The EU and the Limits of the Austerity Hairshirt

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As previous posts on this blog have discussed, trying simultaneously to shrink total private sector debt levels and government debt levels at the same time, absent very aggressive currency depreciation or other measures to increase net exports, is likely to result in a fall in GDP and deflation. Ironically, that means overly aggressive measures to reduce debt levels will make it even more difficult to service outstanding debt. As Rob Parenteau explained, using the example of Spain:

Domestic Private Sector Financial Balance + Fiscal Balance – Current Account Balance = 0

Again, keep in mind this is an accounting identity, not a theory. If it is wrong, then five centuries of double entry book keeping must also be wrong….

We can apply the financial balances approach to make the current predicament plain. If, for example, Spain is expected to reduce its fiscal deficit from roughly 10% of GDP to 3% of GDP in three years, then the foreign and private domestic sectors must be together willing and able to reduce their financial balances by 7% of GDP. Spain is estimated to be running a 4.5% of GDP current account deficit this year. If Spain cannot improve its current account balance (because remember, it relinquished its control over its nominal exchange rate the day it joined EMU), the arithmetic of sector financial balances is clear. Spain’s households and businesses will need to spend 7% of GDP more than they earn over the duration of the next three years, thereby adding more private debt to their balance sheets.

Spain already is running one of the higher private debt to GDP ratios in the region. In addition, Spain had one of the more dramatic housing busts in the region, which Spanish banks are still trying to dig themselves out from (mostly, it is alleged, by issuing new loans to keep the prior bad loans serviced, in what appears to be a Ponzi scheme fashion). It is highly unlikely Spanish businesses and households will voluntarily raise their indebtedness in an environment of 20% plus unemployment rates, combined with the prospect of rising tax rates and reduced government expenditures as fiscal retrenchment is pursued.

Alternatively, if we assume Spain’s private sector will attempt to preserve its estimated 5.5% of GDP financial balance, or perhaps even attempt to run a larger net saving or surplus position so it can reduce its private debt faster, Spain’s trade balance will need to improve by more than 7% of GDP over the next three years. Barring a major surge in tradable goods demand in the rest of the world, or a rogue wave of rapid product innovation from Spanish entrepreneurs, there is only one way for Spain to accomplish such a significant reversal in its current account balance.

Prices and wages in Spain’s tradable goods sector will need to fall precipitously, and labor productivity will have to surge dramatically, in order to create a large enough real depreciation for Spain that its tradable products gain market share (at, we should mention, the expense of the rest of the Eurozone members). Arguably, the slack resulting from the fiscal retrenchment is just what the doctor might order to raise the odds of accomplishing such a large wage and price deflation in Spain. But how, we must wonder, will Spain’s private debt continue to be serviced during the transition as Spanish household wages and business revenues are falling under higher taxes or lower government spending?

Yves here. Now there is another route, which is sufficient currency depreciation to lift all boats in the EU high enough to . Wolfgang Munchau in the Financial Times hazards what might be required:

….the euro’s exchange rate has indeed weakened, and may weaken further. But it will probably not do so sufficiently to solve southern Europe’s competitiveness problems. In Greece, for example, tourism is the main export industry. A slump of the euro against the dollar is not going to change the country’s relative competitive position against the eurozone nations of the Mediterranean Sea. It could improve competitiveness against Turkey and Croatia, for example, but only to the extent that the lira and kuna also revalue. For the euro exchange rate alone to do the heavy lifting in restoring southern European competitiveness, it would take a massive further depreciation – to about 60 or 80 US cents to the euro.

Yves here. A fall of that magnitude has good odds of being more than a tad destabilizing, both from an economic and a geopolitical standpoint. It’s likely to precipitate either retaliation (selective tariffs) and/or deliberate efforts by other countries to devalue their currency versus the euro.

Ambrose Evans-Pritchard at the Telegraph points out that ratings agencies and commentators in Spain are taking note of the demand-dampening impact of the austerity measures now planned:

For Spain it has been a horrible week. The central bank seized CajaSur and imposed draconian write-down rules on banks to restore confidence. The Spanish Socialist and Workers Party (PSOE) of Jose Luis Zapatero then rammed a 5pc cut in public wages through the Cortes by a single vote, shattering consensus. The government cannot hope to pass a budget. Its own trade union base is planning a general strike.

The sub-text of Fitch’s 32-page report shows Mr Zapatero’s self-immolation to be futile in any case. The agency has not downgraded Spain for lack of austerity. Its implicit conclusion is that the policy of 1930s wage cuts – or “internal devaluations” – being imposed on southern Europe’s humiliated states as a quid pro quo for the EU shield is itself part of the problem. Ultra-austerity will bleed the economy, shrivel tax revenues and fail to close deficit anyway. “Fitch believes the risk that economic growth will fall short of the government’s projections,” it said.

El Pais spoke of a “perverse spiral” in its editorial. “The Fitch note drives home the apparently unsolvable contradiction in which the Spanish economy finds itself. To maintain debt solvency Spain must squeeze public spending: yet this policy undermines the chances of recovery which itself causes further loss of confidence.”

Yves here. We are not suggesting that there are pretty or painless ways out. But the course of action underway makes shielding Eurobanks from losses one of its top priorities. Yet any program that is going to make average workers take big hits (remember, wage cuts will hit all workers, irrespective of whether they were prudent or reckless) also needs to have at least the patina of shared sacrifice. More costs need to be imposed on banks and bank investors. Equity and bond investors are risk capital, yet they are being shielded again and again from the consequences of their poor decisions. The longer that goes on, the greater the odds of political blowback that will undermine efforts to create greater stability within the eurozone.

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  1. renting_the_future

    ‘More costs need to be imposed on banks and bank investors.’

    Hmm – as if various eurozone/EU nations (the UK being a very noticeable exception) haven’t been proposing that for years. The scolding of a certain Hausfrau over the years comes to mind, even if most English speaking media remains content to either ignore or ridicule her simple minded ideas of increased global financial regulation and the nationalizing of failed financial institutions in her own country, at the cost of current management losing its job, bondholders definitely forced to get haircuts, and shareholders losing their shirts.

    Oh wait – maybe I do know why the English language media reporting is so selective. After all, though too big to fail may actually mean something, it doesn’t mean too big not to fire the managers and wipe out the shareholders. But if those crazy German ideas (why no real reporting on Commerzbank and its government sponsored change in management, or how the shareholders were stiffed when HypoReal was ‘nationalized,’ as the FDP called it) continued to spread, the problem of deflation would not become, as is do neatly encapsulated here, the topic du jour.

    America is no longer a model for how to run a successful economy, and even if (or while) the ECB is screwing up, they plan to do it their way, not worrying whether they can make it in New York.

    Deflation is going cold turkey, and it sucks. Inflation is just another hit, making the next hit even easier, though at the end, you still end up going cold turkey anyways.

    One of the more fascinating things to see from the American perspective is the idea that the Great Depression was the result of mistakes which can be avoided today, while not taking into account that periodic episodes may have specific causes and effects, but the periodic nature remains unchanged even if those specific causes and effects are changed.

    1. aet

      “…periodic episodes may have specific causes and effects, but the periodic nature remains unchanged even if those specific causes and effects are changed.

      Sound like the cause and the effect are detachable.
      So the mechanism of periodicity is not immanent in the specified causes of the observed effects?

