The deal signed last Friday is the beginning of the end of Europe as we know it. The shift is on from a family of nations, with checks and balances, to a German Europe where diktat triumphs over dialogue, and the interest of the strongest wipes the floor with the concerns of the weakest. Luckily for us, the deal looks unlikely to work because they haven’t been able to come up with enough money to prevent another bond crisis early next year, as more than €1 trillion of bonds in the eurozone come up for refinancing.
But we should take a long look at this deal to see whether this is a place we want to be. Make no mistake, the EU is now a very different beast and, when this deal fails, something more extreme will take its place. So what might the new Europe look like?
It looks like Germany.
This is a place where, if you don’t like something, you declare it illegal. Last Friday, Germany said it didn’t like the business cycle, which is as natural as night following day, so they made it illegal. I don’t like heart disease, but it won’t go away if I declare it illegal.
Similarly, you won’t get rid of the business cycle by saying it doesn’t exist. The world doesn’t work like that. Let’s have a look at the world as it is in Ireland, rather than how the people in Brussels might like it to be.
Ireland, unlike any other European country, is suffering from a severe balance sheet recession. This is not a normal recession. A balance sheet recession means that the nation’s balance sheet is broken because, on one side of the balance sheet, there are houses and land bought in the boom and these are falling in value. On the other side of the balance sheet is too much debt, which is rising in cost as interest-only loans ratchet up to full repayment. And the income or the take-home wage of people is falling as taxes rise and the cost of servicing the debt (in terms of how many hours you now have to work to service the debt you took out in the boom) is rising.
In a situation like this, people do not spend, they save initially and then they dip into their savings to survive as their income falls. We have seen this development in Ireland. From 2007 to 2010 the savings rate rose rapidly as a terrified population retrenched. Now we are seeing a modest fall in savings, yet we are not seeing an increase in retail sales, so what is happening? People are dipping into their savings to pay the gas bill.
If the people are saving and no one is spending, how do you maintain even modest activity in the economy? Someone has to spend. If the government doesn’t spend, who will? The huge current government deficit is a reflection of the government spending to replace the money that has been taken out of the economy, as people are saving because they are scared.
This is called “counter-cyclical fiscal policy” in economics and it is the basis of modern economics. It is just what happens when people stop spending – the state steps in. If the state steps out now, people don’t simply spend again to replace the state.
That is why contractionary fiscal policy is called contractionary, because the economy contracts when the state cuts spending and increases taxes. We all know that a state can’t keep spending indefinitely, but when no one else is, the economy would just collapse if the state didn’t take up the flak. That is why the deficit is high. It is an automatic reaction.
This is what Germany wants to make illegal. It wants to make illegal an economic phenomenon which we have seen in every country over decades. This is a German fiscal union. It penalises rather than helps countries in trouble when they most need help. Now contrast this with an American fiscal union.
Our cousins in Boston had a mad property boom in the late 1980s; then, like the Irish boom, it crashed. Automatically, the unemployed Bostonians paid less tax to the American government and received more federal transfers. That is how a fiscal union works. In good times, boom regions pay more and in bad times they receive more. This smoothes the business cycle, and the depressed region has a chance to recover.
If Boston and Massachusetts had been in a German-style fiscal union, it would have been punished, not helped, and its post-boom depression would have gone on for years, rather than the quick recovery, which it experienced because the rest of America helped it out.
Without this aid, how do we tide ourselves over periods when we are trying to rebuild our balance sheets, which can only be done through debt repudiation or economic growth? What we have signed up to says that there will be no debt forgiveness, so we can only rebuild balance sheets through rapid economic growth. But where will that growth come from?
The government and Germany say it will come from a positive balance of trade because we will export our way out of this. Ok, let’s see if this is feasible.
The balance of trade of an economy is nothing more than a reflection of the balance of savings in the economy. If the punters are saving, then the government will have to spend to offset this saving, otherwise the economy will contract.
The only other way to maintain demand is if we can persuade foreigners to buy stuff from Ireland in huge quantities. But why would they buy stuff in Ireland that they can get at home?
According to our financial plan, we are going to bring the government deficit down from 14 per cent of GDP to 3 per cent in three years. So where will that missing 11 per cent of GDP come from? If government spending isn’t replaced, the economy has to shrink by the same amount – unless, of course, the trade surplus can increase dramatically, which would mean that our savings and government savings were offset by the purchase of Irish goods by foreigners.
