It's Your Choice, Europe: Rebel Against the Banks or Accept Debt-Serfdom

http://www.oftwominds.com/blogdec11/euro-debt-serfdom12-11.html

by nextparadigms • 15 years ago

29 56 15 years ago

nodata3• 15 years ago

Just so I understand the difference between Europe and USA+UK...

The USA has tons of debt too. Per person it's unmanageable. The only reason this is okay (and we keep talking about Europe) is that the USA can print more money and Europe can't. Is this right?

UK: The pound isn't doing so well at all. The UK can also print money. Same argument as the USA?

_delirium• 15 years ago

Large size as well. Italy, for example, has manageable debt (at least in the medium term), if the rates on it stay relatively stable. However there were default fears recently because of interest rates spiking, which could produce a negative feedback loop. U.S. rates are extremely stable, in part because the federal reserve manages them, in part because of general investor confidence, and in part because the market is so large that it's much harder for any sort of market moves to cause spikes (and nearly impossible to deliberately pull off a speculative attack).

The US also has considerably more breathing room to pay it off via taxation if they chose to. A country like Italy, where the government already takes 43% of GDP in taxes, has much less scope to plug any budget gaps by raising taxes than the US, which only takes 27% of GDP in taxes (across all levels).

toyg6• 15 years ago

The fiscal "breathing room" is there, but at European level (Ireland, Netherlands etc). Some US states also have an unmanageable level of debt, but it's balanced out across the whole union through the FED; in Europe this is not allowed by current treaties.

VonLipwig• 15 years ago

Debt is only important as a percentage of GDP. The actual debt figure is fairly irrelevant. It is when you stack the debt figure against the GDP that you see how good / bad the debt load of a country is.

The trouble Europe has is that a number of member states are drowning in debt. Their debt greatly exceeds GDP and it is getting worse.. for a country like Italy this is recoverable as long as the markets believe they can pay it back! As soon as the markets stop believing their debt interest will stay above 7%, they will unable to maintain their debt and will probably go under as they are too big to bail out.

This is where UK and the US differ. There is a strong belief in the markets that they can pay their debt back just fine. The interest on their debt is about 2% and everything is manageable.

At least this is how I understand it.

toyg6• 15 years ago

Basically, yes. US and UK have central banks who will underwrite illogical levels of debt while (supposedly) maintaining a certain level of credibility; the EU has a galaxy of central banks who, individually, cannot do that any more, and a central bank which is not allowed to even try.

I don't like to say this, but the only logical solution is the one put forward (half-heartedly) by Sarkozy: let the ECB be the European FED, a proper central bank with full powers at European level, so that debt can be underwritten by Europe as a whole. The collective credibility of Europe as a huge market and productive force is unquestionable, so this would stop speculative moves and stabilize the system.

Unfortunately, Germany is currently led by a chancellor who thinks she's running a Bavarian village, and would rather try to save her cows into a "safe barn" than to stop the avalanche from getting into the valley in the first place. This makes it easy for US and UK media to fuel doubt in the Euro, indirectly boosting their own currencies and helping themselves to artificially-low borrowing rates.

And I say that as a UK citizen who will eventually benefit from this state of things (through increased public investment, or rather less ferocious cuts by the bunch of aristos currently running the show over here).

nakkiel• 15 years ago

My opinion, exactly. I'm slightly less harsh regarding Germany though.

The biggest problem of Europe is probably that it's unfinished. Now, its institutions should be completed quickly to prevent further degradation of the situation on the markets (or, let's hope an improvement) but that's going to be very difficult.

I'm also concerned that, because of the current situation, the UK will never be willing stand at the core of Europe. And in my opinion, it's very much needed.

roel_v3• 15 years ago

What Merkel is doing, and very good at that, is making sure that now, now that other countries are required to play ball, force fiscal discipline on those countries who think it's not necessary. If Merkel were to support e.g. Euro bonds without at the same time making sure there is a binding mechanisms to keep countries in check in the future, then the countries in the South would in effect be bailed out by the Northern ones and they'd continue as they've always done (because of political pressures from the voters) and we'd be back where we are now in 10 or 15 years. Merkel is using the leverage she has now to ensure that there will be accountability and binding fiscal targets for Member States.

She's certainly not taking the easy route, but it's the right route nonetheless.

Atropos2• 15 years ago

I believe this "Cannot print their own money" argument is simply misdirection. I would guess 90% of all countries worldwide have their own currency and some are doing great and others are doing very badly.

