Deficit Spending is Just Fine
It was clear that once enough time passes without further market pressure, politicians would seize the opportunity to return to their bad habits in full force. In the forefront of the EU's "anti austerity" movement we find – to no-one's particular surprise – the socialist government of France. France is already more akin to a command economy than a free market, with government's spending amounting to 57% of GDP and the government attempting to micro-manage industry. The Hollande government has created an environment that is extremely inimical to free enterprise. Clearly this is a case where the parasite has eclipsed the host. France is has entered a very nasty recession that could easily turn out to be worse than the last one. The government's preferred "solution" to this is to increase its spending even more. Contrary to popularly held beliefs, this will impose additional burdens on the economy.
Germany has made the "mistake" (in reality it had no choice) to provide more "wiggle room" for countries to reach their agreed upon fiscal targets. The end result will be that none of the targets will be reached, ever.
According to a Bloomberg report:
“French Finance Minister Pierre Moscovici declared the era of austerity over after his German counterpart offered flexibility on deficit cutting amid renewed bickering between Europe’s two biggest economies.
“We’re witnessing the end of the dogma of austerity” as the only tool to fight the euro debt crisis, Moscovici said yesterday on Europe 1 radio. “We’ve been pleading for a growth policy for a year. Austerity on its own impedes growth.”
The gap between the French Socialist finance chief’s view and the election-year positioning of Germany’s Wolfgang Schaeuble underscores the divergence between their economies and the wrangling that has marked the crisis fight since Francois Hollande replaced Nicolas Sarkozy as French leader a year ago.
It is of course totally risible for any French politician of the current government to even mention the term "growth". This government has done everything it could to damage the private sector and make it nigh impossible for it to create wealth. However, these people still think that "economic growth" is something that is mainly bestowed by the government in the form of public spending. They firmly believe in central economic planning. France is consequently a disaster zone and if deficit spending accelerates, it will become an even bigger disaster zone.
Interest rates on French government bonds remain extremely low at this time – in a recent report, Gavekal states that this could simply be an artifact of the fact that French banks have to reserve zero capital for holdings of French government bonds. This may continue to keep interest rates down (a kind of "Japanization" effect) – but it cannot solve the central problem. Eventually the market may balk again at the debt expansion. Banks meanwhile become ever more tightly intertwined with the sovereign's fate. France may well end up thoroughly impoverished by the time the socialists are through with it. Real money buyers of French debt should beware (banks are not included in this observation, since they can create deposits from thin air; there will be a lot of wailing and gnashing of teeth eventually though).
Germany Gives them a Finger and They Take the Whole Arm
Meanwhile, after allowing for fiscal targets to be reached later than hitherto planned, Germany belatedly tries to remind its fellow EU members that there is such a thing as a treaty:
“Coalition lawmakers in Germany are pushing back against the two-year extension for France to meet European Union deficit rules floated by Olli Rehn, the EU economic and monetary affairs commissioner.
Europe must compete with countries like China and India, Angela Merkel said during a discussion with high-school students in Berlin today.
“That’s why it’s not about what people always say: to save or not to save,” Merkel said. “We in Europe have to see that we finally get by with what we earn. Those are my analyses. Some may see it differently.” She said talking about austerity policy sometimes leads people to forget that euro nations signed up to a binding treaty that limits debt and budget deficits.”
Here are Dr. Evil and his associates, after hearing Mrs. Merkel mentioning the "binding treaty that limits debt and budget deficits":
Dr. Evil and his associates after listening to Mrs. Merkel talk about the "binding treaty" that supposedly limits debts and deficits in the euro area.
The result of the so-called "age of austerity" so far looks as follows in Europe:
European government debts after the application of "austerity". Apart from a few small countries in the CEE region, public debt has continued to explode into the blue yonder, with the euro area as a whole sporting a debt-to-GDP ratio of about 90% – counting funded liabilities only. Based on GAAP accounting, every single one of these governments would probably have to be regarded as hopelessly insolvent.
We are not mentioning Dr. Evil just for fun. Government debt as such is evil. It perverts society and its priorities, it is totally unproductive, it is incurred in constant attempts to bribe voters, and it can only be serviced and repaid with income obtained by coercion.
Moreover, as e.g. Dimitri Speck has pointed out in his book "Geheime Goldpolitik", citizens don't add the share of the government's debt they are theoretically liable for to their own balance sheets. It is as though the spending and borrowing occurred in a vacuum – ultimately, no-one is truly responsible for it. Even the politicians making the decisions that leave a growing mountain of debt in their wake are usually long gone and retired on fat tax payer financed pensions and even fatter lobbying incomes by the time the chickens come home to roost. They need not fear any personal consequences for having set their countries on the road to ruin.
There can be no question of a truly democratic debate on spending priorities as long as governments can simply borrow however much they like. Citizens would likely react differently if they were taxed directly for every cent of spending; there would probably be a lot of resistance to the government waste that has become endemic all over the world, instead of the apathy that is reigning now.
It is a pity that the financial markets have decided that the bromide of money printing is a good enough replacement for fiscal discipline, as that means there won't be any discipline. Instead there will be robbery by stealth, or what Reinhart and Rogoff call "financial repression".
Charts by: Eurostat