But the simple back-of-the-envelope calculations would mean that, for
the economy to stay stable, the trade surplus would have to increase by at least 11 per cent of GDP from here.
The trade surplus today is €2.8 billion. But, given that our GDP is about €170 billion, our trade surplus would have to move sharply from €2.8 billion to €21.5 billion in the next three years to keep the economy stable.
Our main export markets are the US and Britain, followed by the EU. Whatever happens in the US and Britain, we know that the Germans have the rest of Europe signed up to austerity and we know that austerity makes the economy contract. Europe is already in a recession now and austerity will make it worse, so who will buy the extra €20 billion of Irish goods?
This deal is bad for Ireland. It is also bad for Europe because it turns the EU from a family of nations into a German protectorate, I’m not too sure I’d vote for that. Would you? But then again, I mightn’t be asked.
on how the euro-crisis was germany’s fault:
http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=7693
When will the Teflon personalities finally acknowledge that traditional economic theories are a massive failure! Let me spell it out again, traditional economics has failed to deliver! It is as simple as that. Financial markets are supposed to allocate capital and manage risk, and the system produced nothing but cataclysmic failures, on both accounts! The reason for the build in design flaws never were more evident. They exist for a reason, to allow for the financial oligarchy to exist. The legions of Harvard educated Teflon personalities that make up the governments consultants and infested the building with their ideologically founded… Read more »
And where do we end up if we opt out?
+1. Excellent synopsis of the present situation. “We are where we are” to qupte the fatman in the Finance Ministry during the “drinks cabinet” era of governance. The British have realised that this deal is an exercise is meaningless fantasy. It would seem as if the Swedes have also recognised this. “He who pays the piper, calls the tune”. Germany and the Netherlands pay for the EU Institutional structure. Without the taxes of workers and businesses there would be no funding for the nonsensical edict making machine that is the EU. So the institutional culture is ultimately in a crisis… Read more »
Excellent short piece by Tom Palley identifying neo-liberalism as at the heart of the EuroZone crisis. “Euro lacks a government banker, not lender of last resort” FT Economists’ Forum on December 9, 2011 Copyright Thomas I. Palley In his novel, The Jungle, the American muckraking author Upton Sinclair wrote about the horrendous work and sanitary conditions in the Chicago meat packing industry of the early 20th century. It is sometimes said Sinclair aimed for the heart but hit the stomach. That is because he aimed for progressive social and economic change but instead prompted the founding of the Food and… Read more »
Well, the way the EU works – either they do not ask you at all, or else they keep asking you, until you agrre with the saturation level propaganda, and consent to responding as instructed.
The principle of consent is gone. The option of dissent is met with loads of abuse and being told you are “isolated” and “marginalized”.
This project, of European power centralization, is intellectually going to the direction of turning Europe into an absolute hellhole. Just look at Greece to see where things are going.
i have been wondering lately about the functionality of the euro, especially in the run up to, and throughout the crisis with a specific focus on the ecb setting rates to suit/ boost germany while the rest of the continent ended up booming with disastrous consequences. Normally, if a country was booming they would raise their rates to curb their boom, and vice versa. This of course was not possible in the eurozone for individuall countries. My question is, while interbank rates were set by the ecb, what effect would it have had to allow individual country’s central banks control… Read more »
Spot on: you cannot simply make a private debt bubble illegal, you have to fight it with government spending!
Further on the same note, hope I’ll be forgiven for linking to my own blog: http://icelandicecon.blogspot.com/2011/12/new-euro-zone-rules-do-more-harm-than.html
We in Ireland haven’t a clue what austerity really means but I’m afraid if we keep going down the raod we are we’ll know all about it soon enough. What we call austerity is ‘normal’ in Germany. Go shopping in an Aldi or Lidl in Germany and you’ll see what austerity is. The German discounter stores here are luxury emporia compared to the domestic versions. It’s a cultural thing. We’re ‘flaithuil’ when it comes to money and will never be able to compete with the hard-nosed Germans. Time to get out before they have our pensioners looking for empty bottles… Read more »
But over 20 states could ave gotten together and said no. Germany and france are not in charge. Others stepping back, letting them lead and then agreeing with it is not the same
http://www.foreignpolicy.ie
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This very clearly isn´t simply about economics – its about sovereignity, and it has been since at least the EU constitution was rejected by the French and Dutch and also since no votes were overturned in Ireland.
Its out in the open now for all to see, no one has any excuses.
What will the populaces do?
