By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at http://neweconomicperspectives.org/2014/07/merkels-pyrrhic-victory-cameron.html” rel=”nofollow”>New Economic Perspectives
The finance ministers of Italy and Serbia have just publicly thrown their heads of state and their nations under the bus. In a testament to the crippling effect of the belief that “there is no alternative” (TINA) to austerity, these finance ministers have insisted on bleeding economies that are in desperate need of fiscal stimulus. Their pursuit of economic malpractice is so determined that they eagerly sought out opportunities to embarrass the democratically elected head of state in Serbia when he dared to support competent economic policies.
Serbia
In response to severe unemployment caused by inadequate demand, Serbia’s finance minister demanded that Serbia drastically cut demand further through self-destructive austerity.
Serbian Finance Minister Lazar Krstic stepped down after he and Premier Aleksandar Vucic failed to agree on the extent of cuts in wages, pensions and public-sector jobs.
“I have asked the prime minister to accept a difficult program, unthinkable in our circumstances,” Krstic said at a joint news conference with Vucic. “Those measures would include a minimum 20 percent cut in pensions, 15 percent cut in public wages, 160,000 layoffs in the public sector over two years and a 30 percent increase in electricity prices after floods.”
Yes, Krstic’s proposal constituted “unthinkable” economic malpractice given Serbia’s condition.
Serbia is facing a third recession in five years after the worst rainfall in more than a century wrecked the Balkan nation’s power plants and soaked farms in May. The central bank left its benchmark interest rate unchanged at 8.5 percent on July 10, even as inflation fell to a 50-year low of 1.3 percent.
Serbia has an unemployment rate of around 24 percent with youth joblessness at 50 percent.
Serbia has Great Depression levels of unemployment, an inflation late that is far too low, and is suffering from a massive natural disaster. It should be spending far more money in the public sector. Krstic’s proposal is a prescription for economic and social disaster. What kind of background would lead an official to urge a nation to commit suicide? “Krstic [is] a former McKinsey & Co. associate principal….” Yes, the consultants that brought us Enron are now a global wrecking crew.
And how did Krstic explain his refusal to back the far less destructive policies of the elected government he choose to join?
Discussing the differences that prompted his resignation, Krstic said, “The prime minister has a soft heart and that’s why he’s got such popular support,” referring to Vucic’s landslide victory four months ago.
Krstic’s alibi for his resignation is that unlike the leader of his nation elected four months ago in a “landslide” he has no heart. Krstic doesn’t simply lack a heart. He’s even worse in the brains department. His ignorance of economics and his lack of empathy for the people of Serbia led him to demand a policy of economic malpractice. When he lost the policy debate with others who were (1) the legitimate leaders of Serbia, (2) substantively correct about how self-destructive his policies would have been, and (3) because they had appropriate empathy for the people of Serbia refused to inflict his preferred draconian austerity Krstic quit in a huff and tried to discredit Vucic as a wimp.
Italy
Italy too is suffering Great Depression levels of unemployment. Its attempts to recover have been hamstrung by German demands for austerity. Prime Minister Renzi (who was not elected by the public to that position) is attempting to avoid these demands to bleed the economy.
European Union finance ministers clashed over how to interpret the bloc’s budget rules amid criticism of Italian Prime Minister Matteo Renzi’s proposal to exempt spending on digital infrastructure.
Renzi is trying to game an EU budget system that exemplifies economic malpractice. The simultaneously hilarious and nasty response of the EU proposal was:
Even Italian Finance Minister Pier Carlo Padoan backed away from the [Renzi] plan, speaking to reporters at the start of Italy’s six months holding the EU presidency. Echoing [European Commission Vice President Siim] Kallas, Padoan said “spending is spending, period” and talks are just beginning on how the EU can balance its need to boost growth measures against its fiscal safeguards.
I’ve explained why this is hilarious and it is obvious that Padoan was deliberately throwing his boss, Prime Minister Renzi, under the bus. What is less obvious, but hilarious, is that the EU was simultaneously encouraging member nations to redefine GDP – because it turns out that “spending is [not] spending, period” in the EU. The redefinition is designed to substantially increase reported GDP by including “spending” on EU criminal enterprises as “production.” The sole purpose of this change is to make it appear that Germany’s demands for austerity and reduced workers’ wages have spurred impressive growth. It is a cynical propaganda effort.
As of September, all European Union countries will be required to take fuller accounting of trade in sex, drugs and other underground businesses as part of an overhaul of economic measurements by Eurostat, the European statistics agency.
