Posts Tagged ‘European economy’

What’s Wrong with Europe?

Tuesday, September 8th, 2015

By Mike Andrew

“You, with your vote, will judge us,” Greek Prime Minister Alexis Tsipras told his country in an August 20 speech, calling for new elections on September 20.

Only seven months after coming to power, the leftist SYRIZA party was splitting into pro- and anti-Europe factions, and the Prime Minister was calling for a new election to decide whether the country will remain in the Eurozone.

Tsipras is in a tough situation. Sixtyone percent of Greek voters voted against EU-imposed austerity in a July referendum, but polls show that the same percentage want to remain in the Eurozone. Those aims may be incompatible. Greece’s political crisis exposes deep contradictions in the European Union and its economic arm, the Eurozone. Former Greek Finance Minister and internationally known economist Yanis Varoufakis described the shortfalls of the Eurozone in his book The Global Minotaur. You can understand what’s wrong with Europe, Varoufakis says, by comparing it to the United States.

The United States is also a currency union – the “Dollarzone” if you will. Like the Eurozone, the Dollarzone includes rich states and poor ones.

The rich states regularly produce tax surpluses. Their residents pay more in federal taxes than the states get back in so-called “transfer payments” — in other words federal investments and benefits.

They put up with this inequality because they also regularly produce trade surpluses. They sell more to neighboring states than they buy from them, and they know that destitute neighbors make poor customers.

It would be unthinkable for the rich states to refuse to make transfer payments to the poorer ones because the US is a political union as well as a currency union. Most Americans agree that the federal government has a constitutional obligation to invest in the poor states and provide a safety net for their residents.

(Ironically, the poor states which are beneficiaries of federal spending also tend to be “Red” states that regularly vote for candidates who promise them “smaller government.” But that’s a subject for another article.)

The Eurozone is not a political union, however. The richest European countries have no obligation to make transfer payments to poor countries like Greece, and they have resisted doing so.

In fact, German Finance Minister Wolfgang Schaeuble – Varoufakis’ antagonist in this spring’s loan negotiations – seemed perfectly happy to see Greece out of the Eurozone, the country’s banks out of cash, and the Greek people living like paupers on the fringes of Europe.

Under the circumstances why would Greeks want to stay in the Eurozone?

The answer is that, like the states of the Dollarzone, the countries of the Eurozone are economically integrated, although Europe is integrated in a way that sends transfer payments from poor to rich rather than the other way around.

Like the richest US states, the richest European countries also generate a trade surplus – they sell more to their neighbors than they buy from them.

That’s part of the trap for Europe’s poor countries. They could quit the Eurozone altogether, return to their former currencies, and then devalue their money from its nominal exchange value.

That would make Euros flow into their countries as their neighbors took advantage of cheap money in southern Europe. As the rich countries consumed more of the exports of their poor neighbors, the internal markets of Greece and the other poor countries would revive, businesses would hire new employees, and money would circulate again. However, Europe’s economy has developed unevenly. The poor countries import more than they export, and the imports would become much more expensive.

Greek wine would be cheaper, but the bottles to put it in and the corks to seal them – both of which Greece has to import – would be more expensive. Greek vegetables would be much cheaper, but beef and pork would cost more because they’re imported.

Seeing a doctor would be cheap, but the medicine prescribed would be much more expensive. Donkeys would be cheap; cars, trucks, and vespas would be expensive.

In short, Greece could leave the Eurozone and probably see long-term economic benefits, but the short-term cost would be terrible and maybe too great for Greek voters to bear.

That’s the challenge for any Greek government, and, as Tsipras said, it’s up to the Greek people to judge.

Budget-Cutting is Killing Europe

Monday, July 1st, 2013

By Mike Andrew 

When Europe plunged into economic crisis more than four years ago, the IMF and the European Central Bank had one answer – austerity! Beginning with Greece, Eurozone members were ordered to cut social spending, lay off public sector workers, and privatize national assets.