As DMcW points out the “deal” will fail as the Jan 2012 debt refinancing cannot function. Cameron distanced the U.K. from this looming disaster. Some seem to look to the FED desperately as a model of what the EU should do. Look again before jumping in Bubbles Bernanke’s helicopter! FT only wants money printing, and Germany cannot under any circumstance allow this. Geithner has 3 times tried to strong-arm Merkel, and failed. Sarkozy also failed. Obama personally pressures Merkel, to follow Geithner’s Goldman Sachs line. Germany has only one viable option, a new DM. This will work if the banks… Read more »
This is DMcW practising Joe Higgins economics again , just where do we get this new money from? We are in an IMF/EU program . Growth is not important , it means nothing , AUSTERITY is the only answer. I have cut my spending by 40% gone is the drink and the car , I now shop in Lidl . I will pay off my mortgage in 6 years and then the pressure is off . We must tighten our belts for the next few years by doing the very opposite to the boom …..deleverage and save money. If David… Read more »
As I keep on maintaining Merkel and Sarkozy should be told in no uncertain terms to FOXTROT OSCAR!!! The sooner this is done the better it will be for everybody.Look what happened with the Nice and Lisbon Treaty referendas. The people of Ireland rejected them, but then our cowardly and self serving politicos put the ‘frighteners’ on us and low and behold both referenda were passed at the second time of asking. If the Irish electorate do get the chance of voting in another referendum relating to this new ‘understanding’ then it should be rejected out of hand and if… Read more »
Well, Bertie Ahern has made it clear as to what he sees as the cause of the recession. “It was all Lehman’s fault”. From reading the EU Deal, and it’s deliberations, it seems as if Sarkozy, von Rompuy, Merkel, Barroso, GSuck’s man in Italy, etc.. are on much the same wavelength. It is like as if there are a collection of Dithering Berties running the EU. Small wonder then at the level of fudging the critical issues that we see, and the level of commitment to pretend that everything is doing fine. No acceptance of the responsibility of the ECB.… Read more »
I disagree profoundly with this sentence David: “In good times, boom regions pay more…” You are making a correlation between the words ‘good’ and ‘boom’. The ‘boom’ we had (or you plural had, I was overseas) here wasn’t good; it was FAKE. You might think it’s good to get a new car and over-priced house, but if you are paying for it with money that is not yours; that you have borrowed irresponsibly; that you should not have been able to borrow in the first place; and will spend the rest of your life slaving away to pay off, then… Read more »
I’m not even close to an economist, but I always go with Facts and Logic! I remember what the Ancient Greeks said and what we tell Children…. Beware of strangers bearing “Gifts” As a lay person, I predicted the gist of what has economically and otherwise recently happened. I said all this 10 to 15 years ago, based upon this logic and seeing the EEC change bit by bit into what is now an effectively German run state with countries that are effectively local provinces. Is it time for a Re Boot of a 21st Century “Halls Pictorial Weekly” Anyway… Read more »
I concur with most of what you say here, David, but can’t agree that an economic depression such as this is simply part of the business cycle, “as natural as night following day”. A little defeatist, n’est-ce pas?
“Germany said it didn’t like the business cycle, which is as natural as night following day, so they made it illegal. I don’t like heart disease, but it won’t go away if I declare it illegal.” – If there is one country that could declare heart attacks illegal and then cure them for once and for all, Germany would be the one I’d pick. I detect a slightly anti-teutonic air in some of the messages and in this article. I am still laughing at someone saying how Germans work themselves to death. In the bostononian lubbers part of the world… Read more »
EGB
To: Constantin Gurdgiev , Brian Lucey , Karl Whelan , Morgan Kelly , David McWilliams
Gentlemen,
beyond doubts. you are best positioned to fill a small database with text that operates as an EGB:
“Economic Bullshit Generator”.
How about it? It might just find approval in the highest ranks, perhaps even trigger a nobel price, who knows.
Need ideas?
http://www.dominicirving.com/temp/cccbsg.pl?
Best
Georg
As in America, the greedy and corrupt 1% in Ireland protected by the then and now Irish establishment & governments. Given billions of Irish citizens hard earned Euros are on a reposition binge and show no mercy when grabbing people’s homes and means of make a living. Shame on them, they can’t blame the British, German or French this time, although the established media in Ireland are doing there best to blame others especially Germany. Least we forget in 2006 at a financial gathering organised by the German embassy in Dublin. It was attended by both Fianna Fail & Fianna… Read more »
http://www.guardian.co.uk/world/2011/jan/18/irish-couple-800m-debt-odonnell
Think this highlights just how crazy people went in the Celtic Tiger
David,
I think if we separate spending from wasteful consumption we may break the tyranny of boom and bust.
