Tag: Greece

Europe’s Self-Inflicted Decline: French Taxing, Italian Regulating, Greek Mooching, and IMF Economic Illiteracy

Every day brings more and more evidence that Obamanomics is failing in Europe.  I wrote some “Observations on the European Farce” last week, but the news this morning is even more surreal.

Let’s start with France, where I endorsed the explicit socialist over the implicit socialist precisely because of a morbid desire to see a nation commit faster economic suicide. Well, Monsieur Hollande isn’t disappointing me. Let’s look at some of his new initiatives, as reported by Tax-News.com.

The French Minister responsible for Parliamentary Relations, Alain Vidalies, has recently conceded that EUR10bn (USD12.7bn) is needed to balance the country’s budget this year, to be achieved notably by means of implementing a number of emergency tax measures. …The government plans to abolish the exemption from social contributions applicable to overtime hours, expected to yield a gain for the state of around EUR3.2bn, and to subject overtime hours to taxation, predicted to realize approximately EUR1.4bn in additional revenues. Other proposed measures include plans to reform the country’s solidarity tax on wealth (ISF), to cap tax breaks at EUR10,000, to impose a 3% tax on dividends and to increase the inheritance tax as well as the tax on donations. …French President Hollande announced plans during his election campaign to reform ISF. Holland intends to restore the wealth tax scale of between 0.55% and 1.8%, in place before the former government’s 2011 reform, to be applied on wealth in excess of EUR1.3m. Currently a 0.25% rate is imposed on net taxable wealth in excess of EUR1.3m and 0.5% on net taxable assets above EUR3m.

France already has the highest tax burden of any non-Scandinavian nation, so why not further squeeze the productive sector? That’s bound to boost jobs and competitiveness, right? And more revenue as well!

In reality, the Laffer Curve will kick in because France’s dwindling productive class isn’t going to passively submit as the political jackals start looking for a new meal.

But while France is driving into a fiscal cul-de-sac, Italian politicians have constructed a very impressive maze of red tape, intervention, and regulation. From the Wall Street Journal, here is just a sampling of the idiotic rules that paralyze job creators and entrepreneurs:

Once you hire employee 11, you must submit an annual self-assessment to the national authorities outlining every possible health and safety hazard to which your employees might be subject. These include work-related stress and stress caused by age, gender and racial differences. …Once you hire your 16th employee, national unions can set up shop, and workers may elect their own separate representatives. As your company grows, so does the number of required employee representatives, each of whom is entitled to eight hours of paid leave monthly to fulfill union or works-council duties. …Hire No. 16 also means that your next recruit must qualify as disabled. By the time your firm hires its 51st worker, 7% of the payroll must be handicapped in some way, or else your company owes fees in kind. …Once you hire your 101st employee, you must submit a report every two years on the gender-dynamics within the company. This must include a tabulation of the men and women employed in each production unit, their functions and level within the company, details of their compensation and benefits, and dates and reasons for recruitments, promotions and transfers, as well as the estimated revenue impact. …All of these protections and assurances, along with the bureaucracies that oversee them, subtract 47.6% from the average Italian wage, according to the OECD. …which may explain the temptation to stay small and keep as much of your business as possible off the books. This gray- and black-market accounts for more than a quarter of the Italian economy. It also helps account for unemployment at a 12-year high of 10%, and GDP forecast to contract 1.3% this year.

You won’t be surprised to learn that the unelected prime minister of Italy, Mr. Monti, isn’t really trying to fix any of this nonsense and instead is agitating for more bailouts from taxpayers in countries that aren’t quite as corrupt and strangled by red tape.

Monti also is a big supporter of eurobonds, whichs make a lot of sense if you’re the type of person who likes co-signing loans for your unemployed alcoholic cousin with a gambling addiction.

But let’s not forget our Greek friends, the ones from the country that subsidizes pedophiles and requires stool samples from entrepreneurs applying to set up online companies.

The recent elections resulted in a victory for the supposedly conservative party, so what did the new government announce? A flat tax to boost growth? Sweeping deregulation to get rid of the absurd rules that strangle entrepreneurship?

