Is Europe actually practicing austerity?

[Beet]

The talk this year has all been about austerity in Europe. Numerous so called 'austerity packages' have been passed in Europe. Only the Irish effort has been truly impressive. Yet it strikes one to wonder that Spain, which has enacted numerous 'tough' packages, is still projected to run a deficit of 9 percent of GDP this year, compared to 11 percent last year.

Think of this for a moment. The deficit ought not be reported as a percentage of 'GDP' but as a percentage of revenue. In Spain, the revenue is about 35 percent of GDP. So total spending is 35 + 9 or 44 percent of GDP. In order to bring the budget into balance, Spain would have to cut more than one-fifth of its budget; closer to a quarter as cuts in spending would contract GDP. Even in this case Spain would have to roll over its existing debts.

It is not austerity if a country goes from funding a quarter of all spending from borrowing to funding a fifth of all spending from borrowing. Real austerity would be more like bringing the budget into primary balance, so that the only deficit that might arise comes from the cost of rolling over or paying back existing debts. Or at minimum, going immediately to the treaty level of 3 percent of GDP deficits [and then having the ECB make up the rest]. This is especially the case if your government bonds are seeing high volatility due to credit risk.

It is noteworthy that it is not even a goal for Spain to get to treaty levels next year. I find this quite disturbing. Massive new cuts are needed now. The alternative is to be shut out of the bond markets, forced an even more wrenching adjustment.

[Хahar 🤔]

Why on Earth should Europe practice austerity?

[Beet]

Because, Xahar,



Srsly... the only 'alternative' seriously proposed (by anyone other than myself, opebo, and maybe J.K. Galbraith) is default, and if you do that you are shut out of the bond markets anyhow.

[Хahar 🤔]

...and?

Perhaps I'm being dense, but I don't understand why that would be any worse than the status quo for the rich and austerity for all the rest.

[Beet]

Well if you don't see how things could get worse, you are dense.

[Antonio the Sixth]

So a guy with a -3 economic PM is quoting Mad Maggie ? I have more and more difficulties to understand you, Beet.

[Zarn]

So a guy with a -3 economic PM is quoting Mad Maggie ? I have more and more difficulties to understand you, Beet.

When the budgets get worse, you will see more people like him.

[Antonio the Sixth]

So a guy with a -3 economic PM is quoting Mad Maggie ? I have more and more difficulties to understand you, Beet.

When the budgets get worse, you will see more people like him.

Why ? When the economy gets worse, I doubt there are many right-wingers quoting FDR. Or to stay in the British fashion, I doubt that when poverty gains ground, right wingers start quoting Attlee.

[Hash]

All governments will always spend. For proof, look at the terrific response by Mr. Western Reformer Neoliberal Steve Harper. Stimulus spending, stimulus projects, pork-barrel spending to shore up marginal seats, channeling a majority of stimulus monies to Conservative-held constituencies. He quickly forgot his 'principles' of small government, low spending.

[Insula Dei]

Why on earth would more austerity be a good idea? The only thing you realize by cutting savagely is destroying the healthy parts of your economy. Most of the 'real cuts' Beet seems to be dreaming of, would be ideological way more than pragmatist.

And yeah, Tatcher???

[Filuwaúrdjan]

He's just using that image because of the title of the book. And, perhaps, irony; the Thatcher government did not actually cut public spending overall, mostly because of the massive rise in unemployment (and thus in social security payments).

[Bunwahaha [still dunno why, but well, so be it]]

I don't really see how a rational discussion is possible on that topic. Everybody is driving in the fog hopping not crash against something and focusing on the little light still given by the headlights, I know that situation once it happened to us on a very small mountain road, and we had to go slow if we didn't want to suddenly...badaboom...there was no protections on the road against the ditch, one more problem here seeming that people are driving F1 cars in the fog.

Law seems to be made by what 'the markets' 'seem to want'. Then govts give to 'the markets', which are a totally undefined, uncatchable thing, what they 'seem to want', because indeed nobody can really have a clue of what 'the markets' 'want'. So govts try things, and monitor the consequences, and so far it seems that with austerity, it made 'the markets' happy. So, govts give austerity, more and more, they would give anything that would seem to please 'the markets' in order to make this system keep rolling, because too scared of the social mess which could come from a fall of the system, not matter how immoral it is to make roll this system. What a successful hostages keeping, the biggest ever organized. And it would continue like that as long as we don't meet a concrete or psychological limit. And finance is taking over politics, congrats babies.

That being said, the case of Spain is interesting, because lately I was wondering whether it could be the psychological limit. We knew over crippled cases with Greece, Ireland, and Portugal would be the next worry, but all of those have a rather small size, Euro zone can promise to back them while implementing big austerity programs and 'the markets' would trust it, but if, suddenly, 'the markets' decide to worry about Spain, given the size of this economy would they continue to trust the ability of a big austerity program to appease their worry? I don't know, maybe, maybe not, it's all about fog and psychology, and so far seems like the hostage keepers always get what they want as long as the system keeps rolling, and seems like policemen is charge of hostages seem to have Stockholm syndrome, fearing the release of hostages...

Oh and, I fail to see why this is more in this board than in the 'Economics' one.

[opebo]

Srsly... the only 'alternative' seriously proposed (by anyone other than myself, opebo, and maybe J.K. Galbraith) is default, and if you do that you are shut out of the bond markets anyhow.

What's Galbraigth's suggestion?  The same print-all-the-Euros-needed-to-buy-up-the-peripheral-debt that I suggested?

But regarding the original question, yes, Europe is practicing the wrong policy - austerity - though obviously they could make the austerity yet more severe if they continue to go down the wrong path as they are.

[You kip if you want to...]

I can't speak for the rest of Europe, but British 'austerity' is certainly a false economy.

[Beet]

No, I have not embraced Thatcherism; the difference is that her so called austerity (which did not actually result in lower spending as Al notes) was based on an affinity for a neoliberal economy, whereas mine is based more on elementary school mathematics. She wanted to dismantle socialism, I want to shrink it in a quantitative sense so that it is sustainable and defensible, and not at the mercy of the markets.

Apparently I was wrong about Galbraith though.

And yes, it's a crime that governments should be at the mercy of markets. Speculation is in some ways an act of war; a declaration by the private sector against a sovereign state. But countries put themselves in this position when they want to borrow more than they make, and when they depend for their tax revenues on a highly leveraged private financial economy.

[opebo]

No, I have not embraced Thatcherism; the difference is that her so called austerity (which did not actually result in lower spending as Al notes) was based on an affinity for a neoliberal economy, whereas mine is based more on elementary school mathematics. She wanted to dismantle socialism, I want to shrink it in a quantitative sense so that it is sustainable and defensible, and not at the mercy of the markets.

Apparently I was wrong about Galbraith though.

And yes, it's a crime that governments should be at the mercy of markets. Speculation is in some ways an act of war; a declaration by the private sector against a sovereign state. But countries put themselves in this position when they want to borrow more than they make, and when they depend for their tax revenues on a highly leveraged private financial economy.

Actually no, the State puts itself in this position when they allow the existence of a private sector and 'markets'.  The man with the gun is making the rules, not some ass in the bond pit.