I think the economic cycle is not doomed to boom and bust, spikes and spirals and peaks and troughs of savings and spending.
But, your article is dealing with what we are dealing with presently and defining the sequence of events accordingly.
Keep up the fine work.
No, you won’t get to vote on it David. That’s the future.
Malachi Martin book, Windswept House will tell you all about the EU and the Evil that is behind it
There we go….
Commerzbank in State-Aid talks
Personally, I like the German attitude to money, and understand why they are so reluctant to sign a bunch of blank cheques and leave them in downtown Athens, Dublin, Rome, Lisbon, Madrid, Paris etc. Particularly when those who are demanding it are also saying “Well ye were stupid to hand over blank cheques to our banks over the last 10 years, take your losses” Just ask yourself one question “Would you invest in a Greek bond?” If not, why are you asking someone else to…. Anyways, I found myself in Frankfurt airport Friday waiting for a flight… Obviously, this gives… Read more »
Yes David, your analysis is perfectly rational and logical. From my own perspective, I have been unemployed for two years prior to about one month ago. I had some savings, not much, but together with some redundancy money and cutting out needless expenses like buying coffees and take-aways, I managed throughout that two year period. I did use my credit card to finance things I felt I needed to help my job search. I travelled abroad looking for work, I bought a new suit, enrolled in a few courses, and lo and behold I found employment again. So, now I’m… Read more »
David, As a long time supporter of your views it’s difficult to say but it’s easy to sit on the sideline and comment on how bad our various governments have done, even when taking your advise as the last FF gov did. Honestly, you never had a better chance to make a real change than at the last election, yet you sat on the sidelines and let other Independants put their country before personal fame. It’s the Donelly’s and Ross’ of this country that have put themselves before the people that we should be listening to. I would never aim… Read more »
All the writings and analysis are now futile as we enter a Europe where the one outweighs the many.The Germans Federalists are calling the shots and they are not listening to anyone outside their borders.The French are like a mouse to the Germans.Sooner or later when they tire of pretending to be its friend, they will flick them up in the air, take them head first and squeeze the life out of them. Sooner or later this party was bound to end.From the days of Regional Funds and Structural Funds cheap or free money is no longer.We have the roads… Read more »
‘What Anglo-Saxon economists need to understand is that the Germans and the ECB really, really don’t share our worldview; they really do believe that austerity is all you need. And all indications are that they will cling to that belief, even as the euro falls apart – an event they will insist was caused by the fecklessness of the debtors. Given a choice between saving Europe and remaining righteous, they’ll choose the latter.’ http://krugman.blogs.nytimes.com/2011/12/12/no-draghi-ex-machina/ Krugman is ignoring the complete picture, which is of a German schizophrenia, a “do as I say, not as I do” hypocrisy, which needs to be… Read more »
A rich American explains that the rich do not create jobs, and how jobs are created. By implication this explanation also would apply to the myth of austerity as the sole way to fix an economy.
http://www.businessinsider.com/rich-people-do-not-create-jobs-2011-12?nr_email_referer=1&utm_source=Triggermail&utm_medium=email&utm_term=Business%20Insider%20Select&utm_campaign=BI%20Select%20Recurring%202011-12-12
I don’t understand why day in day out we have to talk continuously about austerity in Ireland, and feel sorry for Irish people. In France, it’s been austerity for many years now. Look at the facts. Half of French people have an income equivalent to €1000 per month! And a 60m2 apartment in Paris in an average area will cost you half a million Euros! I remember during the boom some Irish people telling me that they felt sorry for me living in a shoe box in Paris (yes, just a 60m2 flat!). I don’t find it normal that a… Read more »
We are a great race for an island of nation of 4 million people we are now even responsible for French woes. We almost single handedly brought down the European banking system aswell and must now be punished for it. No we didn’t and we aren’t. We made two mistakes in Ireland or our politicians did. We let our Banks fill thrir boots with property devepopment and then we used windfall property income as an excuse to burden ourselves for the future with benchmarking. For contributors here to try and portray the current economic problem as being caused by consumer… Read more »
We hear various estimates of our current national indebtedness including Eireannach’s recent €328 billion.
Does anyone know what was the sum in our national reserves that was contributed to the ECB at the formation of the Euro?
