Ten years on, how countries that crashed are faring

From The Guardian: Ten years on, how countries that crashed are faring

Excerpt:

 

Blaming their continued economic adversity on austerity is kind of like blaming an individual who went bankrupt from taking out too many credit cards for not taking out more credit cards. Eventually it has to stop, these governments can't keep spending more than the revenue they're taking in.

And guess what? When you take out debt there are terms of repayment.

The only argument I could possibly see is that they might be paying back their debt at too fast a rate, but that's not the case here.

What exactly is your solution? That they keep borrowing more money, growing their debt?

If borrowing money grows the economy so much (like some try to claim), why did these countries have so much trouble repaying it?

 

As regards the US, with a currency that is THE medium-of-exchange for most international commerce (both financial and material), it can keep spending more than the revenue it's taking in. What typically happens in such a circumstance is that the cost-of-money (i-rates) is raised. And, often enough,it keeps spending without the slightest concern even with rising i-rates. Why?

Because as a population we are natural "spendthrifts".

With the arrival (from the US) of the Great Recession, European countries did not cut-back expenditures because that would have only exacerbated unemployment. And no politician gets elected with a headwind of high unemployment. Governments kept borrowing in order to keep spending and thus maintain employment levels. Which is why from Ireland, to Portugal, to Spain, France and Italy - all these countries were running high-deficits. (With the sole exception of Germany.)

That had to stop and did as higher interest rates diminished borrowing and thus consumption. And since European governments obtain their revenues from Sales Taxation (and not Income Taxation), revenues declined seriously and so did spending.

What resulted was a skyrocketing in unemployment rates in not only all of the countries mentioned but a good many others as well. Overall consumption stagnated in the EU. Lesson learned: Avoiding a serious economic downturn is far less costly than curing it once it happens!

But that seems to take a conscience beyond the ability of the politicians we elect (both in the EU and the US). Admittedly, it aint easy - which is why Central Banks manipulate demand by raising the cost-of-money to stem over-consumption that simply raises overall market-prices (for goods/services). (Which, as a mechanism, did not function during the SubPrime Mess because the entire financial system had been compromised in the US given the dimension of bank-losses - and Europe feared the same would happen in the EU.)

Typically, consumers just keep consuming "as usual" and even go on binges - for as long as an economy permits it. There is no easy way to forecast Consumer Sentiment for Spending and then act to modify its excesses. (Unless economists have a crystal ball that works ... !)

 

And when other countries eventually drop the US dollar as the world's reserve currency, the US will be in big trouble. The more debt and inflation the US gets into, it is hastening the day that comes.

It's not like we haven't seen this before. The Bretton Woods system and the US using their position to effectively make other countries pay for the Vietnam War. Until the rest of the world began dumping the dollar.

 

Yes, exactly! But either of us is unlikely to be around when that happens.

And China is holding too many dollars to want it to happen!

Please explain how the US made "other countries" pay for the Vietnam War ...

 

a little bit complicated to get into, the other countries (mainly Europe) had agreed to fixed exchange rates (supposedly for the sake of world monetary stability)
under the system the US could issue more money, and the inflationary burden would end up being spread out onto all participants

 

Looks like the standard of living in Germany is going down... (Germany's overall economy is doing okay, but the people aren't)
German debt to GDP ratio expected to fall below 60% next year
Sweden since 1970, living standard going way down
unemployment, many young Europeans without jobs

 

That just aint so.

The above is a litany of "bad news" that is correct in some respects. After-all, the EU did not see it coming when the countries were hit by the Great Recession wholly imported from the US. That was 2010!

The Great Recession was named great because it was of significant proportions. Moreover, the EU never saw it coming. Because, had anybody in Berlaymont seen it coming they would have taken the measures necessary to reboot economies.

And there is only one that works, called Stimulus Spending. But just like the US, SS would have been troublesome in the EU to implement. Greece was in major deconstruction and destined to leave the EU. Why? Because it had cooked (with the help of Goldman Sachs) its books in order to enter the EU. And, with the downturn, Greece was up against a wall and could not pay its debts. (Meaning those contracted from EU-banks that would likely also suffer if Greece's debt went unpaid. This week's news regarding Greece's debt is more upbeat.)

The southern-EU states, all of which had been lax in their manner of spending were in the same debt-crisis. They are all slowly crawling out of it, but Germany was never even in such a crisis. It's funding of the EU Central Bank was key to getting other members of the EU out of some very bad indebtedness!