      I think “periodicity” must be dtermined by the observations, not the observations fitted to the theory of periodicity.
      My guess is there’s very little underlying similitude between periods of human history distinguished by technological differences. If one person with machines can produce as much as 10,000 did a century ago, why ought the economies have any similarities, at all?
      Economics is about scarcity, want, and supply.
      Tech changes the equation. So what endures across the centuries, when we come to compare economies, that enables us to postulate with such certainty the ever-lasting and determinative nature of the “business cycle”?
      This is political economy, not chemistry.

      1. DownSouth


        Ah, but didn’t you know about those economic LAWS?

        And he gave unto Moses, when he had made an end of communing with him upon mount Sinai, two tables of testimony, tables of stone, written with the finger of God.
        Exodus 31:18

        And so it is with classic and neoclassical economics. As Robert L. Heilbroner explained in The Worldly Philosophers:

        They lived in a world that was not only harsh and cruel but that rationalized its cruelty under the guise of economic law. Necker, the French financier and statesman, said at the turn of the century, “Were it possible to discover a kind of food less agreeable than bread but having double its substance, people would be reduced to eating only once in two days.” Harsh as such a sentiment might have sounded, it did ring with a kind of logic. It was the world that was cruel, not the people in it. For the world was run by economic laws, and economic laws were nothing with which one could trifle; they were simply there, and to rail about whatever injustices might be tossed up as an unfortunate consequence of their working was as foolish as to lament the ebb and flow of the tides.

  2. Swedish Lex

    Sure, there is no quick or easy fix to this. In addition, there are so many moving parts, economic and political, regional, national, European and international, that it would be extremely difficult to politically “manage” a transition to a less unstable intra EU and euro situation, even if there was a political consensus to do so.
    Absent something that resembles a coherent political response, there will – as discussed before on NC – be a few years of messy winding down of over-levered economies. The European welfare state will survive, but on a lesser level. If inflation is kept under control, ordinary peoples’ savings will at least not evaporate.
    6-9 months of economic and political chaos when the euro undergoes a very difficult second birth (i.e. the currency’s political dimension) in the emergency room should be expected during the coming 2-3 year period.

    1. MindTheGAAP

      The European welfare state will survive, but on a lesser level.

      I don’t see how survival is possible. Could you please elaborate?

      1. Lucio

        If you US citizens can continue to pay your absurdingly high sanitary insurance policies and fill your 401Ks with ballooned equity, why shouldn’t we europeans be able to cope with a couple of years more of work before retirement and some fee on the clinical treatments?

        1. aet

          The Americans ought not to be listened to on questions of social policy.
          From what I see, their answer is “longer prison temrs”, “more police, military, and prison spendin

          1. Vinny

            Yeah, but in US prisons you get free health insurance, along with free rent and food, plus cable TV. Sure beats living with inlaws in Greece…LOL


        2. MindTheGAAP

          If you US citizens can continue to pay your […]

          Who claimed that the US model is sustainable? For that matter, who claimed that I’m an American? And what difference would that make, anyway?

  3. Diego Méndez

    Spain won’t get out of the crisis supplying the same goods and services it does today. If devaluation were possible, we could sell the same things, just cheaper; since it is not possible, the economy must transform itself.

    Our only hope is for the market to work properly, for companies to change its mentality and search for new opportunities.

    To some extent, it’s reasonable to think they will. After all, Spanish companies were pursuing the same strategy as German companies: sell in the hot economies. And the hot economy was Spain. Now you see desperate Spanish managers travelling all over Europe and the Arab world to sell their products… that must have an effect in the medium term.

    Not to shun the concerns highlighted by Yves and Rob, but let me add a couple of good data points:

    1) the OECD puts Spanish exports’ growth at 13% over the next 2 years, with an annual 1% contribution to GDP growth. If that were indeed the case, it would account for 2 points out of a 5% fiscal adjustment over the next 2 years.

    2) Spanish productivity is indeed surging. Productivity per employee has grown from 104% EU average in 2008 to 110% in 2009. Per-hour productivity measures are expected to have grown 7% over European measures in 2009.

    If confirmed, that’s a significant productivity surge. It’s reasonable to think that many skilled people were attracted to the low productivity, high-wage non-tradable sector (construction) in the boom times, and now they are returning to other industries, hence improving productivity.

    Let’s hope productivity and net exports surge, relieving the pain. Southern European ountries with a more limited export base than Spain will have an even more difficult time, but a cheaper euro surely helps.

    1. MindTheGAAP

      Spanish productivity is indeed surging. Productivity per employee has grown from 104% EU average in 2008 to 110% in 2009. Per-hour productivity measures are expected to have grown 7% over European measures in 2009.

      I do not know enough to refute this assertion categorically, but how can you be sure that the productivity surge is not due to undocumented employment? After all, at 20% unemployment, I imagine that a lot of people must be working and collecting wages under the table

      a cheaper euro surely helps.

      I don’t think this helps too much, simply because a cheaper Euro implies an expensive Franc, and that forces default on many debtors to European banks (which are backed by respective governments, implicitly or explicitly)

      I think it’s just a matter of time (months) before capital /foreign exchange controls are enforced en masse, but I’m in a tiny minority at the moment.

      1. Diego Méndez

        “but how can you be sure that the productivity surge is not due to undocumented employment?”

        I cannot possibly be sure. I personally think a significant part of it is due to undocumented employment and especially longer work hours per employee (less workhour reductions, less Kurzarbeit, etc.) vs. Germany.

        If per-hour productitivy had a similar surge, as expected by some Spanish economists, then we’ll have to conclude that the productivity surge is real.

        Beyond stats, my experience on the ground is that business managers (who didn’t even consider export strategies some years ago) are desperately touring Europe and the Arab world for exports. They weren’t exporting 3 years ago not because they couldn’t, but because they weren’t even making the effort.

        Similarly, companies are being forced by circumstances to become more innovative and competitive, in a way Northern Europe is not experiencing. For Spanish managers (usually owners), it’s either that or losing all your family wealth in a couple of years.

        We’ll see. The mood here is far from optimistic, but there’s no point in losing hope. We’ll just try harder and work harder. That usually has positive effects on our future.

        1. aet

          Take some simple advice from a great American , Ralph Waldo Emerson, and in addition to what you are already doing, “Love more”.

        2. MindTheGAAP

          Thank you for your reply.

          I’m personally increasingly leaning towards the idea that all of Europe should just default, and then deal with the consequences. This will probably have to happen anyway (their financial sector’s balance sheets look really scary), and they might as well get it over with sooner rather than later. It would also not be a unique event–contrary to popular belief, few countries have avoided defaulting on their debt at some time or another–I think the only existing countries to have not done so are the US, Canada, Australia, NZ, Thailand, and one European country that escapes me at the moment.

          Yves last night posted an excellent contrast of views between herself and an NC poster over whether American homeowners should default. I wish I could find it, but the gist of the poster’s argument applies equally well to sovereigns, I think.

          As an aside, I am really puzzled at the ECB’s structure. It would have made far more sense to have structured the central bank the way the Federal Reserve was initially set up at the beginning of the 1900s, where each country’s central bank shares a common currency but could raise or lower interest rates to fund government spending. At least then, if the government wanted to blow deficits sky-high, people would directly see the immediate consequences. If a government needed to cool inflows or encourage inflows, it could equally do so. I don’t know why the Europeans chose to go the other route.