The EU is following the same strategy made infamous by – Italy – under prior leaders.
Because the math can be fuzzy, economists have tended to be wary of such measurements. Italy holds a place in the annals of creative accounting for “il sorpasso,” or “the overtake,” of 1987, when the government revalued G.D.P. to include the black-market economy. So large were the figures, which included estimates of tax evasion and illegal workers, that almost overnight Italy leapfrogged over Britain to become the world’s fifth-largest economy.
Now, as Italy struggles to pull out of a recession and labors under one of the developed world’s biggest debt burdens, it will start counting smuggled alcohol and tobacco. Mr. Oneto declined to make a forecast, but he noted that Italy’s overall black market already accounted for 15 percent of the country’s €1.5 trillion economy.
The EU is thinking of making a defensible change to the calculation of “spending” – and that change supports Renzi’s proposal. Renzi proposed treating vital productive investments as investments rather than current expenditures. The change is driven by the same EU political motive, but unlike counting criminal sales as “production” it makes substantive sense.
“The biggest boost to G.D.P. figures will come from something with no titillation value: a Eurostat revision allowing governments to count research and development as investments rather than costs. Finland and Sweden, hotbeds of high-tech capitalism, could increase the size of their economies by as much as 5 percent, according to Eurostat.”
It turns out that “spending” is not “spending, period” in the EU. The EU is happy to adopt the disgraceful practices of Italy’s past to inflate GDP by counting “spending” on criminal enterprises as “production,” as part of a propaganda campaign but enraged that Renzi would propose a change that would actually improve Italy’s economy and help the people of Italy.
Discrediting Reform Regimes
Serbia and Italy are examples of how Germany’s demand for draconian austerity and wage reduction acts to destroy the credibility of (mild) reformers such as Vucic and Renzi. Germany forces the (nominal) parties of the “left” to do the dirty work of imposing the economic malpractice policies that forces those parties to betray the 99 percent in general and workers in particular. This leads to severe, long-run economic distress and dramatic increases in inequality that discredit the parties of the left and causes them to be crushed at the polls. Quislings like Krstic and Padoan accelerate this process. This has occurred in Spain, the UK, France, and Greece. The right is delighted in this outcome, but by forcing the centrist parties of the (mild) left to commit political suicide it is setting the stage for an (eventual) rise of far more radical parties. Like their Latin American counterparts who were created by the malpractice of the Washington consensus, the more radical parties of the left that are arising in the EU are devoted to opposing the Berlin consensus.
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Serbia is not a member of the EU. Possibly in 2020 it will be however.
Maybe instead of the IMF, Serbia will go looking for help from the new world bank set up by the BRICS
http://finance.yahoo.com/news/emerging-nations-plan-own-world-191407045.html
Wouldn’t it be great if they just walked away and did a Balkan Switzerland? They inherited the best of the Yugoslav infrastructure and have excellent relations with Russia, so why not?
“publicly thrown their heads of state …”: you mean heads of government, presumably.
Unemployment created by lack of demand. The lack of employment could be a case of over population. Not much one can do about that except limit immigration in certain countries. But you’re still going to have too many people, just a question of where they all are. Plus you can’t have a human cull, like you can for, say, Canadian geese. Well you can – war – but it’s never going to be called a cull.
Lack of demand is due to people not having enough funds to purchase more things. This is due to the 1% hoarding most of the wealth. Thus economic stimulus does not fix the problem, it just kicks the can down the road. This Keynesian solution only leads to unintended consequences, such as more money in the system leading to more inflation, or creating more debt which just means the debt bubble will be larger and do more damage when it pops, or people consume more than their basic needs thus using up more of our dwindling resources. What’s worse, is that we know from recent stimulus that the new money only goes to a select few which means the average person gets more inflation and more debt without receiving any new money to break even. When you have criminals controlling finance does it make sense to empower them further by encouraging them to create more money? Of course it’s philosophically impossible to expect Keynesians to recognize the big economic problem is too much debt. After all, they are the ones who created the problem. In that sense they’ve a vested interest in keeping the current situation going – rather than see their philosophy go down in flames with it. Therefore you continue to have this argument for economic stimulus.
This isn’t a plug for austerity. Any one can see that austerity does nothing to reduce the debt. It is an 1% racket to hasten the wealth transfer. The solution is to eliminate the 1%. Economic stimulus just buys them more time in power.