Germany's unemployment rate is 3.5% - lower than even the US's! Yes, the EU-rate is altogether 7.2%*, which is far higher. But the Euro-zone unemployment rate in general is downwards:

What is critical is whether or not it can get down to the 5%-level, which is likely its long-term rate. Given the present consumer-spending moodswing that has gone from AWFUL to WAIT-'N-SEE I for one think it is entirely possible.

Time will tell ...

*From here.

 

Stimulus spending can get one out of a certain type of recession with certain causes, but it's not the appropriate solution to deal with all recessions.

When a country's recession is caused by it's debt problems in the first place, it really becomes controversial to try to dig a hole out of that pit by adding on to the debt.

In other words, Greece had deficit spending going on for a long time. Surely all that deficit spending had to count as "stimulus". So why then did the country find itself in trouble, if stimulus is so good for the economy? That's a question supporters of stimulus have to answer.

 

Cute explanation. (Really "cute" ... ;^)

 

If you really want to know more about it you can read this: http://internationalecon.com/Finance/Fch100/F100-1.php

 

THE GIRDLE THAT BUSTED

Greece should never have been allowed INTO the EU until it corrected its internal economy. It had cooked-its-books with the help of Goldman-Sachs. See here.

So, I submit that focusing on Greece is somewhat irrelevant, whilst focusing on the "other euro underbelly countries (Portugal, Spain, France, Italy) and Ireland is a better appreciation of why the Euro nosedived.

What happened. For an answer, we need look at recent history of the EU.

Had the above EU countries not been over-extended as regards their national-budgets the crisis would have been far worse. What happened is a typical history of European politics and how it can fu*k-up-a-free-lunch. That is, the Germans had insisted to place a condition within the Maastrich Treaty stipulating that no country national debt could rise further than 3% of GDP. This "girdle" was intended specifically to avoid what happened when the above mentioned countries blinded themselves to the rule.

But, let's not forget that the real Provocative Factor was not EU-spending but the Great Recession that reduced drastically and suddenly EU-imports to the US!

With all five countries in dire financial conditions, the future of the euro at the time looked bleak. Fortunately, the euro resisted - and the only "killer problem" at present is migration. But that too will enter into history without any effect upon the structure of the EU as it stands today ...

 

Ireland had somewhat of a tech bubble. I remember reading all sorts of magazine articles before the crisis about how it was supposed to become the new technology capital of Europe. There was a lot of hype about all the growth potential, and not surprisingly a lot of investor money poured into Ireland, and to a lesser extent Spain.

 

Yes, I know - I went there many a time on business when working in IT.

Nice people, hard working. I think they will come "out of it" well enough in the long-run. But they've had some really hard times ...

 

They also had a lot of Polish laborers pour in during the bubble (Ireland and Poland have a shared Catholic connection). But when the bubble popped, that left a whole lot of extra people in the country and put more strain on the labor market. All those Irish people had moved up into higher paying finance and tech careers, and when those jobs dried up it wasn't so easy for them to go back to the jobs they had before. Imagine you're a young Irish person who has gone to university and got a job straight into finance for 6 years, and that's all you've ever known.

 

Good article! Thanx for the reference.

I for one would like to see the US's influence by means of the Almighty Dollar reduced. The country took advantage of that fact well after WW2 when it was necessary (since Europe was devastated and China was not yet "China"). Why not fix rates in a mixed-bag with no particular dominance of any one currency?

I am frankly unsure how that might work, but the "past rules" simply do not function properly. So something must be done, and there is no time like the present in which to do it.

After this last election, the world must realize that the Uncle Sam is no longer a credible reference. With upper-income taxation having been reduced by Reckless Ronnie, far too many are seeking the BigBucks and depending upon Wall Street to assure that BigBucks earn nice-returns so that they can bequeath BiggerBucks to those who do not deserve a penny of it ...

What is happening in the US is dangerous for world-trade as a whole which is why, to my mind, the dollar should be quarantined. That is, access to the dollar for trade-purposes has one value but for purely financial manipulations (by American and foreign banks on behalf of private dollar holders) has quite another value.

Or some such finagling ...

 

In other words, the US didn't want to cut back its spending (or increase taxes to pay for all of its spending).

When you share a tied currency system with other countries, it's going to cause conflict if one country wants to run inflation (or run up debts) and others don't.