Nope. In addition to whining for further handouts from taxpayers in other nations, the Wall Street Journal reports that the new government has announced that it won’t be pruning any bureaucrats from the country’s bloated government workforce:

Greece’s new three-party coalition government on Thursday ruled out massive public-sector layoffs, a move that could help pacify restive trade unions… The new government’s refusal to slash public payrolls and its demands to renegotiate its loan deal comes just as euro-zone finance ministers meet in Luxembourg to discuss Greece’s troubled overhauls—and possibly weigh a two-year extension the new government is seeking in a bid to ease the terms of the austerity program that has accompanied the bailout. …Cutting the size of the public sector has been a top demand by Greece’s creditors—the European Union, European Central Bank and International Monetary Fund—to reduce costs and help Greece meet its budget-deficit targets needed for the country to get more financing. So far, Greece has laid off just a few hundred workers and failed to implement a so-called labor reserve last year, which foresaw slashing the public sector by 30,000 workers.

Gee, isn’t this just peachy? Best of all, thank to the IMF, the rest of us are helping to subsidize these Greek moochers.

And speaking of the IMF, it just released a report on problems in the eurozone that makes zero mention of excessive government spending or high tax burdens. The tax-free IMF bureaucrats do claim that “Important actions have been taken,” but they’re talking about bailouts and easy money:

The ECB has lowered policy rates and conducted special liquidity interventions to address immediate bank funding pressures and avert an even more rapid escalation of the crisis.

And even though the problems in Europe are solely the result of bad policies by member nations’ governments, the IMF says that “the crisis now calls for a stronger and more collective effort”:

Absent collective mechanisms to break these adverse feedback loops, the crisis has spilled across euro area countries. Contagion from further intensification of the crisis—including acute stress in funding markets and tensions involving systemically-important banks—would be sizeable globally. And spillovers to neighboring EU economies would be particularly large. A more determined and forceful collective response is needed.

Let’s translate this into plain English: The IMF wants more money from American taxpayers (and other victimized producers elsewhere in the world) to subsidize the types of statist policies that I described above in places such as France, Italy, and Greece.

I’ve previously explained why conspiracy theories are silly, but we’ve gotten to the point where I can forgive people for thinking that politicians and bureaucrats are deliberately trying to turn Europe into some sort of statist dystopia.

What Does It Mean When Obama and His Former Top Economist both Reject Obamanomics?

To answer the question in the title, it means you need to read the fine print.

This is because we have a president who thinks the government shouldn’t confiscate more than 20 percent of a company’s income, but he only gives that advice when he’s in Ghana.

And the same president says it’s time to “let the market work on its own,” but he only says that when talking about China’s economy.

Now we have more evidence that the president understands the dangers of class-warfare taxation and burdensome government spending. At least when he’s not talking about American fiscal policy.

After the Greek elections, which saw the defeat of the pro-big government Syriza coalition and a victory for the supposedly conservative New Democracy Party, here’s some of what Politico reported.

President Barack Obama on Monday called the results of Greece’s election a “positive prospect” with the potential to form a government willing to cooperate with Europe.  “I think the election in Greece yesterday indicates a positive prospect for not only them forming a government, but also them working constructively with their international partners in order that they can continue on the path of reform and do so in a way that also offers the prospects for the Greek people to succeed and prosper,” Obama said after a meeting with the G-20 Summit’s host, Mexican President Felipe Calderon.

In other words, it’s “positive” when other nations reject big government and vote for right-of-center parties, but Heaven forbid that this advice apply to the United States.

Interestingly, it’s not just Obama who is rejecting (when talking about other nations) the welfare-state vision of bigger government and higher taxes.

Check out this remarkable excerpt from a Washington Post column by Larry Summers, the former chairman of the president’s National Economic Council.

… it is far from clear, especially after the French election, that there is any kind of majority or even plurality support for responsible policies.

Remarkable. Larry Summers is dissing French president Francois Hollande and the French people by implying they want irresponsible policies, even though the Hollande’s views about Keynesian economics and soak-the-rich taxation are basically identical to the nonsense Summers was peddling while in the White House.

It’s almost enough to make you cynical about America’s political elite. Perish the thought!

