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The Insanity of Austerity

Nightmare and insanity are akin.
Mysterious and involuntary states that skew
and distort objective reality
One wakens from nightmare.
From insanity there is no awakening.

“Let Your Life Be a Friction to Stop the Machine”

While the unelected fonctionnaires working for the European Union (EU) in Brussels have their Nobel Peace Prize to keep them warm this winter, the citizens of Europe, on the other hand, have only their furniture to burn. Almost 4 years after the official end of the worst financial crisis in 80 years, things are not going well in the EU. The euro-zone (the 17 EU countries that use the euro as their currency) fell back into recession in the third quarter of 2012 according to Eurostat, the official statistics gathering arm of the EU.

The European Commission believes that the euro-zone will contract, with Gross Domestic Product (GDP) falling by 0.3% this year as compared to last. As recently as this past November, growth was predicted to be 0.1% (with even that tepid number being nothing to brag about). As a result, unemployment is expected to rise to 12.2%, a revision upward from a previously dismal forecast of 11.8%. Youth unemployment levels in Spain and Greece are well over 50%. In Ireland, the percentage of people considered as long-term unemployed rose from 29% to 63%, the largest increase of any OECD (Organization for Economic Co-operation and Development) country. Things are so bad that even the newspaper “The Economist” is asking that Ireland be given “a helping hand” by the Germans in order to leave their punitive bail-out program.

And what does the (unelected) President of the European Commission, Mr. José Manuel Durão Barroso, have to say about all of this? The former student Maoist (and host of the infamous Azores summit of 2003 where President Bush II, Prime Minister Blair and Prime Minister Aznar of Spain set the stage for the invasion of Iraq) in a letter dated March 11, 2013, said that while he was “painfully aware that economic activity over the past year has been disappointing” and that there are still “unacceptably high levels of unemployment” somehow, beyond all logic and reason, Mr. Barroso feels that the “reform efforts [i.e. austerity] of Member States are starting to bear fruit.”

The amount of self delusion and complete disregard for the suffering of other human beings needed to make that statement simply boggles the mind.

Even more troubling is a recent paper from the IMF (Eyraud and Weber 2013) which basically argues that the effect of European governments imposing austerity and budget cuts in order to get their debt levels down will be to, paradoxically, increase their debt to GDP ratios.

A complimentary paper by De Grauwe and Ji (2013) provides further support to the argument that austerity has been a complete and unmitigated disaster. They argue that the poorly thought out “panic induced” austerity programs that have been imposed upon the citizens of the southern euro-zone countries have only exacerbated the financial crisis.

De Grauwe and Ji found that the countries that had imposed the strongest austerity measures were the ones that also experienced the greatest declines in their GDP. Furthermore, the more intense the austerity, the larger the subsequent increase in the debt-to-GDP ratio of the respective country. This is almost exactly what was argued in the IMF paper.

The austerity programs that were imposed on the people of Europe not only resulted in (predictably) severe recessions, these programs didn’t work. They only resulted in the unnecessary suffering of the millions of people who lost their jobs (more than 26 million are out of work in the EU).

For his part, French “Socialist” President Francois Hollande has said that the “only priority” is to find fresh ways to boost growth and get people back to work. This from a man who curiously had no trouble finding a way to provide militarily aid to an unelected government in Mali (at an estimated cost to the French taxpayer of $3.6 million per day) and who said that France is ready to “take its responsibilities” and supply weapons to the rebels fighting to overthrow Syria’s secular (if unelected) government, completely ignoring the blowback received from overthrowing the secular (if unelected) government of Libya in 2011 (at an estimated cost to the French taxpayer of $2.1 million per day).

Disturbingly, there is already talk of a “European Spring” and growing popular resistance to more self inflicted pain through directives from unelected officials in Brussels. In recent Italian elections an anti-austerity party won 25 percent of the vote.

And the EU’s response to all of this? After a European Council meeting held on March 14-15, guidelines regarding economic priorities for 2013 were issued for the member states. The European Council stressed “the need for fiscal consolidation [i.e. austerity] while at the same time ensuring economic growth.” Something that it calls “growth-friendly fiscal consolidation.”