On a side note:
Today is the CERN press conference, here the time table:
http://public.web.cern.ch/public/
Banjaxed@Julia Recently this year young pupils in Primary Schools have been learning about credit cards and minding their money and basic household budgeting .During one of these sessions the local priest Fr. O’ Connor arrives and gives a talk on religion. During the class he spoke of that God is everywhere .A disgruntled pupil at the back of the class rose to ask a question to the priest .He said : is God in Murphys back garden ? He responded : of course HE is .To which the cocky pupil replied : Murphy has no back garden. And everyone laughed… Read more »
Hi David,
Thanks for the welcome. Yes, a lot of Irish people abroad (the forgotten ones, who don’t have a ‘voice’) think the way I do. The room was full at Colm McCarthy’s conference at the Irish college in Paris last week.
Thanks Eireannach (I appreciate your posts on this website) for clarifying the location of Paris 13th. It’s the ‘nouveau quartier latin’ at Bibliothèque beside Bercy Village.
France
Has anyone heard of ‘ The F in PIIGS’ ?
ON DEADLOCKS, LIVELOCKS & MURPHY’S LAW: Shut down the markets! A deadlock is a situation where nothing progresses due to two or more parties not being able to make a move. You all heard about it with different descriptions before, Catch 22 comes to mind. Now, does that remind you to something else? Politicos, banksters and markets perhaps? I just finished writing a few pages when suddenly…ZAPP, power cut. Seven cuts in 90 minutes and counting make it impossible to do any computer work. Normally that would not be an issue for me, I am well used to the “dirty… Read more »
Look deeper into the Irish Bank guarantee and the gangsters that signed the 99% of Irish people to a life of misery for the next 20 or maybe more years, were first and foremost protecting there 1% sponsors here in good old Ireland were the bullshit and lies flow like an Irish river in winter. The goons never taught of the consequences from Europe and the rest of the financial world and the power they can yelled. So here we are on the eve of 2012 and who do we have representing us, another bunch of Pension grabbing liars and… Read more »
Yanis Varoufakis is one of the few economists around that are not to bedescribed as Yes men. I follow his writings since more than two years now.
Refereshing to sse Fintan offering some form of support to him:
http://www.irishtimes.com/newspaper/opinion/2011/1115/1224307583055.html
@Eireannach You constantly bring this back to which side are peple on when it is the game itself that is wrong. Taking sides now until the rules are changed will make little difference. Yes as a nation we have made mistakes and are bad at government but have the Germans or French a good enough track record for us to follow without interrogation.
The Germans and the French have always been the major decision-makers in Europe. Some Irish people seem to have realized this just recently. Let’s face it, Ireland is a small country. It’s easy to question the track record for the Germans and the French. We all know our history. From my experience living in France, I can at least say that most things are FAIR. Children’s allowance is means tested, everyone is entitled to health coverage …
The 29 TRILLION FED Wall Street bailout
http://www.levyinstitute.org/pubs/wp_698.pdf
Sorry Paris this is not about comparing and France which is irrelvant but about us all questioing governmen motives amd expecting them to answer to citizens. Are u happy to follow Sarkozy without question
I don’t disagree Adam, but its also true of government as it is for individuals. in Ireland taxes were slashed and developers and banks were given an unrestricted licence to print money. In effect the state promised beyond its ability to deliver economically, acting in the irresponsible manner you describe. All else flowed from that. Wherever you go, people are people, boom bubble or bust.
A Bad Deal For The Men of Ireland and a Bad Deal To Find Work
I propose that all women should be made redundant and allow more men work again to restore the integrity of the Nation once more .
As it is said , Adam was very happy until Eve arrived .
David, “It looks like Germany” is an insightful perspective, from my point of view with a few months experience living here in Berlin. This is very much (but certainly not universally!) a rules based society. There is a high value placed on order. I have listened to how the debate is framed here in the media and in private and the discussion always ends up with a commentary about the Greek system’s disfunctionality. This is of course a complete red herring, rather like the silly comments about Ireland’s corporation tax rate. Its as though people have convinced themselves that if… Read more »
Gizzy, I don’t agree when you say that this is just about questioning government motives amd expecting them to answer to citizens. This is called only looking at what has happened in the past. The boom and the getting banks away with it, is all part of the past. What is more important now is looking at what will happen from here on. You mentioned Sarkozy. If you read the newspapers (and I don’t mean just the Anglosaxon newspapers), you would know that Sarkozy won’t be around for very much longer (yes, in case you didn’t know, there will be… Read more »