Market Currents
Maybe surprising to some, Italy actually runs a primary budget surplus (balance before interest...
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Wednesday, November 9, 2011, 12:49 PM ETMaybe surprising to some, Italy actually runs a primary budget surplus (balance before interest payments). The issue (and this goes for France as well) is slowing economic growth necessitating an even larger surplus to keep debt levels from exploding. Fiscal austerity promises to slow growth even more, requiring more austerity ... it's an ugly cycle.
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I agree.
While greater efficiencies and effectiveness in public expenditure in both France and Italy (and, for that matter, anywhere that one can imagine) would undoubtedly be a significant plus, both these countries have strong economic sectors which need to grow and encompass more of the people of these countries in greater productive activity. It is highly doubtful as a general rule and particularly inappropriate in the case of these two countries to dream that shrinking the economy is anything other than a wrong detour on the road to economic and fiscal stability and recovery.
This is the conundrum I don't understand. I would think that government spending, rather than growing the economy, would compete with the private sector for financing and resources (human and material). Governmental austerity, especially on 'feel good' projects, would seem to encourage private investment as an alternative to mattress stuffing. It seems that real growth in GDP is created by the private sector.
Many think the ECB can save the day. But that too would not be cost-free. It would lead to a sharp decline in the value of the euro, inflation, and further strains on a banking system that's already partly insolvent. It's a much worse situation than the US in 2008, because their banks are far more leveraged than ours have ever been.
The premise that by cutting public sector this automatically frees up resources for private sector expansion, that private sector expansion will rapidly occur in such circumstances and that the net balance of such a transition will be clear and significant within a reasonable period is open to serious doubt in the circumstances of the fiscally challenged EU member States at present. I suggest that a more likely scenario would be that significant delays and inefficiencies in the assumed transition from public to private sector activity would actually occur and, when public sector activity slowed the private sector, rather than filling the void, would itself shrink because of lost demand in the economy.
It's not that "Adam Smith's invisible hand has been cut off" but rather that, as I tried to describe above, it would nove too slowly.
Unfortunately nobody is willing to go back to the free market and the true form of capitalism; so we engage in the simplest method at our disposal - sticking it to the debt holders (think GM, Chrysler, Greece). Of course, that shocks the banking system -- the usual holders of that debt -- who then must cut on their loan portfolios to raise cash. So small and mid-size business becomes unbankable. Employment shrinks and the productive part of the economy takes a much bigger whack from the initial public finance morass. It is sickening.