This can only be described as “Unicorn Economics 101.”

Albert Einstein supposedly said that insanity was doing the same thing over and over again and expecting a different result each time. By that definition, the leaders of the EU are clearly insane. They will only have themselves to blame when their cherished project ends in tears.

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. 

Notes

“Charlemagne: Meet the president” February 17, 2005, The Economist. Accessed at:

http://www.economist.com/node/3669399

“Eurozone unemployment reaches new high” January 8, 2013, BBC News. Accessed at:

http://www.bbc.co.uk/news/business-20943292

“Flash estimate for the third quarter of 2012” Eurostat News Release No. 159/2012, November 15, 2012. Accessed at:

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-15112012-AP/EN/2-15112012-AP-EN.PDF

“Ireland and the euro crisis: Dawn in the west” January 5, 2013, The Economist. Accessed at:

http://www.economist.com/news/leaders/21569034-why-irish-deserve-helping-hand-leave-their-bail-out-programme-dawn-west

“Jose Manuel Barroso’s call for EU banking union threatens national sovereignty and economic freedom” by Nile Gardiner, June 12, 2012, The Telegraph. Accessed at:

http://blogs.telegraph.co.uk/news/nilegardiner/100164732/jose-manuel-barrosos-call-for-eu-banking-union-threatens-national-sovereignty-and-economic-freedom/

“Leaders endorse EU’s economic priorities for 2013” Statement by the European Council, March 15, 2013. Accessed at:

http://www.european-council.europa.eu/home-page/highlights/leaders-endorse-eus-economic-priorities-for-2013?lang=en

“Leaders wrestle with austerity as EU jobless fears rise” March 15, 2013, EUbusiness.com. Accessed at:

http://www.eubusiness.com/news-eu/summit.mxr

“Letter from President Barroso to the Members of the European Council” by President José Manuel Barroso, Reference: MEMO/13/195, March 11, 2013. Accessed at:

http://europa.eu/rapid/press-release_MEMO-13-195_en.htm

“Long-term unemployment” February 23, 2013, The Economist. Accessed at:

http://www.economist.com/news/economic-and-financial-indicators/21572209-long-term-unemployment

“Mali costs France $3.6 million per day” February 8, 2013, UPI. Accessed at:
http://www.upi.com/Top_News/Special/2013/02/08/Mali-costs-France-36-million-per-day/UPI-78771360343086/#ixzz2NgquyUac

“Panic-driven austerity in the Eurozone and its implications” by Paul De Grauwe and Yuemei Ji, February 21, 2013, VOX. Accessed at:

http://www.voxeu.org/article/panic-driven-austerity-eurozone-and-its-implications

“Prodi Says Europe Hurt by Too Much Austerity Amid Very High Euro” By Indira A.R. Lakshmanan and Kasia Klimasinska, March 15, 2013, Bloomberg. Accessed at:

http://www.bloomberg.com/news/2013-03-15/prodi-says-europe-hurt-by-too-much-austerity-amid-very-high-euro.html

“The Challenge of Debt Reduction during Fiscal Consolidation” by Luc Eyraud and Anke Weber, March 8, 2013, The International Monetary Fund (IMF) Working Paper No. 13/67. Accessed at:

http://www.imf.org/external/pubs/ft/wp/2013/wp1367.pdf

“The Greek election could be the start of a European spring” by Costas Douzinas, May 1, 2012, The Guardian. Accessed at:

http://www.guardian.co.uk/commentisfree/2012/may/01/greece-vote-european-spring

“The IMF on the Austerity Trap” by Dr. Paul Krugman, March 10, 2013, The New York times. Accessed at:

http://krugman.blogs.nytimes.com/page/2/

“The Nobel Peace Prize 2012 – Press Release” October 12, 2012, The Norwegian Nobel Committee. Accessed at:

http://www.nobelprize.org/nobel_prizes/peace/laureates/2012/press.html

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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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