Mr Barroso, European Commission President has a way with words. In January 2013, he declared “that the existential threat against the euro has essentially been overcome”. More recently (April 3, 2013) he pronounced “that the EU has come through the worst of the crisis”. Really? And, just yesterday he was at it again, lecturing France on the need to hack into welfare payments and worker protections. Meanwhile, Eurostat released the first-quarter 2013 National Accounts publication – Euro area GDP down by 0.2% and EU27 down by 0.1% – a few hours after Barroso was on French radio delivering his threats. The data is shocking which is a euphemistic way of saying _ _ _ _ _ _ _ (fill in your own expletive). There are now 10 Eurozone nations in recession. The overall monetary union has been contracting for six consecutive quarters (that is, 1.5 years). And the situation will deteriorate even further. When does someone conclude that the current policy framework is a total failure and causing massive permanent damage? When will these lug heads in Brussels realise they are not only destroying the fabric of prosperity but also jettisoning their political aspirations – for one Europe? Amazing.
The following graph shows the annual real GDP growth for the 12 months to March 2012 (blue bars) and the 12 months to March 2013 (red bars). The data is sorted by the worst performers in the last 12 months. The latest data is incomplete for the Luxembourg, Malta and Slovenia.
What is clear is that the recession is spreading to the northern states. The Southern States are now in more or less permanent Depression and that dynamic is now consolidating in the more affluent nations in the North.
The following ten member states are now in official recession (defined as two consecutive quarters of negative growth):
The EU17 (overall Eurozone) has had 6 consecutive quarters of negative growth as have the Czech Republic, Greece, Spain, Cyprus, and Portugal. Other nations are catching up fast – France (3 of the last 6), Italy (5 of the last 6), the Netherlands (4 of the last 6), and Finland (3 of the last 6).
Just before the data was released by Eurostat, Mr Barroso gave an interview with Europe1 Radio in France (May 15, 2013) – “L’effort doit continuer, la dette reste trop élevée” (Translated: The effort must continue, the debt is still too high).
Mr Barroso said that the European Union will only agree to extend to France the two-year extension before it invokes the – Excessive Deficit Mechanism.
He claimed that France had lost its competitiveness over the last 20 years and needed to accelerate the structural reforms – which is code for further undermine the standard of living of the poor and weak and create the conditions for the top-end-of-town to redistribute more real income to themselves.
The Excessive Deficit Mechanism claims that:
In order for EMU to function smoothly, Member States must avoid excessive budgetary deficits. Under the provisions of the Stability and Growth Pact, they agree to respect two criteria: a deficit-to-GDP ratio of 3% and a debt-to-GDP ratio of 60%.
Note the terminology “function smoothly”, “excessive … deficits” and then the leap to the arbitrary SGP fiscal rules, as if there is a connection.
I remind readers of the that the fiscal rules defined in the SGP and the later derivative Fiscal Compact (the “Six-Pack”) were plucked out of thin air over a weekend by the French advisor to the Mitterand government at the time.
The Le Parisien article (September 28, 2012) – L’incroyable histoire de la naissance des 3% de déficit (The incredible story of the birth of the 3% deficit) – spilled the beans.
An English language report – The secret of 3% finally revealed – says that a “former senior Budget Ministry official” in the Mitterrand government was asked to come up with the fiscal rules that would become the Stability and Growth Pact (SGP).
He was quoted as being the “the inventor of the concept, endlessly repeated by all governments whether of the right or the left, that the public deficit should not exceed 3% of the national wealth”.
Note that this reporting, itself, is misleading because wealth is a stock and GDP is a flow and the SGP budget deficit rule is specified in terms of 3 per cent of GDP (the size of the flow of national output and income in any given period). But we can overlook that reporting slip.
Anyway, the French official had this to say when asked about the origins of the 3 per cent rule:
We came up with the 3% figure in less than an hour. It was a back of an envelope calculation, without any theoretical reflection. Mitterrand needed an easy rule that he could deploy in his discussions with ministers who kept coming into his office to demand money … We needed something simple. 3%? It was a good number that had stood the test of time, somewhat reminiscent of the Trinity.
Somewhat religious (Trinity) no less.
So what appear to be “credible” rules are just arbitrary numbers – all part of an elaborate smokescreen or charade – to limit the capacity of government.
Of-course, Barroso’s latest bully-boy threats to the French reflect the general tenor in Brussels, where countless highly paid officials are making all sorts of statements about the need for nations to cut welfare, wages, jobs and the like and invoking the fiscal rules that were just made up on the spot without any economic justification or authority.
And a single moment’s reflection, for those who actually understand macroeconomics, will lead to the conclusion that the SGP provides for neither stability or growth. In fact, it is not a credible framework for ensuring the monetary system functions smoothly.
The reality is that it biases the system to crisis and then reinforces the negative impacts a crisis. The SGP provides no credible avenue for addressing the dynamics that arise when a severe aggregate demand failure as occurred in late 2007 into 2008 arises. The SGP amplifies the crisis – that is, provides a destabilising dynamic.
In my 2008 book with Joan Muysken – Full Employment abandoned – written well before the crisis emerged, we argued that the SGP (aka the “neither stability or growth pact”) would cause Europe to suffer disproportionately when the crisis that we predicted manifested. And so it has.
We wrote extensively about why the SGP had failed to stimulate growth and was incapable of maintaining financial stability once a crisis emerged.
The mainstream of my profession, of-course denied most of the obvious criticisms of the SGP. Their usual retort was that I had failed to understand the victory that macroeconomics had achieved by focusing on price stability and adopting largely conservative fiscal positions.