    2. Vinny

      Hey Diego,

      I’m looking to buy a 2 bedroom condo with a view in Barcelona on Diagonal or nearby. Any chance I might pick one up for around 20 grand in 2 years? :)


      1. Diego Méndez

        20 grand? You mean after the US dumps its currency and a new grand equates 100 old grands?

        It may be, but I don’t think your trash properties in the US will be worth so much :)

        1. Vinny

          Oh, I sold all my US properties in 2007, just before the crash, and made a killing on it. Just lucky, I guess :)

          But for a nice condo in Barcelona, I’m willing to part with my Rolex :)


    3. /L

      If devaluation were possible, we could sell the same things, just cheaper; since it is not possible, the economy must transform itself.
      Our only hope is for the market to work properly, for companies to change its mentality and search for new opportunities.

      Europe’s only hope as the EU-bosses play it is to hope that someone else in the world will go for expansionary economic policies. It’s a totally different ball game to go into a destructive price wars for market shares in a standstill or stagnate international market than increasing on owns market share in an expanding international economy.

      So we all have to hope that USA ones more care more about its own unemployment and will go for a expansionary economic policy and save Europe and the rest of the world while they are “thrifty” and die hard export growth orientated. That is what has saved a lot of countries in the past that thought that they was saved by devaluations.

      But Europe is so big and this time infested with so loony neo-liberal economic policies that USA probably isn’t strong enough to do the trick another time.

      How on earth can an entire continent (Europe) believe that it’s economic remedy will be that large parts of the rest of the world will go in debt to save the continent of the loonies?

      1. Kevin de Bruxelles

        Europe doesn’t necessarily need to export more, it needs to block Chinese imports. Correct me if I am wrong but the most deflationary thing for the global economy is to transfer a well paid European (or American) job to a sweat shop in China. You strip a ten euro an hour job away and give it to some peasant making 5 euros a day. Worse, while the western worker will generally spend his salary rather liberally (with the American worker leveraging this up with credit cards as well) the Chinese worker spends next to nothing and all the profit from the enterprise eventually just goes into either a T-Bill that sits in some Chinese vault or to Wall Street. And so conversely, the most stimulatory and inflationary thing one could do at this point is to transfer Chinese jobs back to Europe and America.

        So to me European leaders are on the right track and as usual American leadership is in Wall Street’s back pocket and so doesn’t think along these lines. Instead of worrying about “beggar thy neighbour” one should remember the words (heavily paraphrased because I cannot find the quote and dinner is burning!) of Nietzsche that instead of loving thy neighbour the best thing you can do for your neighbour is to take care of yourself so that your neighbour does not need to come to your rescue.

        1. DownSouth

          Kevin de Bruxelles,

          ”So to me European leaders are on the right track and as usual American leadership is in Wall Street’s back pocket….”

          From where I sit, /L has a lot better handle on the situation than you do, which comes through loud and clear when he says:

          ”But Europe is so big and this time infested with so loony neo-liberal economic policies…

          What I believe /L to be saying, and which I agree with wholeheatedly, is that Europe is ruled by the same neoliberal/neo-imperialist bastards that rule the US.

          1. Kevin de Bruxelles

            If neo-liberals control Europe then you are going to have to explain why European GINI scores are in the 20’s to low 30’s (US high 40’s, Latin America 45-65) and have generally beed declining over the past decade.

            Because if you can’t explain this it’s almost as if you are endorsing Neo-Liberalism since you seem to be giving them credit for the some of the most just and equitable societies on earth.

          2. DownSouth

            Kevin de Bruxelles,

            Your defense of current European leadership is based on the greater equality (see GINI coefficients) and greater social welfare that exist in Europe (in relationship to the US).

            But what does the future look like? I think Swedish Lex revealed the game plan when he stated “The European welfare state will survive, but on a lesser level.” (see his comment above)

            I wholeheartedly applaud Europe’s past accomplishments in achieving some modicum of social equality. It’s a wonderful thing, and it’s a bright shining beacon in comparison to the US. But what does this have to do with the future? And what does it have to do with:

            1) The fact European countries are now heavily indebted, some more in the private sector and some more in the public sector, depending on the country.

            2) The fact that the European community is so obviously ruled by the same bastards, with the same neoliberal and neo-colonial ideology, that rule America and Great Britain. (This is evidenced by the policy prescriptions issuing from Brussels, Frankfurt and Strasbourg, obvious to anybody who isn’t totally blind.)

            3) The fact that you can’t/don’t give a good reason why Europe’s peoples should be subjected to austerity.

            4) The fact that a balancing of goods/capital flows must be achieved if any sort of sustainability is to be achieved.

            5) The fact that dealing with sovereignty is a significant, and many times insurmountable, problem. The Europhiles seem to think these can just be wished away, as if the United States didn’t fight a Civil War to settle the very same sort of sovereignty issues that Europe is now grappling with.

            6) The fact that separating from the EU and maintaining their sovereignty may be the only way Club Med can prevent falling under the heel of the neoliberals that have their hands so firmly on the levers of power in Brussels, Frankfurt and Strasbourg.

            I very, very much wish Europe all the best in its pursuit of a European Union. It would be like a dream come true, taking world leadership to a new, never-before achieved level. But there is no hope for the European Union with the current leadership in Frankfurt, Brussels and Strasbourg.

            In order for a sustainable, functioning European Union to be achieved, the people of Europe will have to clean house in Frankfurt, Brussels and Strasbourg.

          3. Doug Terpstra

            AHA! First, we discover Cat woman is named Susan. And no Zorro’s mask is off; Clark’s glasses removed! I suspected as much when BP was so deftly eviscerated by both DS and GS; the signatures were so alike.

        2. /L

          In total EU over time don’t have had any problem with its current account position, if I recall correct it have had room for more imports. This despite the southern entities flavor for being growth engines for the export orientated mercantilists of the world and EU.

          The sound thing for the world to be in balance its trade with each other, that’s the favorable position for us the ordinary people of the world. In the age of currency gold standard there was some reason to act mercantilist but in today’s fiat currency world there isn’t any reason to accumulate piles of dead fiat currency. If an entity like the EU is in trade balance with the rest of the world the issue of unemployment, activating its productive resources in full should be an internal matter, simply a technical thing. But when the politicians of an entire continent got collective neo-liberal cerebral hemorrhage the continent is in trouble.

          Now there is some countries like oil producers that can’t help the self but to be in big current account surplus but that is exceptions.

          But as the economist Paul Davidson said:
          we should never let the score keeping per se retard the game as long as there are real resources available to engage in productive activities

          1. DownSouth


            But when the politicians of an entire continent got collective neo-liberal cerebral hemorrhage the continent is in trouble.


            Well said!

            From your English grammar errors I assume you’re European, but a European with his eyes wide open.

            I think many Europeans get blinded by their jingoism, boosterism and chauvinism, which can find expression either along European vs. Anglo-American lines or along national lines—-Germany vs. Greece for instance.

            I think these emotional responses just play into the hands of the neoliberals.