NATO Has Become a Form of U.S. Foreign Aid

The NATO summit starts Sunday in Chicago and will be the largest gathering ever held by the alliance. This is fitting given NATO’s desire to act around the globe. While U.S. officials say no decisions on further expanding membership will be made at the meeting, they explain that the door remains open. Adding additional security commitments in this way would be a mistake.  

The United States has always been and will continue to be the guarantor of NATO’s military promises. In reality, NATO could not pay its bills without the United States, much less conduct serious military operations. American alliance policy has become a form of foreign aid. Nowhere is that more true than in Europe.  

America’s alliances once had a serious purpose: to increase U.S. security. NATO joined the United States and Western Europe to prevent the Soviet Union from dominating Eurasia. The alliance lost its raison d’être in 1989 when the Berlin Wall fell. Communist regimes throughout Eastern Europe had toppled. The Warsaw Pact soon dissolved. Ultimately the Soviet Union collapsed.

Yet 23 years later NATO labors on, attempting to remake failed societies and anoint winners in civil wars. There’s no big threat left: Russia isn’t going to revive the Red Army and conquer the European continent. Moscow was barely capable of beating up on hapless Georgia.

Moreover, the Euro zone crisis threatens to turn NATO’s military capabilities into a farce. Virtually every European state is cutting back on its military, even France and Great Britain, which traditionally had the most serious—and most deployable—forces. NATO always looked like North America and The Others. Today the only power prepared to battle even a decrepit North African dictatorship is America.

Yet like the Borg of Star Trek fame, the alliance wants to ever-expand, absorbing every country in its path. Bosnia—an artificial nation who military was cobbled together from three warring factions—hopes to join. So, too, Macedonia, which remains at odds with Greece over its very name. Georgia, which triggered a war with Russia in apparent expectation of receiving U.S. support, wants in. Montenegro, which has no military of note, is also interested.

There is even talk of adding Kosovo, another artificial country in which the majority ethnically cleansed national and religious minorities while under allied occupation. Serbia, bombed by NATO in 1999 and still resisting Kosovo’s secession, is on the long list. As is Ukraine, a country with a large Russophile population and a government that acts more Russian than Western.

Adding these countries would greatly expand America’s liabilities while adding minimal capabilities. The United States would have to further subsidize the new members to bring their militaries up to Western standards while making their disputes and controversies into America’s disputes and controversies. Worst would be expanding the alliance up to Russia’s southern border, giving further evidence to Moscow of a plan of encirclement. As Henry Kissinger once said, even paranoids have enemies. Indeed, Washington would not react well if the Warsaw Pact had included Mexico and Canada.

The United States cannot afford to take on more allies and effectively underwrite their security. It is not worth protecting Georgia at the risk of confronting Russia, for instance. Moreover, now is the time to end this foreign aid to wealthy European countries. The Europeans have a GDP ten times as large as that of Russia. Europe’s population is three times as big. The Europeans should defend themselves.  If they want to expand their alliance all around Russia, let them. But the U.S. government, bankrupt in all but name, should finally focus on defending Americans, not most everyone else in the world. 

Paul Krugman and the European Austerity Myth

With both France and Greece deciding to jump out of the left-wing frying pan into the even-more-left-wing fire, European fiscal policy has become quite a controversial topic.

But I find this debate and discussion rather tedious and unrewarding, largely because it pits advocates of Keynesian spending (the so-called “growth” camp) against supporters of higher taxes (the “austerity” camp).

Since I’m a big fan of nations lowering taxes and reducing the burden of government spending, I would like to see the pro-tax hike and the pro-spending sides both lose (wasn’t that Kissinger’s attitude about the Iran-Iraq war?). Indeed, this is why I put together this matrix, to show that there is an alternative approach.

One of my many frustrations with this debate (Veronique de Rugy is similarly irritated) is that many observers make the absurd claim that Europe has implemented “spending cuts” and that this approach hasn’t worked.

Here is what Prof. Krugman just wrote about France.

