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Eurozone in Crisis

by TOM McNAMARA

“Let all the poisons that lurk in the mud hatch out.”

– Robert Graves, I Claudius

Rennes, France.

Things are bad in the European Union (EU). Just how bad you ask? They are so bad that the unelected fonctionnaires in Brussels are finally being forced to say so. In a communiqué dated March 26th, 2013, the European Commission (EC), the civil service arm of the EU, pulled no punches. It reads like a laundry list of pain and suffering:

– Unemployment rose in January to 26.2 million people or 10.8% of the economically active population (11.9 % for the euro-zone area).

– Overall employment in the EU fell by 0.4% in 2012

– GDP in the EU shrank by 0.5% during the fourth quarter of 2012, the largest contraction since early 2009.

– Youth unemployment reached a new peak in the EU in January at 23.6%, with levels in Spain and Greece now approaching 60%

– The crisis has had a negative impact on fertility rates, which now stand at just under 1.6 children per woman. This is below the generally accepted replacement rate of 2.1, the minimum considered as necessary to keep a society’s population stable and at current levels.

By that last measure, one could literally say that the EU is dying.

To be fair, the Commission is urging that EU countries put more of an emphasis on social investment. It is calling for measures that will increase people’s “skills and capacities” in order to better allow them to “integrate in society and the labour market.”

As if to say that the only problem with the over 26 million people who are currently out of work was that they just needed to brush up on their java programming skills.

If the EU didn’t have enough problems on its hands already, the banking system of Cypress has just inconveniently blown up, a completely foreseeable event given the fact that it was allowed to grown to 7 times the size of the country’s economic output or Gross Domestic Product (GDP), fuelled in large part by Russian deposits seeking favourable tax treatment. Granted, this is not as bad as Malta’s banking sector which is 8 times GDP or Luxembourg’s 22 times GDP.

But not to worry. The EU, in an attempt to learn from previous banking crises, has decided to save the day by using a “bail-in” instead of a “bail-out.” The details appear to change on a daily basis, but instead of making all depositors whole, there is talk of “haircuts” being introduced, that is to say, losses on any deposits over the insured threshold amount. Current reports are that large depositors might stand to lose 60% of any amount over the guaranteed threshold of €100,000. Local “Mom and Pop” investors with deposits within the €100,000 insured threshold, and who basically had absolutely nothing to do with the crisis, stand to lose “only” 6.75% of their money (there is a talked about exemption for accounts under €20,000). To add insult to injury, a report in Reuters said that while banks were closed for a government imposed “banking holiday” that subjected ordinary Cypriots to limited ATM withdrawals, two banks at the centre of the Cyprus crisis had units in London that remained open throughout the week and placed no limits on withdrawals, implying that large depositors – and the people most likely responsible for fuelling the banking bubble – were allowed to get some, if not all, of their money out.

What the unelected fonctionnaires in Brussels (as well as those in Frankfort, the home of the European Central Bank) are somehow failing to realise is that we are in the worst economic and social crisis in 80 years. Recent analysis from a Nobel Prize winning economist (“The Economist Who Shall Not Be Named” as one needs to refer to him in order to avoid internet vitriol) shows that the pace of economic recovery in Europe has been worse than that of the Great Depression in the 1930s. The same can also be said of the UK economy.

So what exactly is the solution to the current crisis that we find ourselves in, a crisis, it should be noted, that was brought on by reckless and irresponsible speculation in the now estimated $639 trillion unregulated over-the-counter derivatives market and the poor regulatory oversight carried out by various government agencies, and which was aggravated by poorly planned and poorly coordinated government policies that were doomed to failure from the very start, and which had almost nothing to do with the 26 million people who now find themselves out of work?

(Author’s Note: Contrary to popular belief, the euro-zone crisis was not brought on by Greek hairdressers retiring at 50)

As the old saying goes, “When the going gets tough, the tough get going,” and the EU is no exception. It is doggedly promoting what can only be referred to as the 2 redheaded step-children of economics, better known as “growth friendly fiscal consolidation” and “smart fiscal consolidation.” In English (supposedly one of the official languages of the EU) this translates into “the good kind of self destructive austerity measures, not the bad ones that haven’t worked for the past 4 years.”

The EC, for its part, has decided to “go big,” stating a need for “a deep and genuine Economic and Monetary Union.” The Commission’s (unelected) President Barroso, and infamous Gulf War II enabler, is calling for the even greater integration of a failed economic and monetary system, no matter what the cost in pain and suffering to its citizens. President Barroso said that there is a combined need “for more discipline [i.e. more austerity, i.e. more failed policies] at national level with more solidarity at EU level.”

All of this is supposed to somehow magically “drive forward Europe’s competitiveness, growth and job creation” despite over 4 years of empirical evidence to the contrary.

President Barroso’s partner in crime, Vice President Olli Rehn, appears to be even more deluded and criminally negligent than the good President himself. In a statement made at a conference in Poland on March 8th, 2013, the Vice President spoke of the continued need for failed austerity measures. He banged on about the crucial need for EU countries to get their debt levels to below 90% of GDP (this, in the midst of the worst economic crisis in 80 years) since “serious empirical research has shown that at such high levels, public debt acts as a permanent drag on growth.” It would be interesting to know what “serious empirical research” the good Vice President was referring to. Recent research (Eyraud and Weber 2013, De Grauwe and Ji 2013) has shown that the policies that our esteemed Vice President is calling for will only make debt-to-GDP ratios worse, the exact opposite of what he is trying to bring about, albeit delusionally, with his failed policies.

Menacingly, the Vice President warns that European countries with high debt levels “face hard choices and imperfect policy options” and that “fiscal stimulus cannot be the answer for these countries.” What the good Vice President neglects to mention is that these “hard choices and imperfect policy options” are going to be imposed by unelected fonctionnaires in Brussels and Frankfort, and that the victims will be the citizens of countries that have only known pain and suffering since the start of this (engineered) crisis.

Vice President Rehn goes on to state that “Europe faces profound economic and social challenges. And that is precisely why we need to stay the course of reform.”

English translation, “Unicorn Economics will save the day.”

Tom McNamara is an Assistant Professor at the ESC Rennes School of Business, France, and a Visiting Lecturer at the French National Military Academy at Saint-Cyr, Coëtquidan, France. 

 

Tom McNamara is an Assistant Professor at the ESC Rennes School of Business, France, and a former Visiting Lecturer at the French National Military Academy at Saint-Cyr, Coëtquidan, France.

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