While draconian budget cuts were supposed to be the road back to prosperity, economic reports for the first quarter of 2013 show that austerity measures are having exactly the opposite effect. In fact, budget-cutting is killing Europe.

“The misery continues,” Carsten Brzeski, senior economist at ING bank in Brussels, told Reuters. “Almost all major countries except Germany, are in recession, and so far nothing has helped stop this downward spiral.”

Consider the facts:

  • Nine of the 17 countries in the Eurozone are in recession: Spain, France, Italy, Finland, Netherlands, Portugal, Cyprus, Greece, and Slovenia.
  • On average, the regional GDP fell 0.2% in the first part of 2013 compared to the previous quarter, and 1% in the previous year.
  • The Eurozone has been in recession for six consecutive quarters, the longest recession since area data began to be recorded in 1995.

France’s GDP fell 0.2% in the first quarter of 2013, the second consecutive quarter of decline. In the previous year, French GDP fell 0.4%.

Italy, the third largest economy in the Eurozone, recorded its seventh consecutive quarter of decline, the longest since data started being recorded in 1970.

The poorest countries were, of course, the hardest hit.

Greece’s economy shrank by a catastrophic 5.6% in the first quarter of 2013. Spain’s declined by 0.5%, and Portugal’s by 0.3%.

Unemployment in Greece and Spain is now over 27%. By comparison, unemployment in the US in 1932 – the worst year of the Great Depression – was 23.6%. Cuts in unemployment benefits have left millions of workers destitute.

In both countries, almost two-thirds of workers under 25 are out of work, with no alternative but to emigrate to find a job.

Austerity advocates in the US – from Congress to the state legislature – might take notice.

Cyprus: The latest domino to fall

Monday, April 1st, 2013

By Mike Andrew

The banks are closed, and no one knows when they will reopen. If you can find an ATM still stocked with cash, it will only give you $160. No one will take your checks anymore because no one knows whether the bank that issued them will still be in business tomorrow.

You’re just a regular working person, but you’re thrifty and you’ve managed to save up some money to see you through retirement. The government wants to take your savings away to pay off the German and Dutch bankers who are underwriting your country’s debts.

You wish you could move to Australia.

If you lived in Cyprus, this would be your daily reality. Cypriot President Nikos Anastasiades has called for a criminal investigation to find out who is at fault for the crisis, but this isn’t a crime story, this is the story of a small poor country struggling to survive rough handling by calculating international creditors.

A former British colony, Cyprus has always experienced slow economic growth and, as a result, relatively high unemployment. The northern third of the country is still occupied by the Turkish army, which invaded the island after the Greek military dictatorship unsuccessfully tried to overthrow Cyprus’s democratically elected government in 1974. Refuges from the occupied area still depend on government support.

Prior to the turn of the 21st Century, the country’s principal industries were shipping and tourism – both of them very vulnerable to global economic trends. Cyprus reportedly has important natural gas reserves, but it lacks the capital to develop them.
In an effort to diversify the country’s economy and attract additional capital investment, the Cypriot government decided to turn Cyprus into the banking hub for the eastern Mediterranean. To facilitate this, Cyprus joined the European Union (EU) in 2004 and the Eurozone in 2008.

Cyprus was so successful in expanding its banking sector that by 2013 it accounted for 30% of the country’s total economic activity. In doing so, Cyprus became the Cayman Islands of the Mediterranean – a tax-haven for European investment fund managers and Russian oligarchs. Prior to the global financial crisis beginning in 2007-2008, Cyprus’s debt was lower than the European average, and declining. But the crash of US subprime mortgage markets had serious consequences. By 2009, the Cypriot economy was in decline, mainly due to contraction of tourism and the shipping industry.

Because 80% of Cypriots are ethnically Greek, and Greece sponsored Cyprus’s entry into the EU, Cypriot banks invested heavily in Greek government bonds. With a total GDP of less than 20 million Euros, Cypriot banks held Greek debt amounting to 22 billion Euros. Cyprus was therefore extremely exposed when the EU imposed austerity measures on the Greek government, causing its economy to collapse. When the EU allowed Greece to mark down its bonds in 2011, Cypriot banks took a hit from which they never recovered.