If you look at the world banks doing business report + transparency internationals corruption report you get: - Iceland: Rank 9 / 13 - Ireland: Rank 10 / 19 - Italy: Rank 87 / 69 - Greece: Rank 100 / 80

No wonder that Ireland+Iceland are doing better, growing again. Even if you forgave Greece+Italy their entire debt, gave them their own currency back etc... I would bet in 20-30 years they would be in the exact same situation as now! I studied in Italy for 2 semesters and I love the country but every time I had to deal with the public bureaucracy I wanted to blow my brains out... I don't know how anyone could run a business in Italy and it is really astonishing how many great companies there are, which shows that a large part of the population has a very good education and work ethic...

BSousa• 15 years ago

Can't say about other countries but the bureaucracy in Portugal is quite high as well.

But the interesting thing is (and it was before my time so I'm taking my parents word for it) most of it was created because of the assumption people will cheat on their taxes if they can, so they added a lot of paperwork and 'silly' taxes to make up for it. Most is unneeded now but remains. Most stores are forced to use certified software they can't tamper with. A lot of purchases are done using credit/debit card so they can't be 'forgotten' in the tax forms, but because there is still the mentality of 'business owner' = 'tax evader/thief' a lot of this bureaucracy remains.

I have two examples that for me are just absurd, but if you start a company, even before you start developing a product or whatever you do, even if you don't take a salary or hire anyone, you are forced to pay social security (about 150 euros) and a chartered accountant per month (about 100 euros) before even having any income on the company. This was introduced so business owners couldn't just try and declare no 'profit' and avoid taxes, but now, it cripples a lot of small business just trying to start or hold on.

bodyfour• 15 years ago

The prerequisite is really "can print their own money AND can borrow, at a scale commensurate with their GDP, in that currency"

The theory goes that a country like US/UK/Japan/etc always has the capability of paying their $/£/¥/etc debts (modulo political idiocy like the US debt ceiling standoff). Of course it might be painful from an inflation standpoint, but that would always be better than a default. Therefore the interest-rate relates to the risk of inflation making the repayment less valuable, not the risk of a literal default.

Since individual eurozone members don't have that privilege, their interest rates are high leading to a potential death spiral (risk of non-payment -> rates go higher -> debt more expensive -> risk is now higher) The theory behind the "eurobond" solution is that since the ECB can print euros it would remove the default risk so in theory interest rates would be limited to inflation risk.

You make a good point about the business climate numbers though. I don't see how a guaranteed-in-common Eurobond is ever going to fly with economies like Greece in the mix. Italy probably has some hope of reform if they want it badly enough, but it would be a big step for them.

peteretep8• 15 years ago

The Pound (GB, rather than Syrian) is doing just fine - almost no-one can borrow as cheaply as the UK can, and inflation is a little too high, but that's factored in to the price. The UK also still maintains an AAA rating, and unlike much of the other European AAAs, isn't on credit watch either. The UK economy isn't growing so well, and we won't have eliminated the structural benefit as soon as they'd have liked, but ain't nothing wrong the Pound.

peteretep8• 15 years ago

Also note that in both the UK and the US, it is the nominally non-political central bank that controls the printing of money, not the government. This tends to give investors more confidence.

nodata3• 15 years ago

The housing market is about to tank, the GBP is expensive compared to the Euro, there are jobless problems, and confidence is lulling. Which parts are doing fine?

nhaehnle6• 15 years ago

The UK economy isn't growing so well, and we won't have eliminated the structural benefit as soon as they'd have liked

This is largely by choice. The UK government is on the forefront of the austerity crowd. They cut spending and fire people. Is it any surprise that GDP (which is basically the sum of all spending) is on a disappointing trajectory?

In a way, the UK government is doing economics a huge favor by acting as a laboratory that implements unneeded austerity.

The proponents of austerity predicted an upswing of activity as a result. I would say their theory has been proven wrong by now.

InclinedPlane• 15 years ago

Even the EU could print more money if it really, really wanted to.

The reason is that the debt loads are different. For the US it's actually NOT unmanageable. It's a lot, but it's fully manageable if people and the government take the right steps to keep it in check.

Take a look at the graphs here: http://www.theatlantic.com/business/archive/2011/11/reasons-...

Europe has much higher bank debt, overall higher government spending to GDP ratios (keep in mind in many cases this is with a lower overall GDP as well), and in a few cases higher debt to GDP levels. Europe has a handful of critical financial problems: shaky, heavily indebted banks; a massive debt burden; very little room to increase government spending; and an inability to actually regulate key aspects of the Eurozone economy (due to flaws in the nature of the laws backing the Euro). The EU in general is incapable of pulling even a hail mary bank bailout to stall for time. Add on top of this an even larger burden of state services (socialized medicine, pensions & retirement, welfare, etc.) that European politicians will have trouble downsizing to try to pay off the debt.