The French are revolting. …Mr. Hollande’s victory means the end of “Merkozy,” the Franco-German axis that has enforced the austerity regime of the past two years. This would be a “dangerous” development if that strategy were working, or even had a reasonable chance of working. But it isn’t and doesn’t; it’s time to move on. …What’s wrong with the prescription of spending cuts as the remedy for Europe’s ills? One answer is that the confidence fairy doesn’t exist — that is, claims that slashing government spending would somehow encourage consumers and businesses to spend more have been overwhelmingly refuted by the experience of the past two years. So spending cuts in a depressed economy just make the depression deeper.

And he’s made similar assertions about the United Kingdom, complaining that, “the government of Prime Minister David Cameron chose instead to move to immediate, unforced austerity, in the belief that private spending would more than make up for the government’s pullback.”

So let’s take a look at the actual data and see how much “slashing” has been implemented in France and the United Kingdom. Here’s a chart with the latest data from the European Union.

I’m not sure how Krugman defines austerity, but it certainly doesn’t look like there’s been a lot of “slashing” in these two nations.

To be fair, government spending in the United Kingdom has grown a bit slower than inflation in the past couple of years, so one could say that there’s been a very modest bit of trimming.

There’s been no fiscal restraint in France, however, even if one uses that more relaxed definition of a cut. The only accurate claim that can be made about France is that the burden of government spending hasn’t been growing quite as fast since the crisis began as it was growing in the preceding years.

This doesn’t mean there haven’t been any spending cuts in Europe. The Greek and Spanish governments actually cut spending in 2010 and 2011, and Portugal reduced outlays in 2011.

But you can see from this chart, which looks at all the PIIGS (Portugal, Italy, Ireland, Greece, and Spain), that the spending cuts have been very modest, and only came after years of profligacy. Indeed, Greece is the only nation to actually cut spending over the 3-year period since the crisis began.

Krugman would argue, of course, that the PIIGS are suffering because of the spending cuts. And since there actually have been spending cuts in the last year or two in these nations, does that justify his claims?

Yes and no. I don’t agree with the Keynesian theory, but that doesn’t mean it is easy or painless to shrink the burden of government. As I wrote earlier this year, “…the economy does hit a short-run speed bump when the public sector is pruned. Simply stated, there will be transitional costs when the burden of public spending is reduced. Only in economics textbooks is it possible to seamlessly and immediately reallocate resources.”

What I would argue, though, is that these nations have no choice but to bite the bullet and reduce the burden of government. The only other alternative is to somehow convince taxpayers in other nations to make the debt bubble even bigger with more bailouts and transfers. But that just makes the eventual day of reckoning that much more painful.

Additionally, I think much of the economic pain in these nations is the result of the large tax increases that have been imposed, including higher income tax rates, higher value-added taxes, and various other levies that reduce the incentive to engage in productive behavior.

So what’s the best path going forward? The best approach is to implement deep and meaningful spending cuts, and I think the Baltic nations of Estonia, Lithuania, and Latvia are positive role models in this regard. Let’s look at what they’ve done in recent years.

As you can see from the chart, the burden of government spending was rising at a reckless rate before the crisis. But once the crisis hit, the Baltic nations hit the brakes and imposed genuine spending cuts.

The Baltic nations went through a rough patch when this happened, particularly since they also had their versions of a real estate bubble. But, as I’ve already argued, I think the “cold turkey” or “take the band-aid off quickly” approach has paid dividends.

The key question is whether nations can maintain spending restraint, particularly when (if?) the economy begins to grow again.

Even a basket case like Greece can put itself on a good path if it follows Mitchell’s Golden Rule and simply makes sure that government spending, in the long run, grows slower than the private economy.

The way to make that happen is to implement something similar to the Swiss Debt Brake, which effectively acts as an annual cap on the growth of government.

In the long run, of course, the goal should be to shrink the overall burden of government to its growth-maximizing level.

Italy Slowly Recognizes that the Substance of ‘Austerity’ Matters

Apologists for big government have regularly warned that Europe’s austerity measures would push the European economy into a recession. To some extent they’ve been correct, but not for the reasons they claim. So far austerity in countries like Greece and Italy have been austerity for the private sector, not the public. They’ve attempted to close budget gaps by tax increases rather than spending cuts. Witness Mario Monti’s implementation of a tax on first home purchases (sure to do wonders for your housing and construction labor markets).