In June 2011, explosives stored at a Cypriot naval base accidently blew up, killing dozens of people and destroying the country’s largest power plant, which was located next to the base. More than half the country was left without electricity, including the capital city, Nicosia.

Cyprus was then forced to borrow heavily from European banks to rebuild its power system, and secured an emergency loan from Russia to refinance its existing debt.

Finally, in November 2012, the Cypriot government secured an EU bailout. The bailout did not come without a price, however. As they did in Greece, the EU insisted on severe austerity measures – layoffs of public employees, deep cuts in pensions and social benefits, increases in medical deductibles, reductions in salaries, and increases in regressive sales and fuel taxes.

The formula was the same as in Greece, and the result was the same. Rather than improving Cyprus’s financial situation, the austerity program led to further economic contraction. Unemployed workers began liquidating their bank accounts to pay their bills. At last, Cypriot banks could no longer cope with the situation, and they shut their doors on March 15.

The EU agreed to an additional payment to Cyprus of 10 billion Euros, but only on condition that the Cypriot government kicked in 5.8 billion Euros by confiscating savings accounts held in the country’s banks.

According to the BBC, European fund managers knew this was coming, and had already taken the precaution of moving their holdings elsewhere, leaving the Russians – and the Cypriots themselves – to take the hit.

The Cypriot parliament unanimously rejected the EU plan on March 19, and tens of thousands of workers poured into the streets to protest their government’s willingness to make them the victims of EU demands. Alternate plans, which may hit only the largest accounts, are now being negotiated.

Banks reopened March 28, but Cyprus’s second-largest bank is now out of business, and its largest bank is being acquired by foreign investors. It remains unclear whether Cyprus will be able to remain in the Eurozone.

Jeroen Dijsselbloem, head of the Eurozone’s finance ministers, has suggested the Cyprus model – forcing local savings account holders to pay for EU loans – might be applied in future EU bailouts.

Deficit reduction increases Europe’s deficit

Tuesday, December 4th, 2012

By Mike Andrew

European austerity measures meant to reduce government budget deficits have proven to be stunning failures, according to new figures released by the European Union

Instead of reducing sovereign debt, the all-cuts austerity programs have actually increased deficits and reduced prospects that the poorest European countries will ever be able to lift themselves out of crisis.

The European economy as a whole shrank for the second consecutive quarter, officially marking the EU’s slide back into recession. For four consecutive quarters the European economy has contracted or shown no growth whatsoever.

Protesters filled streets in Lisbon, Madrid, Rome, and Athens as EU finance ministers made the announcement.  EU-enforced austerity policies in all four countries have driven up unemployment and led to drastic cuts in wages and social security benefits, while failing to halt their slide into economic chaos.

Some 140 people were arrested in Spain, where the unemployment rate has jumped above 25%, and above 50% for workers under 25. In neighboring Portugal, employment stands at a record 15.8%.

In Greece, economic output declined at 7.2% annual rate as the country lurched into its sixth year of depression. Like Spain, Greek unemployment is now above 25% and nearly 60% for young workers. The actual existence of the country is at risk as the best educated and most enterprising young workers now emigrate en masse to Northern Europe or Australia simply to find work.

A newly announced EU/IMF “bailout” of Greece was barely sufficient to reduce the country’s debts from a staggering 144% of gross domestic product, to a “mere” 124% of GDP by 2020. Had it not been for that injection of EU money, the debt to GDP ratio was expected to rise to 189% by 2013.

The latest EU loan to Greece – some 44 billion Euros – will be sufficient for the government to pay its December bills, but not much more. The Greek government is now taking bids from private investors who hope to buy its postal system, railroads, and bus lines. Even the Acropolis may be leased out to a private tourism firm.

Across the EU almost 26 million people are out of work, and studies indicate that 116 million Europeans are at risk of falling below the poverty line as governments cut spending and benefits, lay off workers, and sell state-owned assets.