          2. Kevin de Bruxelles

            I’m confused. One of the main tenets of Neo-Liberalism is to tranfer high paying Western jobs to Chinese sweatshops and to arbitrage the resulting profits towards Wall Street. But when European take steps to reverse this you claim they are Neo-Liberals?

            Please be clear. Should Europe push to have as many high paying jobs as possible in Europe. Or should they acquiescence to the Neo-Liberal orthodoxy and conitinue to pit European workers against Chinese peasants?

          3. /L

            From your English grammar errors I assume you’re European

            Yes I have to admit that i’m “European”, usually there is really no Europeans over here, we are usually Swedes, French, Poles and so on.

            I’m sorry for my bad English, I’m just a country boy trying to understand a strange modern world. :-)

          4. /L

            Kevin de Bruxelles

            The core idea of the neo-liberal propaganda that trade and economic interaction is good is also so. The Chinese workers live in a dictatorship and are not allowed to have unions and so on the unions there is state controlled and more of the state controls the workers. This is a real problem in the globalised word, and EU is doing nothing about it. As I’ve heard locale textile manufacturing companies in e.g. Bangladesh could take home up to 50% profit margins. Already in that context there is plenty of room for improvement or of labors living standard without even touching the low price we pay, not that I’d against that they could get even better paid than that . They have to organize, be more “commie” orientated and start unions.

            In Sweden export relative GDP was about 20% in the 1950s and 1960s, considered to be the really good growth times with full employment. Today Sweden’s export is more than 50% relative GDP. Now there is 10% official unemployment, in the peak of the previous business cycle 2006 it was 6,1%. The last number is hailed by the social democratic leader as something good, guess 6,1 % is the social democratic NAIRU bar.

            Similar growth in export relative GDP have occurred in most of the EU nations, I can’t but wonder how much do we need to export to have full employment, enough recourses for public good, give our children a high quality education?

            Now the politicians of Europe want to cut pensions, health care, our children’s education to make arbitrary numbers to fit their liking, the people and the real economy have to be cut short to fit in to their Procrustes bed.

            Meanwhile in hard core free market capitalist America (you know the place where capitalists and Wall Street eat the infants of the labor force for breakfast, so I’ve heard):

            [USA] are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015.

            Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to “grit its teeth” and approve a fresh fiscal boost of $200bn to keep growth on track. “We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on”, he said.

            One can just hope that the politicians of Europe isn’t prone for heart attacks, too read such a “recklessness” from real capitalists would cause more than on heart to bolt.

          5. DownSouth

            Kevin de Bruxelles,

            Neoliberals are essentially debt junkies. They are in the business of creating debt slaves. It’s like the old company store, but on a national and international level.

            Your statement that “One of the main tenets of Neo-Liberalism is to tranfer high paying Western jobs to Chinese sweatshops and to arbitrage the resulting profits towards Wall Street,” doesn’t demonstrate a very good grasp of what is going on, or what neoliberalism is all about.

            In the territorial imperialism of old, it was pretty easy to separate the colonized from the colonizer. And there was some trickle down to the rank and file for those lucky enough to be born in an empire. As George Orwell wrote back in 1942:

            All left-wing parties in the highly industrialized countries are at bottom a sham, because they make it their business to fight against something which they do not really wish to destroy. They have internationalist aims, and at the same time they struggle to keep up a standard of life with which those aims are incompatible. We all live by robbing Asiatic coolies, and those of us who are “enlightened” all maintain that those coolies ought to be set free; but our standard of living, and hence our “enlightenment,” demands that the robbery shall continue.
            –George Orwell, “Rudyard Kipling,” Horizon, February 1942

            But with the new imperialism (or neoliberalism), it’s not so easy to tell the exploiter from the exploited. In looking for targets, the neoliberals are really quite fuzzy, and they’re not looking for any specific “subject race.” A fellow German will serve just as well as an Asiatic coolie for a victim, and an Asiatic banker will be invited into the bankers’ club just as quickly as an German. That, for the neoliberal, is the beauty of globalization. It’s bye-bye to all those old racial, ethnic, religious and nationalistic divisions.

            It should be pointed out that China, along with many Asian countries, specifically rejected neoliberalism. They followed a very different trajectory than what the victims of neoliberalism did. An example of how neoliberalism works can be found in Miguel Teubal’s description of the path Neoliberalism took in Argentina:

            In the early 1970s Argentina was one of the highest income per capita and most industrialized countries of Latin America. It also had one of the more advanced scientific-technologic infrastructures, for example, its electronics industry at the time was said to be on the par with that of South Korea. In this context a more export-led industrialization strategy was in the making, something that
            appeared to be similar to what was occurring with the NICs of Asia. It was thought that such a strategy could be much more employment-generating than the traditional strategies based on the export of primary goods – agriculture and
            livestock commodities and petroleum. Nevertheless, this strategy was soon set aside. Since the mid-1970s an important role was assigned to foreign indebtedness
            and to local and international financial interests, a strategy that increasingly diverged from the industrial exports strategy concocted in the early years of the decade.

            –Miguel Teubal, “Rise and Collapse of Neoliberalism in Argentina”

            To conclude, the issue you raise about “Chinese sweat shops” really isn’t germane to a discussion about neoliberalism. Those sweatshops existed for hundreds of years (such as in 16th-century Phillipines, with Indian equivalents to be found in Goa) before neoliberalism was even thought up.

            As to your question: “Should Europe push to have as many high paying jobs as possible in Europe?” the answer is of course is an unqualified “YES!”

            But if you’re looking to “Chinese sweat shops” as the explanation as to why high paying jobs are disappearing from Europe, I think you’re barking up the wrong tree.

          6. Kevin de Bruxelles


            But you have to ask yourself why is there now more unemployment? What has changed since the fifties and sixties? And one of the main answers is globalization – the exporting of well paid western jobs to Asian sweatshops. And I don’t want to go overboard here, the EU has unfortunately not renounced globalization. And the idea that Europe will pressure the Chinese politburo to liberalize is a fantasy – it would take a strong naval task force with a credible threat of imposing regime change for that to happen. But they are clearly positioning the euro to at least give the possibility of retaining more jobs.

            But without some dampening of the job leakage to Asia, American-style stimulus accomplishes little. What the US is talking about is basically extending unemployment benefits. And who can be against that? In America’s deeply unjust system my opinions change 180 degrees. But in European terms these dole payments would be standard. The main impetus for this stimulus package is not kindness but instead to ensure that some Americans on the brink will to continue paying their credit card bills to their banksta overlords. The stuff they are talking about will have no impact on unemployment – which is pushing 17% (U6).

            On pensions the numbers you have to look at are percentage of GDP spending. With people living longer, with the demographic changes it is normal that eligibility would be delayed. As retirees make up more and more of the population I suppose their share of a percentage of GDP will have to grow but increasing retirement ages does NOT necessarily equate to a reduction of the welfare state. We have to remember that any retiree claims on the welfare state have to be balanced by the needs of children and others. Again the key is the percentage of GDP. There are limits to how big the welfare state pie can be and discussions about how it is split. But in order for the welfare state to decline the percentage of spending of GDP has to decline. And I am not aware of any reductions to the universal medical benefits, or any changes to the education systems in Europe. Please let me know if you have any more details about this.

            I have been reading for 20 years in the New York Times that the Swedish welfare state was on the brink and about to collapse. Correct me if I am wrong but this has not quite happened yet, nor is it likely any time soon. This is just more typical Anglo-Saxon propaganda meant to quell the thirst of American for social justice.