Fortunately there is some small ray of hope that Italy has come to recognize the error of its ways. As reported in today’s Financial Times, instead of pushing for an increase in the value-added tax, Italy will focus its next austerity measures on cutting government.  As the Financial Times goes on to explain:

The new government’s €30bn austerity package, passed in December, was heavily oriented towards tax increases rather than spending cuts, an emphasis that is now widely recognised by ministers as having driven Italy deeper into recession.

When even the Financial Times recognizes that tax increases are contractionary, then perhaps there is some hope for Italy (and Europe) after all. Now if we can actually get spending costs of real significance (€30 billion is a rounding error for the Italian government’s budget).

Cutting the Government—Greek Style

After much wrangling and consternation, the Greek government has agreed to the latest round of “drastic austerity measures,” the most significant of which is the promise to cut 15,000 government jobs. In return, the Greeks will receive 130 billion euros ($170 billion) of European bailout money to keep the Greek state afloat and, crucially, in the eurozone. That, anyway, is the plan.

The leaders of the political parties that “support” the Greek technocratic (i.e. unelected) government still have to approve the cuts, which they might not do because the unions threaten a general strike. But, there are additional problems as well. First, many of those 15,000 government workers will likely come from the ranks of those who are close to retirement. While the number of government workers will thus shrink, the government’s unsustainable social security burden will worsen. Second, the government workforce (i.e. public servants and employees of the Greek parastatals) account for over 22 percent of the Greek labor force of 4.4 million. That means that the number of people working for the government will decline from 968,000 to 953,000—a reduction of 1.6 percent. And that is what amounts to a “drastic austerity measure” in Greece!

The Euro Crisis in Prose and Poetry

The European debt crisis is inspiring public radio to literary analysis. Last week NPR’s Planet Money put the French-German relationship into a “threepenny opera”:

All

Everyone is counting on you
You’ve got the money
We’ve got the debt (Oh yes, we’ve got a lot of debt!)
And do we need a bailout—you bet

Germany

Zat’s it, I’ve had enough
Looks like it’s time now for me to leave…

France

Oh?

Germany

Vhy is ze door locked? You must let me out.

France

Dear when the times are tough
It’s better to give zan to receive

Then Monday Marketplace Radio turned to classics professor Emily Allen Hornblower and economist Bill Lastrapes to discuss Greek debt as classical tragedy—Oedipus? The ant and the grasshopper?

Loyal Cato readers will recognize Bill Lastrapes as the coauthor of the much-discussed Cato Working Paper “Has the Fed Been a Failure?

And then, if you prefer prose and sober analysis to literary analogies, let me recommend Holman Jenkins’s perceptive column on why Europe hasn’t solved its crisis yet, which unfortunately appeared in the less-read Saturday edition of the Wall Street Journal. (OK, not less read than Cato-at-Liberty, but probably less read than the weekday Journal.)

Neither leader has an incentive to sacrifice what have become vital and divergent interests to produce a credible bailout plan for Europe. To simplify, German voters don’t want to bail out French banks, and the French government can’t afford to bail out French banks, when and if the long-awaited Greek default is allowed to happen….

There is another savior in the wings, of course, the European Central Bank. But the ECB has no incentive to betray in advance its willingness to get France and Germany off the hook by printing money to keep Europe’s heavily indebted governments afloat. Yet all know this is the outcome politicians are stalling for. This is the outcome markets are relying on, and why they haven’t crashed.

All are waiting for some market ruction hairy enough that the central bank will cast aside every political and legal restraint in order to save the euro….

And then the crisis will be over? Not by a long shot.

All these “solvent” countries and their banks will be dependent on the ECB to keep them “solvent,” a reality that can only lead to entrenched inflation across the European economy. That is, unless these governments undertake heroic reforms quickly to restore themselves to the good graces of the global bond market so they can stand up again without the ECB’s visible help.

It’s just conceivable that this might happen—that countries on the ECB life-support might put their nose to the grindstone to make good on their debts, held by ECB and others. Or they might just resume the game of chicken with German taxpayers, albeit in a new form, implicitly demanding that Germany bail out the ECB before the bank is forced thoroughly to debauch the continent’s common currency, the euro.