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.
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 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.