Europe is right to worry

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I’ve stated many time over the last 2 years that I consider the current economic policies within the Eurozone to be delusional. As I covered back in December 2011, when I referred to them as Europe’s suicide pact, there were two reasons for this.

Firstly, the entire premise of the fiscal compact and its associated treaties was based on a flawed ideology that a large cuts in government sector expenditure would, over time, lead to an increase in economic output owing to the effects of “expansionary fiscal contraction” along with increases in external demand due to higher economic efficiencies.

As Greece, Spain, Portugal and more recently Italy and France have proven this is grossly inaccurate and in all cases, outside of Ireland, that already had an economic structure tightly coupled to the US. Not only has time and time again the estimates of the economic downturn been inaccurate ( to the point that the IMF has admitted it), but when it has became obvious that the current plan is failing those in power have doubled down and made things even worse.

A plan that required most of the nations of the Eurozone to implement policy which by its very nature was going to slow economic activity in the world’s largest economy and relied therefore upon some third party to pick up the slack was quite literally delusional. In fact what we have seen over the last three years is simply a continuation of the structural issues I explained back in March 2011 which were the beginnings of the crisis itself; that is the fact that German domestic policies are incompatible with the rest of the EuroZone under a fixed exchange rate architecture.

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The economic delusion, although my namesake, has not been my biggest issue. The second, and greatest concern, was the potential socio-political fallout from what I saw as the inevitable outcome of these deluded policies:

I’ve been covering the European crisis for over two years and throughout my commentary I have been very clear that I consider the policy responses to the crisis to be misguided, delusional and dangerous. One of my major concerns has been that the implementation of what I see as a deluded ideology would eventually lead to a breakdown of cvil society in periphery nations that are being forced to endure these failings. As I stated previously:

One of my greatest concerns is that there are now literally millions of bored, unemployed and socially disenfranchised youths across southern Europe. These numbers will continue to grow as the mix of government austerity and deflating private sector economics pushes down periphery GDP.

Obviously this is an economic disaster and I have been at the front of the queue screaming about misguided economic ideologies in Europe that have led, and continue to lead, to this situation. However, it doesn’t take much of an imagination to realise that this has the potential to become something much more sinister than just ugly looking charts and that is my real concern.

You only have to look at the latest Eurozone unemployment figures to get a feeling for the human toll. In the last 12 months alone 1.9 million people have become unemployed in the Eurozone, that is nearly equivalent to the entire population of my home city, Brisbane. Greece has very obviously been at the forefront of this disaster and, until recently, was seen as the misbehaving child of Europe. Behind the troika-ish media coverage, however, is the story of people’s lives being destroyed as their country is stripped of not only wealth, but the ability to ever get it back.

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Yesterday I noted that Yanis Varoufakis had written a post in preparation for an appearance on radio national explaining some of these issues, along with the situation of the “man on the street” in his home country. I recommend you read the entire post, but this extract gives you an idea of what is happening to the average Greek citizen:

These austerity measures are also having a massive social impact, we’re reading stories about old people raiding rubbish bins for food and families not being able to pay their phone and utility bills. What’s life like for you in Athens?

Heart wrenching. A society that took pride in its rise from the hardship and poverty of the 1940s and 1950s, which had caused the economic migration waves of that era, is now sinking with incredible speed into a black hole. Worse still, the direction of change being what it is, it leaves no room for hope. At least back in the grim days of the Second World War and even the misanthropic Civil War, there was hope. Hope that things cannot get much worse and that when the war is over, as wars eventually are, Recovery would follow. But now, this is a sinister, a silent ‘war’, which can drag on potentially ad infinitum. The hopelessness occasioned by this prospect turbo-charges the economic hardship and gives an opening to all sorts of evil forces.

What are people saying, how much are they hurting?

Indignity, rage, resignation, determination, depression, exemplary solidarity, menacing misanthropy, racism, selflessness, pain, elation when they hear a good piece of music – this is the mélange of contradictory sentiments that are constantly and chaotically in the air. What is certain is that you cannot meet anyone, on the street, in a bar, in a reception, at work, without going straight into a conversation about our Predicament.

There was a report in the London Telegraph about the sick not able to buy medicine, because Greek hospitals and social insurance funds are not paying their bills. What’s happening to the health system?

As you might expect, an imploding social economy cannot but bring down with it its health service system. Pension and health funds have run out of money long ago. Their unpaid bills to pharmacies and pharmaceutical companies causes the latter to stop importing a large variety of medicines (since they lack the cash to do it), and demanding up front cash from patients before they order their medicine from the pharmaceutical companies – in full knowledge that the patients may never get their money back from their fund. Add to this the severe reductions in the size of pensions and wages, plus the rampant unemployment, and you get the picture…

Portugal, the poster child of austerity, now has economic predictions looking more like Greece everyday. It’s hard to read the report below relating to Portugal and not make comparisons with the Troika’s fantasies of the past from the Hellenic isles.

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Portugal’s disappointing performance in the nearly two years of the bailout program has raised concern that the country is being required to swallow too much austerity too fast. In 2011, the lenders estimated the economy would contract a combined 4% in 2011 and 2012 and start growing again in 2013, while unemployment would peak at 13% this year. Instead, the forecast now points to a contraction of nearly 7% from 2011 through 2013, with unemployment reaching 17.3%.

Portuguese officials acknowledge they overestimated tax revenues and underestimated how much money the country would have to spend on social benefits to the unemployed. They say Portugal has been hit hard by a deeper-than-expected slowdown in the euro zone, with which it does most of its trade.

I’m not sure whether the Greek situation had much of an affect on the outcome of the Italy election or whether it was simply their own domestic economic retrenchment and political distrust that saw Beppe Grillo rise from obscurity to win the popular vote, but Italy may well be the turning point for the European periphery. It is early days yet, and there is always the possibility that some back-door deal could see another technocracy installed in Rome, but there is now a good chance the Italian outcome will pressure the Eurozone’s leadership to alter course.

That theory will be tested in the coming days as the Troika perform their seventh evaluation of the Portuguese economy while the government, much like Ireland, is requesting a renegotiation of its current bailout agreement due to the latest data and the growing public anger that saw a reported 500,000 people take to the streets over the weekend.

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Although it won’t be stated by the Troika themselves, I would read an easing of the parameters around Portugal’s bailout as a clear sign that Italy’s election has the Eurozone bureaucracies worried. But as far I am concerned that is a very good thing.