going to Change – That Would Mean Admitting They Were Wrong

An admission that a particular position or policy position is wrong is very difficult for an individual to do.  Doing so calls into question all the other policy positions that individual took; if one position is wrong maybe the others are also.  But for government an admission that its policies are incorrect is impossible.  Such an admission might lead to replacement of that government, and elected officials have no higher priority than their own re-election, public benefit be damned.

The European governments’s response to the financial and economic crisis was to set as the policy goal reducing government deficits.  This was wrong.  The policy goals should have been economic growth and higher employment, that should always be the policy goals of any government.  But then having set the wrong goal the Europeans selected the wrong policy, which was austerity.  Here’s how that is working out.

The travails in the Netherlands are the latest evidence that what's left of the euro-zone "core"—Germany, Austria, Finland, the Netherlands and tiny Luxembourg—is crumbling. Standard & Poor's demoted Austria from triple-A status, saying the country needed to do more to cut its deficit and debt. Finland, struggling with national champion Nokia's decline, ran its first trade deficit in two decades last year.

But what about Germany, the great success story of Europe.  Well Germany is an export dominated country and Germany is learning the hard way what the rest of us already knew, that when your customers are having problems and can no longer afford to buy your products, you are in trouble regardless of how strong your internal economy is.

Growth even in Germany is forecast to be anemic in 2012, in part because important export markets in Southern Europe are mired in recession

And the reason for all of this of course is the European policy of austerity, primarily in the form of massive cuts in public spending.  The impact of all that on getting to the goal of reducing deficits is this as illustrated by the Dutch economy.

The Central Planning Bureau now predicts the darker economic outlook will raise the deficit to 4.6% of gross domestic product this year and next, requiring more austerity. It is a dynamic familiar to countries in the euro-zone periphery: Deficit cuts hurt growth, shrinking government revenue and requiring more cuts to achieve previously-set budget targets.

That’s right for all those folks who don’t understand Econ 101, aka European Finance Ministers if you reduce the economy tax revenues will decline and the deficits will grow not shrink.  But no matter how many times that happens Europe will never change, after all that would mean they were wrong before and we can’t have that no matter how many millions lose their jobs.  In fact as long as the people who lose their jobs are not the officials implementing this ignorant policy, they will think all is right in the world.

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