Please read my blog – The Great Moderation myth – for more discussion on this point.
In our book, we analysed the so-called – Sapir Report – otherwise known as the An Agenda for a Growing Europe – which was published in 2003 and was a report to the EU edited by a “panel of experts”. André Sapir managed the project which was funded by the President of the European Commission.
The Report was intended to be a review (evaluation) of how the EU was travelling in the wake of the decision to create the Eurozone within it.
It was obvious that these doctrinal briefing documents that the EU was receiving from the mainstream economists were totally wrong in their assessments. The same logic used then is still being used (and mouthed by Barroso). The result now is that massive on-going damage is being inflicted on the citizens of Europe in the name of a “credible” economic strategy.
Some quotes from the Sapir Report are killers:
Faster growth is paramount for the sustainability of the European model …
The Group considers that three pillars upon which the European economic edifice is now built are fundamentally sound …
Expanding growth potential requires first reforms of microeconomic policies at both the EU and national levels …
there is no doubt that the period of the last 15 years has been a tremendous success …
You can see that they thought they had the macro issues solved – the SGP would deal with that in tandem with the ECB pursuing inflation targetting. They are still singing from the same hymn sheet – emphasising microeconomic reform and the freeing up of markets and the reductions in welfare budgets etc.
That was the tenor of Barroso’s threats on French radio yesterday.
Please read my blog – The hypocrisy of the Euro cabal is staggering – for more discussion on this point.
France was notified on February 18, 2009 and that was ratified by the EC decision on April 27, 2009 that it was to be the subject of an excessive deficit procedure. The deadline for correction is 2013. It ultimately faces “financial sanctions” if it fails to meet the deadline.
There was an acknowledgement that:
The weakness of households’ real disposable income linked in particular to rising unemployment and tax increases would only be partially offset by decelerating prices, while persistent unfavourable entrepreneurs’ confidence is expected to lead to a continued fall in investment.
This is significant because it amounts to a denial of the mainstream economics proposition that underpins the claim that fiscal contraction will stimulate private demand (the so-called Ricardian Equivalence myth).
Please read my blog – Pushing the fantasy barrow – for more discussion on this point.
You can bet though that the myth will continue to be propagated by politicians who are seeking some economic authority for wrecking the joint.
At a press conference accompanying the release of the Spring Forecasts 2013, the EU Economic and Monetary Affairs Commissioner Ollie Rehn claimed that the French forecasts were “overly optimistic”. He then said:
Considering the economic situation, it may be reasonable to extend the deadline by two years and to correct the excessive deficit at the latest by 2015 in France …
It was in that context that Barroso toned in yesterday berating the French for lack of microeconomic reform.
What has been interesting though is not the belligerence and denial of the EU bosses but the cap-in-hand attitude of the French President. He was reported as saying yesterday that he was “grateful” to the EU for the two-year extension (Source).
Since when has a leader of a large nation had to express gratitude to some unaccountable elites in Brussels for allowing his/her country to accept a slightly slower death than otherwise would be the case?
We are going to smash you but with a million-tonne weight rather than a two million-tonne weight. Feel grateful, boy.
In 2012, France’s budget deficit was 4.8 per cent of GDP (down from 5.3 per cent in 2011). Its public debt ratio was up from 69.3 per cent to 84.2 per cent (Source).
By the end of 2013, on the current trajectory, the public debt ratio will be around 95 per cent of GDP. Its budget deficit is forecast by the EU to be 3.9 per cent this year, but I suspect that will be an under-estimate, given that the growth estimates are unrealistic (too optimistic).
Its unemployment rate is at 11 per cent (up from 10 per cent this time last year) and its youth unemployment rate is up to 26.5 per cent (up from 23.1 per cent this time last year).
Meanwhile, the Bundesbank boss Jens Weidemann was reported in the article (May 9, 2013) – ‘Can’t Call That Savings’: German Central Bank Head Blasts France – that he was “adamantly opposed to any delay in adjustment to 2015 for France:
You can’t call that savings, as far as I am concerned … To win back trust, we can’t just establish rules and then promise to fulfil them at some point in the future. They have to be filled with life … Particularly now, at a time when we have strengthened the rules regarding deficit reduction, we shouldn’t damage their credibility by taking advantage of the built-in flexibility. What we need is trust in our ability to clean up state finances.
It is a strange concept of trust he must have. Push even more people to join the millions of unemployed that the failed policy stance has created to date is in some way meant to elicit trust in the policy process and the credibility of the state as a vehicle for prosperity and well-being.
I wonder if Dr Weidmann took a trip to Spain and asked on the unemployed 15-24 year olds what they thought about trust what answer he would get. He wouldn’t have trouble finding someone to interview given the current youth unemployment rate there is now 55.9 per cent and rising fast. Eurostat haven’t published the Greek youth unemployment rate since January when it stood at 59.1 per cent and had jumped between March 2012 when it was estimated to be 52.3 per cent. When we next get data for Greece, it will be well above 60 per cent.
That is trust-building sort of stuff. Dr Weidmann should get out more.
In fact, they all should get out more. My recommendation is that the EU elites hire a bus for a month and go to Spain and Greece and some of the French towns where huge housing estates are located and check out what their policies are breeding.
They would find, although I am sure they wouldn’t admit it, a seething, deprived and angry cohort which is growing and will become a force for lawlessness and societal instability.
All courtesy of the common currency – which has been such a success after all.
That is enough for today!
(c) Copyright 2013 Bill Mitchell. All Rights Reserved.