          7. Kevin de Bruxelles


            I agree with Orwell and personally I avoid that international leftist trap by being much more from the old school workingman’s kind of left. The kind that would still be against illegal immigration and other soft little fantasies. The kind whose primary concern would be the standard of living of working class people.

            But if you are really saying that Wal Mart (or Carrefour in Europe) stores full of Chinese junk is not part of the Neo-Liberal scam then you really are fighting the wrong war. Governments falling into debt is as old as history itself. But it is curious that you label European efforts to diminish their debt loads as Neo-Liberal.

            The difference between South Korea and Argentina was all about the Cold War. Follwoing the model used with Japan, Hong Kong and Taiwan, the US allowed preferential access for South Korea to US markets in order to showcase the wonders of capitalism for the global stage. People forget that for many years after the Korean War it was North Korea that was far more prosperous than South Korea. Argentina, just like most of Latin America, was for many years just a US client state ruled by US-backed dictators, so there was no reason to showcase anything economically in that region except for an iron fist to anyone who got too cozy with the Soviets.

          8. DownSouth

            Kevin de Bruxelles,

            But if you are really saying that Wal Mart (or Carrefour in Europe) stores full of Chinese junk is not part of the Neo-Liberal scam then you really are fighting the wrong war.

            There’s nothing new about Asian goods in Europe. They’ve been around for hundreds of years.

            The rise of the powerful city states of Venice and Genoa came about as a result of trade with Asia.

            When the route from Europe to the Indian Ocean via the Cape of Good Hope was pioneered by Portuguese Vasco Da Gama in 1498, resulting in new maritime routes for trade, it marked the end of the power and prominence of the Italian city states.

            Portugal, with its trade monopoly with Asia guaranteed by a papal bull, then rose to become Europe’s richest and most powerful country.

            Spain, envious of Portugal’s great wealth, set out to discover another trade route to India, and “discovered” the Americas instead. Sailing from Acapulco to the Philippines was not difficult, but from the Philippines back to Acapulco was, and the tornaviaje wasn’t discovered until 1565. Fray Andres de Urdaneta sailed north from the Philippines to Japan and discovered the kuro-shio, a warm, swift, black current that flowed towards the east and carried the galleon San Pedro to a point off the coast of northern California. From here Urdaneta sailed south to Acapulco, and Spain’s dream of an Asian trade route was realized.

            Portugal and Spain could not defend their trade routes, however, which fell prey first to the Dutch, who in turn fell prey to the English. The rise and fall of European Empires is closely related to who controlled the trade routes to Asia.

            Spices, textiles, ceramics, lacquer wares and ivory carvings filled the shops and stores of Europe and the Americas since the 16th century.

            Like I said, there’s nothing new under the sun about European or American trade with Asia. If you’re looking here for the reason European workers are getting the shaft, you’re looking in the wrong place.

          9. /L

            EU has squeezed Latvia to close down hospitals (they have now significantly less hospitals than they did have 20 years ago), make cuts in education and so on pensions are cuts and so on. And now there will be cut backs in Greece and so on.

            The actual size of GDP is one thing the potential GDP that the real resources could accommodate another.

            High unemployment is the largest threat to the welfare state, when you not optimizing the use of real recourses. Pensioners and others that live of those in the active generations depend on that the resources are used at optimum. The austerity policys the politicians now want to implement is no good for future pensioners and so on. It seems that they don’t understand that the huge number of unemployed youth is disastrous, it’s of these youths production pensioners shall live.

            Export is basically about paying for imports, there is no other imperative to export. And of course it’s better the easier you can achieve it, the higher up in the value chain the better, the more knowledge the goods and services entail.

            In a self-interested view there is nothing bad about Chinese producing a lot of stuff cheap, the concern and problem is if that Chinese labor is exploited, abused and so on that they seems to be in many cases. I have no0 problem with other people advance their industries and can produce a higher standard for them self.

            Our concern should be if we can pay for the imports we want. Stimulus of the economy will usually create demand also for imports and if the trade balance will be negative we have to do something about it, in my opinion it’s better to make the currency take a hit than impose austerity and unnecessary unemployment. Public sector production/consumtion is usually where the lowest import share is.

            As long as we have our external affairs in balance it’s a matter of how we organize our societies if we allow that there is big unemployment or if people shall be paid decent wages for the work they do. The Chinese have nothing to do with that and is not their business and there is no natural laws the determine it.

            And yes USA has a favorable position in that they can operate on a global scale entirely in the currency they have monopoly to create. But even if also in USA the middle/working class have seen a diminishing share of productivity growth US economic politics is more expansionary and create more jobs and growth than Europe. In this aspect America seems to have a higher degree of democracy than Europe. Despite all one can blame them for in plenty other aspects I would be seriously concerned if export zombies like Europe/Germany, Japan or China would become the superpowers of the world instead of US of A. Yes the “empire” can be mean in many aspects but there is a great deal of transparency and that is good. And it have also a lot of good sides.

            The American economist, Professor Edward Luttwak, has said that most Americans find the actions of the European Central Bank incomprehensible. “The European economy is slowing down,” he has said in an interview published in Italy, “there are ugly signs for employment in various countries, therefore the central bankers ought to reduce interest rates to relaunch growth. Instead, the only thing which interests these high priests of finance is inflation. In America, if any government presided over 7% unemployment, it would lose power. The Federal Reserve is independent like the ECB but if the Fed did what the ECB does, the White House would move in and shut it down.”
            [Interview with Gian Battista Bozzo, Il Giornale, 31st March 2001, p. 18] (quote from European Journal)

            At the time of this crisis it’s said that American potentates made proposals to Europe to conduct some expansionary economic policies, America was a bit exhausted after kept the record long economic boom times of the 80s going. Europe did of course don’t engage in such a irresponsible behavior, miss out on a good opportunity for scourge and flagellation, no way.

    4. Eric

      ”Spain won’t get out of the crisis supplying the same goods and services it does today. If devaluation were possible, we could sell the same things, just cheaper”

      it’s not that simple in my opinion. Devaluation does not guarantee lower costs (import becomes more expensive), cheaper products do not guarantee more sales (price is not the only marketing variable) and there are many more variables that play a role. Devaluation seems to be an obsession of US and UK economists, but Germany and The Netherlands are export countries who believe in strong currencies, and don’t even want to think about devaluation.
      Devaluation is just the low effort solution, and it doesn’t even guarantee results.

  4. Kevin de Bruxelles

    Yves here. We are not suggesting that there are pretty or painless ways out. But the course of action underway makes shielding Eurobanks from losses one of its top priorities

    I completely agree that fairness is essential. But while I’m no expert on banking regulation, in Rupert Murdoch’s Wall Street Journal, hardly a bastion for euro-symps, we get a different take:

    Most observers believe the Bank of Spain’s recent moves will spur more consolidation as ailing cajas scramble to avoid being taken over by the central bank—with the accompanying threat of legal action against for their managers—and to guarantee their solvency after being forced to recognize losses more quickly.

    The central bank has proposed that Spanish lenders set aside provisions for the full value of each bad loan one year after it has soured. Banks currently provision gradually over a period between two and six years. The Bank of Spain also raised provisioning requirements for real-estate assets that lenders hold on their balance sheets.

