Feb14
EU GDP
on February 14, 2013 at 8:18 amThere is no magic bullet that can magically transform the EU economy. The French made a mistake electing a socialist in France that decided to expand government programs and increase taxes. But no one ever confused the French for being capitalists. The multiplier effect of government spending is 0. You cannot tax and spend your way to economic prosperity.
No one tell the Democrats. Of course, it doesn’t matter. They won’t listen. It’s not in their political interest to do so (or at least that’s what they think).
[Update a while later]
Rescuing the euro is like saving the tumor, not the patient.
“You cannot tax and spend your way to economic prosperity.”
True, True. Of course you cannot not tax, but still spend your way to prosperity either, which is the GOP alternative plan.
No one is actually talking about seriously cutting federal government spending, now, this year, today! (except for possibly the Pauls, Ryan and Rand)
All the last four years have done is advance the date the inevitable crash.
Ah, the French, will they ever learn? If something can’t go on forever it won’t, but unfortunately we in the rest of the EU are being forced to pay for it. Fortunately, things are improving in Spain, with jobs moving from France to Spain, which may force the French to face reality sooner rather than later.
They always say, “Well we didn’t execute *quite* perfectly. Next time will be better.”
The time-dishonored socialist lament, “It would’ve worked had the right people been in charge.” (meaning themselves, of course). Their ideas are never wrong, just poorly executed and poorly communicated. Had they just given more speeches, everything would’ve been fine.
Which, of course, means you have to have the right people in now, and forevermore. Which is why it can never work. Eventually, you’re going to get the wrong people in charge again with probability 1.
Rescuing the euro is like saving the tumor, not the patient.
I see no more reason to believe this than to believe California and Texas should not be sharing a common currency. Currency union is what removed some of the obstacles to interstate commerce in the EU. There are many more obstacles, which are being slowly addressed. Local banking oversight fiefdoms are more harmful than an EU-wide mechanism.
I expected this to happen eventually. Without the currency controls and market control each national economy cannot adjust itself in the best way to the current world economic conditions. The economic unification ended up leading to an economic policy basically decided by the largest economic block which was France and Germany. They lead the market negotiations with the WTO and others.
When the EU opened up their light industry in textiles and apparel to competition from China and other Asian economies in exchange for winning lucrative deals selling machine tools to do the manufacturing jobs there the fate of the South European economies was sealed. The Italians suffered less since they have a better reputation for quality and they have more heavy industry but as Asian manufacturing quality improved even their jobs were secure no longer. As for the Germans they will eventually realize the Chinese are not interested in buying their machine tools and heavy industry products forever since the Chinese government has a national R&D policy of self-reliance. I still remember the deal the Germans made with the Chinese to sell them the Transrapid and ICE T train technology. It was announced as a major trade deal back then. However today the Chinese are able to manufacture all of the relevant technology domestically and their train imports were cut down to zero. Germany has been weathering the crisis better because of their auto industry which is still protected by import tariffs from Asian competition. Their automobile manufacturers can also use the currency crisis to their advantage in several ways. For example Volkswagen has their own bank which can borrow at the rates enjoyed in Germany to sell cars with interest in other countries in the EU: charging interest rates there at the interest rate levels charged by local banks which cannot get such low rates themselves. In this way they managed to artificially increase demand for higher end vehicles even in major debtor nations and keep their imports up however this will inevitably blow up on their own face.
Analyzing the situation there are several ways to solve the problem. The EU leadership imposed all the macro economic adjustments I predicted here a long time ago. They attempted to create an artificial currency devaluation in the debtor nations. The measures are taking a long time to take hold and the social impact has been terrible mostly because the lender nations seem to think the way to solve the problem of the peripheral economies is to liberalize the economy sometimes to a level not seen even in the United States while ignoring local characteristics as for why the market is structured in that manner to begin with. Often it is also the case they are interested in plundering vital national resources like energy generation and distribution or even land there for a pittance to recoup their loans however this will lead to an aggravated economic recovery in those countries since higher prices in these sectors means all the produce is made more expensive as a result and many industries cannot operate economically.