Also, every country that has tried fixed exchange rates with another currency has run into problems when the trade balance didn't pan out with what the exchange rate was set at. Trying to set rates in a market by buying or selling is very expensive, and the country quickly dries up its reserves of the foreign currency, so that it can no longer fix exchange rates. Or conversely, it keeps having to give away its own currency for free, to the benefit of consumers in another country.

 

That happens in the US, and most often (certainly not always) people find a job elsewhere. It takes a Real Recession to be "universal" in the US, and the Great Recession was real-enough.

In Europe, that does not exist - largely due to language barriers. In the US, if one loses their job in Boston, often enough one also finds work in San Francisco where English is spoken.

People cannot do that typically in Europe - especially in the lower grades of work. But those Europeans who speak English can and do go elsewhere to find jobs.

There are plenty of Irish bankers in Gibraltar or Malta ...

 

Don't want to go too much off topic here, but there are hundreds of thousands in Europe who go to other countries within the EU to work there.
Poles going to Germany, Ireland or the UK or Greeks, Czechs and people from the baltic countries working in Germany, etc. Others move to Austria or Switzerland to work there, without C1 English language skills. There usually is a language barrier, but it's not really an obstacle. Work migration within the EU is a pretty normal thing.

 

Yes, but it depends.

When it comes to shoveling ... yes, you're right. Or any skill-based work that does not require any real means of communication. (I've hired polish carpenters. Damn fine workers - but I needed a translator to explain what I wanted done. And I never had a problem with the result.)

At the moment, France is short of doctors. Presume you lived in France. Would you care to be treated by a doctor who could not speak proper French?

Not me - nor will I ever meet one because they simply will not make the cull. A simple phone-call to interview tells much (that is key) about the candidate ...

 

I would not consider you comment "off topic".

Language is the primordial barrier that separates Europe and makes its economic potential less than it could be. (In the US, recessional economies can be regional, and simply changing regions gets many back to work. Of course, the Great Recession in the US was universal, not regional, which is why it was called "great".

We should be teaching a second-language to all the kids. But if said that second-language should be English, I am sure that would raise a hullabaloo. (So I wont ... ;^)

 

Definitely agree here. Foreign doctors living and working in Germany (where I live) all speak German, some even pretty good. In some Eastern European countries, medical students attend medical school and language school simultaneously for better future prospects.
There was this case of a doctor from Germany a few years ago. He went to England for work and, due to his poor language skills, accidently killed an elderly patient by giving him a fatal overdose of drugs. Not good at all.

I'm not awfully familiar with foreign language teaching in France and the French have a reputation of 'not keen on foreign languages', but in Germany around 95% of all primary school kids start English either in year 3 or even year 1 these days and almost everybody has to take English in secondary school. Many other countries do basically the same, Netherlands, Austria, Belgium, Scandinavian countries, Spain. Eastern European countries on the other hand seem to be a bit behind here.

 

English is not mandatory in high-school in France. It is selective. But, a student must elect one foreign language being taught.

When one looks at the evolution of the English-language, one notes that it is clearly a mixture of languages. That influence came from a French King that sat on both the French and British thrones in the 15th century - all of five years. This was the background for Joan of Arc who thought that God meant that she should free France from the British crown - which she did.

The British, otoh, burnt her as a "witch. All of which historically did not mean much.The French dynasty of kings ended with heads being chopped at the French revolution in 1789.

The person who started the arch-Right conservative party known as the Front Nationale in France celebrates Joan-of-Arc's birthday every year at her statue in downtown Paris. Which makes her not only a religious but a national heroine as well. For some.

But, I digress ...

 

Most of the movement of people happens between countries with much lower standards of living (say, Romania for example) and countries with much higher standards of living (say, the U.K.). For a country with an intermediate standard of living (Spain, Italy) the trouble and difficulty of overcoming the language barrier to move to a higher income country does not seem to be worth it.

 

True, too true.

The Italians once flocked to Germany. No longer. With all the Middle-east and African migrants to move the garbage, there is no longer any great need for them. And they have no real skill-sets that can be applied in an economy that does not need them. (Sound like the America Migrant Problem, does it?)

So, what happened in Italy? Just like in some of the newer eastern-EU countries that became members, the Rabid Right is getting elected into power.

History repeats itself in both Europe and the US - the migrant problem just wont go away ...