    For the government, the clean-up of the cajas is one of its three biggest problems, along with a double-digit budget deficit and a 20% unemployment rate.

    In that article (link below) it seems the Spanish government is being pretty tough on the banks but of course this could be mistaken since these things are really quite complicated. It is not easy for regular people like me to see the difference between Kabuki and real reform (which is why we rely on experts like Yves). But further down though we do get this revealing sentence:

    Fitch said it expects the “inflexibility” of labor markets and restructuring of the nation’s banking sector will hinder efforts to stabilize Spain’s economy.

    In other words a more conflict-oriented reading of this would be that the Wall Street/City banksta-fellow travellers Fitch are making the case that among other reasons, the Spanish government being tough on their banks was one of the main reasons why they were downgraded. It seems to me that this downgrade could be read as an Anglo-Saxon warning shot across the eurozone governments’ collective bows to not go too far in setting bad examples by aggressively reigning their bankstaz in.

    On austerity it would be a political disaster for the Germans to immediately start reinflating without critical imbalances being resolved first, let alone before the necessary political changes within the eurozone financial structure have taken place. Simply put consumption has to be replaced by production in some economies (and vice versa eventually in others). But to see what inflating first does, just look at import-dependant Britain. There the inflation route has been chosen, the Pound devalued by 20% and people there are now faced with 4-5% inflation along with stagnate wages. Its not called austerity but it is the same result, the standard of living is sinking fast in Britain. The eurozone is so large and self-sufficient enough that the recent euro decline often just makes local products more competitive. While the ECB still is holding the inflation card in reserve, the Bank of England has pretty much shot its load. Any more easing will result in even more inflation and higher gilt rates and an even lower standard of living. And at the same time Britain continues to do everything it can to combat any European efforts to reign banks in.

    The hard reality behind all this is that, eventually, consumption has to equal production. Obviously on a global scale this has to be is true. But for most of the history of the world, the people within any given society who actually produced were, more often than not, not the people who were allowed to actually consume the fruits of their efforts.

    The example par excellence is 18th Spain. From Antony Beevor’s The Spanish Civil War:

    The backwardness of Spanish commercial activity during the seventeenth and eighteenth centuries was mainly due to the way that Spanish Catholicism had maintained an anti-capitalist line by clinging to medieval teaching on usury. The code of the hidalgo (Spanish nobleman) forced him to despise money in general and the earning of it in particular. The census of 1788 showed that almost 50 per cent of the adult male population was not involved in any form of productive work. The army, the Church and, above all, the vast nobility were a dead weight on the rest of the population. It was perhaps this statistic which provoked the well-known saying that “one half of Spain eats but does not work, while the other half works but does not eat”.

    Many different institutions arose the defend these production / consumption imbalances: slavery, feudalism, colonialism, racism, some forms of capitalism, some forms of Christianity, and now globalization. And one way to see the history of the past two-to-three hundred years, with the rise of liberalism, socialism and even to a lesser extent communism, is as a correction (but certainly not resolution) of imbalances between the actual producers and those who benefit from this production. And one of the leading lights in this charge was the United States, were due to an abundance of natural resources and a hard work ethic–to a large extent–the common man (if they were white) was allowed to benefit from the fruits of his labour. But that all changed 30 years or so ago – not just on the national scale but more so internationally. Now, just like 200 + years ago in Spain, a portion of the world works and another portion consumes, and the Anglo-Saxon world has been in the forefront of the push to be those who consume and not produce. And recently Wall Street bankstaz have pushed this phenomenon even further and have really made it an artform. Nice work if you can get it I suppose! And why not, if anyone was given the choice between producing and consuming it’s pretty obvious which path they would travel.

    Because what else is money except a representative of some combination of valuable resources and productive activity? At the simplest level, when I exchange money for a product, I trade my previous productivity or resources for someone else’s. If I go into debt I am trading my future productivity for someone’s past productivity. So when the US gives dollars to China in exchange for a boatload of finished products, they are issuing, in theory at least, promises of tomorrow’s American productivity in exchange for yesterday’s Chinese productivity. The nice thing about the dollar is that it is pretty much excepted everywhere. So the music chairs-style swindle can continue for a while longer, the Chinese can pass these dollars on to others in order to buy raw materials elsewhere. But at the end of the day, when the music stops, can America really keep the promise of future production / raw materials implicit in each dollar it issues?

    This is the framework that European moves must be seen in. Europe has to be balanced within this global system and the individual countries within Europe have to strive towards balance as well and / or just mechanisms must be implemented to resolve temporary imbalances. While a lot of arguments could be made that the United States is the indispensable power etc, no one is going to place Greece or Spain in the same category. It is not sustainable think Chinese peasants or German workers are going to continue producing forever so that Greece can just sit back and consume. And these are potentially rich and productive countries who just took a wrong turn down the consumption path several years ago. This must and can be balanced out.

    So in the end the austerity programs are a first step. And it is certain that austerity will never solve all the problems alone. But reinflating without even attempting to correct underlying imbalances is hardly going to be effective either. As Swedish Lex says, there will be a difficult period of readjustment. And I think as this process intensifies, as the pressure rises, just when it looks like disaster is over the horizon, a shot reinflation will be applied.

    1. Lucio

      Fitch said it expects the “inflexibility” of labor markets and restructuring of the nation’s banking sector will hinder efforts to stabilize Spain’s economy.

      WHAT? In Spain there is the biggest percentage of unsecured jobs (temporary, especially) in the whole Western world, last time i read it it stood at 34%. How can they say ‘inflexibility’? Another bunch of financial gangster talking its book…

      1. Francois

        “How can they say ‘inflexibility’?”

        It’s a bogeyman they use to distract the attention from the fact that the rating agencies bend over backward, forward and sideways for the banks.

        Alas, they’re not alone in this regard; just look at all our newly minted deficit hawks in Congress. They’re about to force a repeat of 1937 with a colossally stupid deficit reduction bullshit, which, of course, will never, ever touch one penny of the defense budget.

        The bastards never learn, don’t they?

    2. Diego Méndez


      I am much of an economic determinist here. If you have free money, you use it. It’s not a question of culture. Japan did it in the 80s. Germany did it in the 90s. Spain did it in the 00s.

      Free money leads to asset inflation and displaces production outwards. That’s what happened to Spain in the 17th century. Spain was the largest wool producer in the Middle Ages, and had flourishing ports, artisans and merchants. Nobility was involved in the economy.

      Was Spain any more Catholic 300 years later? Of course not. Did Italy’s Catholicism forbid it from becoming the most advanced nation, economically and culturally, during Renaissance? Of course not.

      What happened to Southern Europe, then? Inflation. Free money (gold) from the Americas. Prices shot up in all of Europe, but inflation in European cities was correlated to distance from Seville, where the gold from the Americas was brought.

      Inflation was lower further away from Seville, in Northern Europe, whose manufacturing industries grew from exports to Spain. Meanwhile, all traditional Spanish production (wool, textiles, etc.) went down the drain. The same could be said about Italy, to some extent. Wrong economic policies contributed to the disaster, but it was mainly a monetary event (much as today).

      Money’s always being both a blessing and a curse.

      1. Vinny

        “Money’s always being both a blessing and a curse.”