I don’t agree with some your points. You could say this is about population but it isn’t really by itself. It is about aggregate consumption of natural resources and using the environment too much as a sink for wastes. You could just as easily argue that it is about per capita consumption and that could lead back to your correct comment about the 1% and their wasteful economic system.
I also don’t like calling what has been done “Keynesian”. It would be more accurate to call it Friedmanism since Friedman claimed that the Fed was at fault for the Great Depression because it didn’t put enough money into the system after the crash. Keynes called for the socialization of finance and the “euthinasia of the rentier” in the last chapter of the General Theory. Establishing a public bank that could eventually get rid of, or lessen, the power of private financial capital would be what I would call Keynesian and that isn’t in the cards. Keynes also talked about the crushing debt that Germany had to pay after WWI and predicted the disaster that followed. Has there been a mass debt write down? Of course not.
I do think that the lack of demand is in part a result of the reliance on private, for profit, banking and the private financial system. Inequality, de-industrialization and private debt have a large role to play as well. A public banking system could be created to provide credit and it could do so in ways that takes environmental, ecological and social costs into account when it lends. I know that is far off from where we are. However, if we assume that nothing fundamentally changes, we are stuck with private institutions having a monopoly on credit creation and no mass debt write down, we are stuck with feudalism.
Well said, Eoin. Could not agree more. Socialism would be far preferable to Keynesianism, in my opinion.
And so what? Working with both Brussels and Germany’s preponderant influence in the EU has always caused the Latin Countries of Europe do”walk the walk” and “talk the talk” in Barleymont (home of the EU Commission), then return home and do as they damn well pleased.
Let’s not forget, the Commission members were all nominated into their jobs, and the country PMs elected into theirs.
Except Renzi, who’s party did win the elections and he simply deposed the head of the party at the time. It was a “palace coup”. According to a Corriere della Serra (a major Italian newspaper):
Yes, Italian politics is one of the more articulated variety, but then so are its people, which makes them so attractive (imho). Any people that could vote for a humorist who formed a party out of thin air must have a very large sense of black humour as regards Italian politics. Beppe Grillo is a great humorist but would not even make a good municipal dog-catcher.
The country has had since way, way before Mussolini a class of politicians who were not up to the task. Besides, American forces did not help matters when they counted on the Mafia to assist in “facilitating” the supply of troops because they literally controlled all port facilities. Which established the Mafia as a force to be reckoned with in post-war Italy.
Italy is a country that knows how to produce and sell its products. It has no bona-fide political class, however. Perhaps a youthful Renzi will change circumstances, since many of the young have avoided politics because it was so corrupted.
Renzi is nobody’s ass-kisser. The Germans can moralize to the Italians, but that will do no good. The two nations are poles apart in both sentiment as well as ways and means. So Renzi smiles and back-slaps in Brussels, then goes back to Italy to do as he damn well pleases.
The Italians are not waiting for Mother Merkel to bless their new-found growth prospects. The Latins do things differently … Italy will pull out of the present slump.
I give it another year, however, before reaching cruising speed …
“Prime Minister Renzi (who was not elected by the public to that position)”
Renzi received a pretty clear mandate in the late May elections, of course in Italy’s system one votes for a party slate in national elections. Renzi was lacking an electoral mandate prior to that election, but it would be misleading I think to say that today.
“It should be spending far more money in the public sector.”
Can we all agree on the plain English reading of that sentence? Or is there something I’m ‘taking out of context’ or ‘don’t understand’?
I would have understood the above to mean an effort to obtain Social Justice. That usually translates into funding efforts by the government to level the playing field. Meaning, in the US, “food stamps”, but in Europe it means also “a National Health Service that costs half as much as the total Health Care per capita expenditure in the US”. Consider this info-graphic showing Life Expectancy and Total Health-Care Spending (OECD countries)
It also means that a Tertiary Education is a human right, and not just a “nice thing to have”. Most tertiary level schooling rarely costs in Europe more than 1/2K euros in tuition plus room ‘n board (unless a student lives at home).
Tertiary Education worth the government subsidy necessary. Germany, is a good “for instance” since it literally pioneered apprenticeship vocational training. Nearly 95% of its graduates obtain a job at the company where they apprenticed. Companies are looking for “people with experience”? Then why not someone who has spent a year in total already working part-time for the company?