The salaries were depressed to increase economic competitiveness in those regions but the debts were not slashed as well like a currency devaluation would do. However, just like with a currency devaluation, those countries are getting more competitive and their exports are growing thus improving their balance of trade. Examples are Portugal, Ireland, Greece and Spain. Check out the balance of trade of Spain from 2007-2013:
http://www.tradingeconomics.com/spain/balance-of-trade
So as I predicted at the time the macro economic result of increasing VAT and decreasing salaries was reduced imports, increased exports, and an improved balance of trade.
However the collapse of the internal economies is undermining any achievements made there. Exports cannot grow forever since the world economy is in a slump. Without being able to control tariffs it is going to be next to impossible to fund local enterprises of high technological complexity.
Cutting public sector employees is seen as inevitable but no leader in the EU wants to further inflate the unemployment levels which are reaching, sometimes surpassing, Great Depression levels.
The next answer of course will be to cut VAT in sectors which are most likely to be fueled by national inputs or which create the most jobs and economic value with the least imports thus introducing tariffs in an hackneyed fashion. Then you use the VAT proceeds from the mostly imported products to fund startup enterprises by creating a national investment bank with low interest rate loans for startups. I have not seen anyone do this yet but it is IMO the logical next step.
Without the currency controls and market control each national economy cannot adjust itself in the best way to the current world economic conditions.
Ding. Ding. Ding. We have a loser. To say they need more controls is to be blind to the fact that it’s too much control that is part of the problem.
This trend may be a good thing if hitting bottom is first required before any solution can take hold.
The Chinese do seem to get the better of the idiots they negotiate with, but internally they are just as stupid.
The Chinese are being stupid by laughing all the way to the top. They are merely repeating the successful strategies of Meiji Japan, Imperial Germany, and yes the United States. Namely those strategies espoused by your great economist Alexander Hamilton the proponent of the American School of Economics.
Do they not teach kids anymore that the US grew to be a major industrial power by imposing a system of tariffs on imported products? Such a system is vital for any developing nation and the PIGS are closer to a developing nation in manufactures than a developed nation. Deny your own history at your own peril.
My daughter’s history class taught about several tariffs the US imposed–most of the ones they mentioned did more harm than good, a couple might have been helpful.
That’s interesting. Yesterday Godzilla was excited about increasing the minimum wage. Now he wants currency controls, and he claims this is the key to China’s success. Perhaps he should consider China’s minimum wage in comparison to the US or EU nations.
Different local situations require different measures.
The key to China’s success is not merely currency controls. It is also an active policy to acquire foreign technological know-how for the purpose of producing those technological products natively thus improving self-reliance. An active export led policy which also aims to reduce imports. A centralized energy, telecoms, and transportation policy. Government controlled banks to fund gigantic infrastructure projects.
In the long run China will have to relinquish some of those governmental controls as their economy reaches first world levels and central planning becomes more unreliable. It is one thing to plan by replicating some else’s success story and it is another altogether to navigate the uncertainty of creating new markets. This is what the US is better at doing so there is little point in replicating the Chinese strategy in the US in the present. At least not completely.
Where Hoover failed in attempting to introduce tariffs is that he failed to realize the US was no longer an import led nation but an export led nation with manufactures so the tariffs no longer made sense then unlike in Alexander Hamilton’s time. It is in the interest of export led economies for tariffs to be globally low while for an import led economy the opposite applies.
What the US could replicate is the infrastructure projects. However what the US most requires at this moment is better telecoms infrastructure and support for natural gas pipelining and transport rather than what the Chinese are investing on like roads and high-speed rail and electric generation capacity using coal, nuclear and hydro. The places in the US where high-speed rail makes sense are more limited so that transport strategy will not translate directly. The problem of startup funding in the US is being taken care of by things like Kickstarter where the banks failed. So it is pointless for the government to intervene there. Where the US government could intervene is easing the burden for access to the stock market by repealing bureaucratic make work like Sarbanes-Oxley.
The present US trade deficit is a problem but perhaps a larger problem is that the US government cannot capture the profits of US companies which followed the globalization strategy properly anymore. The solution to that, like I said before here, is for the US to introduce VAT.