        Oh yeah! Especially when raising kids. :)


      2. DownSouth

        Diego Méndez,

        I certainly disagree with the statement that “The backwardness of Spanish commercial activity during the seventeenth and eighteenth centuries was mainly due to the way that Spanish Catholicism had maintained an anti-capitalist line by clinging to medieval teaching on usury.”

        But I equally disagree with your statement that “Wrong economic policies contributed to the disaster, but it was mainly a monetary event (much as today).”

        What we have here is jumping from one highly simplistic, reductionist theory to another, equally simplistic and reductionist theory. When I see things like this, I’m always reminded of something Leo Tolstoy wrote in War and Peace:

        The human mind cannot grasp the causes of phenomenon in the aggregate. But the need to find these causes is inherent in man’s soul. And the human intellect, without investigating the multiplicity and complexity of the conditions of phenomena, any one of which taken separately may seem to be the cause, snatches at the first, the most intelligible approximation to a cause, and says: “This is the cause!”

        For a primer on the many causes that contributed to Spain’s economic meltdown, one could probably not do better than J.H. Elliot’s Imperial Spain: 1469-1716.

        1. Diego Méndez


          I agree both with you and Tolstoi.

          The idea that hunger, greed, love, fear and sex are somehow dependent on culture goes against my deepest beliefs. These primary forces act on every human group and determine culture, society and economy.

          For centuries, pride had it that Europeans (or Whites, in the US) were racially superior to any other human group. This became politically incorrect, so they went for the “cultural” explanation.

          And we had to wait til Jared Diamond to see the obvious: Europeans were from Europe. The difference from other groups is not racial or cultural, only geographic.

          The same goes for the Northern / Southern European divide. As of today, we have people right here, in an enlightened forum, explaining cultural differences as a determining factor. But culture is only the expression of a deeper truth, a deeper structure, which is mainly socio-economic.

          Geographic economy is to the nations and their development what mathematics is to the natural world: a deeper truth than reality itself.

    3. aet

      Where do you find this “inflation”?
      With two wars on the go, and large public sector deficits, and a price for oil about 5 or six times what it was in 2000,we get this:

      And a year ago, no difference:

      So why all the “inflation-busting” austerity?
      What makes people think that causing inflation is “easy”?
      Recent evidence does not seem to support that view.
      OH well time to cut payrolls salaries pensions and benefits, anyway.
      Maybe some more wars, and a further quadrupling of the oil price, would cause some some inflation?

      1. Kevin de Bruxelles

        The inflation is in the UK not the US.

        nflation hits 5.3pc – no savings account pays any return

        Britain’s millions of savers will find the value of their investments wiped out by the increase in the cost of living, financial experts said.

        Not a single one of the 1,660 savings accounts on the market being offered by banks or building societies, including the most generous Individual Savings Accounts, offers a real rate of return of more than 5.3 per cent. This is the first time that no account has been able to match the rising cost of living, according to the personal finance website Moneynet.

        The Office for National Statistics said that inflation, as measured by the Retail Prices Index jumped from 4.4 per cent in March to 5.3 per cent in April. The RPI is widely accepted as the truest measure of the cost of living because it includes housing costs.

        1. Lucio

          Pretty obvious, since the pound is not a reserve currency AND they are busy printing money; therefore the external value of the pound is falling and the internal prices are keeping pace with the external value of the goods. I’m really expecting the day when A E-P will not sport anymore that smile on his face…

    4. i on the ball patriot

      Consumption and production, and Mr. Political Will …

      The central banks control the consumption and production buttons on the big board.

      The big board is a product of five hundred years of aggregate generational corruption that has paid its media minions to champion the slavery of usury and its obfuscatory attendant voodoo economics, an effort that has been well salted with the oppression of those who would resist. The oppression of ‘Mr. Political Will’. Mr. Political Will who wants only fairness and a balance between production and consumption. Mr. Political Will, who only wants peace and harmony in the world. Mr. Political Will, who loves to sing and dance, drink a little wine and make love in the moonlight …

      And where is Mr. Political Will now?

      Shot dead in international waters by Scamerican surrogate thug rat Israel …


      “The reason for the slaughter of the Free Gaza activists posted by lenin

      The Israeli government and media has been vilifying the Free Gaza movement in a rabid build-up for weeks, but who would have anticipated this bloody culmination? Who would have expected this act of high seas piracy? Israeli claims that they were fired at, or even attacked with “knives” and “other cold weapons” when they illegally boarded the flotilla, before going on to stalk the sleeping and the innocent can surely be dismissed as vulgar propaganda. From the people who gave us the fastest re-definition of the term ‘civilian’ of any belligerent state in recent history, such talk is emetic. The idea that there was a “fight”, any kind of meaningful combat, between unarmed peace activists and trained killers is just absurd. But let’s note a few things. For a start, it is Israel’s official contention that there is no humanitarian crisis in Gaza, that their murderous blockade has no severe consequences for the people of Gaza, even at the same time as their official spokespersons speak of Gaza explicitly in the language of genocide. This after the Goldstone report and a mountain of evidence compiled by relief agencies and NGOs documenting the effects of Israel’s blockade. It is, of course, absurd and despicable, but it should remind us what kind of state we’re dealing with, what kind of logical somersaults it is capable of performing while maintaing perfect equanimity.”

      More here …

      No balls! No brains! No freedom!

      Deception is the strongest political force on the planet.

      1. Skippy

        For a start, it is Israel’s official contention that there is no humanitarian crisis in Gaza…


        Well don’t that say it all, there are no humans in Gaza, in Israel’s eyes and minds.

        Skippy…Israel, the deep-water of the middle east, and as my mother said…but, they have a covenant with god!!!

        PS. global cops should stay out of family domestics, they usually *both* turn on you.

      2. attempter

        We know that while the proximate motivation here is Israel’s will to enforce its regional totalitarianism, that’s still just one regional iteration of neoliberalism (just as Israel’s version of the “war on terror” is one iteration of the Global War on Terror, which is really an aggressive tool of neoliberalism).

        But the real terrorists, in deed and propaganda, are the neoliberal thugs themselves.

        So the real target audience is activists and those contemplating activism all over the West. The real targets of this terrorist propaganda are the Greek protestors, and anybody else who might get uppity about being crucified on “austerity”.

        The crime, as where Obama claims the right to put a hit out on anybody on earth he chooses, is simply to challenge corporate domination. To engage in assertive nonviolent activism against the globalist kleptocracy is a capital crime. This was a mass execution.

        So now we’ve seen overt fascist terrorism before the eyes of the world.

      3. Doug Terpstra

        The irony of a concentration camp run by Zionists is almost too much. Only the horror of anti-Semitism, their final ace, can protect them now.

    5. DownSouth

      Kevin de Bruxelles,

      As the MMT guys and gals have said repeatedly, austerity can result in a downward spiral of production.

      The production can fall faster than the debts are paid off. This means an increase in the Debt/GDP ratio.

      I don’t buy into all the hype that austerity is the elixir the neoliberals make it out to be.

      1. Kevin de Bruxelles

        Yes but the MMT guys and gals refuse to consider trade policy and they ignore inflation. For a real-time analysis of the MMT-way just look at Britain. Here are some other key points from the Telegraph article I linked to below:

        The rise in the cost of living dwarfs the average increase in wages, which on average are just 1.9 per cent higher than a year ago, meaning most workers are suffering from a significant fall in their standard of living.