Bill Black is off the mark here in case of Serbia. Serbian economy is a mess and requires massive structural reforms. The reason the finance minister called for cut in government spending is that the ratio of private sector employees to retirees is close to 1:1 and yet retirement benefits are set at 70% average salary. Additionally, about 800,000 people (out of population of 8 million) are employed either in government services or in state-controlled enterprises, most of which are heavily subsidized to maintain social peace. Inflation, far from being low, is between 5-10% on an annual basis.
Previous governments ran a large deficit to maintain social peace, but the debt levels have risen close to 70% of the GDP and it’s becoming more difficult to borrow. Also, large chunk of the budget revenues used to come from privatizing state-owned enterprises, but that has been stripped bare now. The country’s demographics are horrible, the population has been falling over the past 10 years by about 1% per year due to high emmigration.
So finance minister Krstic was proposing to cut pensions and public employee salaries, which are at an unsustainable level for the economy the size of Serbia, a redirect that into infrastructure and capital investments. No reduction in public spending, but a redistribution of funds from straight handouts to investment (which in a corrupt economy might be the same). He was shot down for political reasons, country’s electrorate is disproportionatly old, so cutting pensions is a political non-starter.
Rather than preach austerity, Serbia’s finance minister was trying to push through some much needed strucural reforms. Lumping him in with EU countries shows a complete lack of reserch on Bill Black’s behalf.
So the foreign groups that lent the country money will take a haircut, or will they be paid in full? If so, does that not deserve a discussion? Time and time again working people are asked to make sacrifices but creditors are always paid in full. What role have the recent floods had on inflation? If the country is having a hard time borrowing then why not create a public bank to lend to the economy debt free money?
You said “debt levels have risen”…do you mean public debt, private debt or both? I hate it when people just say “debt” but don’t explain whether they are talking about private or public debt, because both exist and private debt is usually much larger. If the country is growing older then inhereted wealth would seem to matter more, yes? Are there taxes on inhereted wealth and the higher income brackets? How much of the country’s lending was siphoned off by the people who run that corrupt political system you talk about? If so, and if the people didn’t have a say in taking on that debt, could they not fight to write off a portion of that debt(odious debt)? Also, if the country owes money internationally do they owe money in their own currency or dollars, yen and euros?
The same crooks who were pitching neo liberal policies as gospel for the past 10 years have sold off all the choice income producing state enterprise to EU carpetbaggers and now want to cut pensions to make up for the missing tax revenue that’s been siphoned out of the country? Sounds familiar.
” Lumping him in with EU countries shows a complete lack of reserch on Bill Black’s behalf.”
I agree with you.
Only has the SAA, Stabilisation and Association Agreement been signed and the country now begins to implement its obligations under the agreement, with the expectation of accession to full membership not until year 2020. Support for full accession is reported to be on the decline amongst the populace.
Don’t these “Economic Hit Men” work on commission? The more “extraction” out of the hide of the “little people” the more swag for the SteppnFetchit *Snakes in (Silk) Suits*?
Stark poverty is a reality across many sectors here in Europe with no plan in sight to turn around. Political elites see these folks as only as stats on a spreadsheet.
Time to bring back Guy Fawkes.
[i]”The EU is happy to adopt the disgraceful practices of Italy’s past to inflate GDP by counting “spending” on criminal enterprises as “production,” as part of a propaganda campaign but enraged that Renzi would propose a change that would actually improve Italy’s economy and help the people of Italy.”[/i]
Wait a minute Dr. Black, perhaps the EU is trying to help Renzi out. After all, if the EU central bank is requiring that sovereign debt not exceed a specified fraction of a nation’s GDP, by golly Renzi should add mafioso criminal activity and perhaps incorporate the Vatican into the nation so they could count its lucrative financial dealings to show Italian GDP as a moonshot, and party like Berlusconi.
Just kidding Bill, but if one doesn’t make fun of stories like this, clinical depression may set in.
Germany requires austerity because her banks are rotten to the core and totally insolvent. I wish there was room in the human imagination for something completely different. Like wiping out the austerity gangsters with tactics they can’t fight. It would be so amusing. There must be an unidentified universal truth behind Gresham’s Law. Let’s just say OK, people are easily corrupted, so let us corrupt us all, every last one of us. Let’s fight fire with fire and print (globally by sovereign banks) so much money – and distribute it to every person and every good cause on the planet and give them more than they can even ever hope to spend – that it wipes out greed completely. Use sovereignty and common cause to achieve this and to control resources, etc. When everyone is satiated with so much money they finally realize it was a scam all along, who is gonna to hold a cigar between his teeth and demand a kickback?