        Though the governor of the Bank of England, Mervyn King, said that inflation would “wane over time” he admitted the timing of any fall was “highly uncertain”.

        Nice huh. All workers are taking more than 3% haircuts. And this is just the beginning. But that’s all cool with the MMT guys since Britain still has the option to print money. But what about retirees and those who have managed to save?

        The group that are hit the hardest by high inflation are pensioners, living on a fixed income. David Black at Defaqto, a research house that specialises in personal finance, said: “Savers are faring pretty badly, especially those older people who rely exclusively on their savings. There are lots of accounts paying just 0.1 per cent.”
        According to the Bank of England the average savings account pays out a mere 0.18 per cent, while the average cash ISA is paying 0.46 per cent.

        Let’s see here, the bankstaz are scoring more than a 5% real interest rate rape on these retirees. And again, this is just the beginning I bet with this performance you will be finding more and more bankstaz endorsing MMT.

        DownSouth, you are obviously an intelligent guy. What seems to be happening to you reminds me of a story told by William Shirer, the author of The Rise and Fall of the Third Reich. He was a very bright journalist working in Nazi Germany during WW2. And as a result of living there he was subject to a constant bombardment of anti-Jewish propaganda. He tells a story in his book about how at one point he was forced to leave Germany due to the fact that he realized that, despite the fact he was an intelligent and fair person, the never-ending propaganda was starting to overwhelm his thinking.

        I saw it happen to my own mother. In the run-up to the Iraq War I would talk to her but she was highly sceptical of it all. But then, as the wall of noise intensified, the weekend before the war started she almost hysterically screamed about how we just had to do something about that evil Saddam.

        The moral is, don’t get sucked in by all the propaganda.

        1. Keith Newman

          Kevin, I’m not too sure what you’re on about re UK inflation and interest rates. Regular deposit accounts always have very low interest rates. Here are the figures according to the Bank of England:
          Consumer Price Index annual increase for UK, March 2010:+3.4%. Major factors included increase in VAT (contributing 0.4%), increase in oil price, decrease in value of UK pound.
          Yield on 10 year gilt on May 31, 2010: approx 3.6%. The yield has dropped 0.5% in the last 2 weeks due to the crisis in Europe.

        2. DownSouth

          Kevin de Bruxelles,

          Why all the focus on the bad things transpiring in Great Britain? I thought we were talking about Europe here.

          When your first rattle out of the box is an appeal to lowest-common-denominator thinking, that’s a surefire indication that you’re in deep denial. You’re trying to defend Europe’s scumbag neoliberals by pointing out that Great Britain’s are even worse. Way to go, man! That’s like giving us a choice between death by firing squad or death by hanging.

          I haven’t heard anybody on this thread defend Great Britain’s economic policy. Everybody knows the neoliberals own the place, and that is the reason the rank and file of Great Britain are biting the big one. The exact same thing is happening in the United States.

          What has the existence of inflation in Great Britain got to do with whether or not inflation exists in Europe?

          Are any European countries experiencing inflation?

          Exactly what edicts are floating down from the lofty heights of power in Frankfurt, Brussels and Strasbourg that are going to help ease the plight of the working stiff in Germany or Greece or France or Spain?

          If you want to defend Europe’s leadership, that’s how you have to do it, by pointing out the specific things it is doing, and how that behooves the interest of the working man. This potty mouthing the US or Great Britain ain’t gonna cut the mustard, at least with anybody who has half a brain.

          1. i on the ball patriot

            Its not neo-liberalism, that is too kind and it is a deflective description.

            It deflects from what it really is …

            Its neo-gangsterism, controlled by the wealthy ruling elite, their global corporations and their central banks. It could also be called neo-population control as it involves creating policies that reduce mass demand by eliminating the masses … or neo-perpetual conflict as it involves policies that create intentional divisiveness … or neo-bubble blowing for its debt trapping policies … or neo-global dividealization into ruler and ruled … or neo-intimidation for its policies of intimidating legitimate dissent … or … etc.,

            Deception is the strongest political force on the planet.

        3. greg b


          Your grasp of MMT is pathetic. You have made some comments about MMT the last few weeks that are evidence you have never read nor understood what their points are.

          You’ve written a lot of intelligent comments but the ones you write about MMT are pure drivel.

  5. blueridge

    Forgive a simple-minded question, but how is a devaluation of the euro anything more than a temporary solution? Will the US and all the asian economies with dollar pegs stand idly by and watch their currencies appreciate and thereby lose “competitiveness”?

    1. Lucio

      Hmmm… should things go in a textbook way, I’d look at the current accounts imbalance of (US+China) vs. the rest of the world to foresee the dollar’s fate…

  6. Siggy

    Hair shirts take time to manufacture and they’re no fun to wear except, perhaps, when its bloody cold.

    Why not repudiate any and all debt that is held by entities other than pension and retirement funds.

    Banks go insolvent, nationalise them. Shareholders are wiped out, unsecured creditors take a serious haircut and secured creditors take a nominal haircut. Then no one is willing to lend, reality is they haven’t got the wherewithall.

    World economy comes to a stall and then we all crash and burn. Crash now and we will be doing it from a lower height. Do it later and we will fall from a greater height and few will survive.

    Along the way down, someone may consider fixing the money supply. Our global fiat currency experiment has failed quite grandly, yet we refuse to admit it and so we have these untenable problems.

  7. Ancaeus

    There is one other way out of this bind for Spain, Greece, etc.: barriers to trade. Barriers to imports, in particular, will increase the attractiveness of native production. A nation that produces most of what it consumes will have a healthy economy. Such barriers could be erected gradually in order to give the native producers a chance to ramp up production.

    “Solutions” based on trade are a chimera. If they work, then they are beggar-thy-neighbor. And, as has been pointed out repeatedly, the attempt to increase exports will be very painful. In a certain sense, Germany has been successful in its exports at the expense of Spain, Greece, etc. Does anyone think that Germany is in a good position right now?

  8. Tortoise

    Economies adjust to externally imposed constraints. The Cub Med countries got intoxicated in low-cost credit in 2000-2008. This was a change from previous periods when securing a loan at any interest rate was considered equivalent to receiving a gift. Now, conditions have changed again and these countries are adjusting. Of course, adjustments take time and can be painful. So, in any discussion, we should distinguish between the short term and the long term. In the short term pain but in the long term strength.
    As for the euro devaluation, it certainly helps the economy of every country in the euro zone. It does not matter whether a country is an exporter or tourist destination or whatever. Let us see two real examples. For example, beer is produced in Greece and also in neighboring countries. Cost differentials at destination Thessaloniki are razor thin. A 20% devaluation of the euro makes for a huge difference and secures the viability of the Greek facility. Or an Italian family is considering whether to vacation in Italy or abroad. The devaluation of the euro made the decision to stay in Italy easier.
    Finally, when a government reduces its deficit, the short term effect is a reduction in GDP (which is not totally bad because it happens with a reduction in the cost of living) but in the longer term activity increases in the private sector and the GDP recovers with net improvement in the standard of living because more is produced and prices are lower.

  9. greg b

    Theres a very simple way to look at austerity measures. One never grows by spending less. You must spend money to make money

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