The US has a massive defense budget it could, in theory, trim substantially to bring the deficit under control, especially in concert with slightly reduced spending across the board and slightly increased taxes. The EU doesn't even have that option though, it's coming down to the wire and very little short of a miracle can save them.

Edit: note that the issue isn't paying down debt in the next few years, that's a fantasy for most of the world. The issue is keeping things together for the next few years to allow for long term effects like economic growth and inflation to really take care of the problem. For some parts of the EU there doesn't seem to be a way to make that happen. It won't be the worst thing in the world if some countries default on their debts (it'll probably be a footnote compared to other events of the last 3 decades), but it won't be a picnic either.

nhaehnle6• 15 years ago

The USA has tons of debt too. Per person it's unmanageable. The only reason this is okay (and we keep talking about Europe) is that the USA can print more money and Europe can't. Is this right?

Yes. The picture is even more stark when you look at Japan, where the government has more than 200% debt/GDP, but pays record low interest on bonds. Monetary sovereignty matters.

However, I wouldn't use the term "print money", simply because it clouds the issue. After all, you can also look at it this way: all the US government debt is money that has already been "printed". That view is essentially equivalent, because "paying back" a bond simply means transforming one government liability (the bond) into another government liability (reserves at the central bank). Whether that money is held in the form of paper, reserves at the central bank, or longer maturity bonds is unimportant.

What is important is that the private sector has already made it very clear that it does not intend to spend that huge amount of money any time soon, so for the purpose of analyzing what is actually happening in the economy the debt is irrelevant. After all, the debt is a stock, and what we're mostly interested in - things like GDP, or the payments that go towards employment - are flows.

Yes, there are interest payments. It is sobering to learn that a monetarily sovereign government chooses the interest rate that it pays on its liabilities. If the political will was there, the US government could just stop issuing interest-bearing bonds, and otherwise continue as usual.

Inflation, you worry? Well, the only first-order effect of such a move would be that the interest rate falls to zero. In theory, that could have a (very small) inflationary effect, but since the interest rate is already essentially zero, even that is unlikely to happen.

peteretep8• 15 years ago

| Yes. The picture is even more stark when you look at Japan, where the government has more than 200% debt/GDP, but pays record low interest on bonds. Monetary sovereignty matters.

Well, sorta. A big reason Japan has such great rates on bonds is that they mostly sell them to Japanese people and institutions, and there's some weird nationalistic stuff going on there...

rd108• 15 years ago

Thank you for framing the choice like this. The article mentions as a case in point Iceland; our Western media has conveniently ignored the miracle that occurred there post-banking crisis. They threw the government and banking chiefs out and started their democracy afresh- actually having ordinary Icelandic people help reformulate their Constitution and their future. It's a beautiful story: http://wilmaswish.blogspot.com/

toyg6• 15 years ago

A beautiful story which is only partially true, and which would probably never scale. Paris alone has 7 times the population of Iceland; good luck having the whole European population "reformulate their Constitution[s]".

falava• 15 years ago

GDP and government debt comparison:

http://www.wolframalpha.com/input/?i=gdp%2C+debt

david927• 15 years ago

It's not so simple. First, GDP has reflective aspect, so that if you sell me something for $10 and I sell it to Bob for $20, GDP goes up $30. It's a much rougher figure than we expect and if there is a crisis, it may decline rapidly where the debt figure will not.

Secondly and more importantly, not included in that government debt amount are future obligations. For example, in the US, unfunded obligations for government employee retirement and veterans' benefits, Social Security, Medicare and other programs are around $50 trillion. Add that in.

The coming crisis will be a surprise to many. But Thanksgiving is only a black swan to the turkey, not to the butcher.

viandante8• 15 years ago

Guys, this article is really wrong. I am European and the problem is much deeper than that. It concerns the welfare system that has grown too big to be sustained by income taxes. Even having a taxation that is now close to 50% of the GDP.

Banks are only a small subset of the problem. Europe has to find a way to either increase welfare productivity or to reduce it in order to reduce public expenses.

What is driving now the crisis are public expenses, don't fool around with other fantasies.

Edit.

People are voting down. Not sure why. I am being harsh, but rationale, that should be fine with HN style.

cromulent2• 15 years ago

The article talks about "Europe" but it does seem to focus on the Eurozone countries, and the Euro is definitely a factor in the current crisis. Otherwise it would not be one crisis, but several separate crises, which could be dealt with separately (e.g. by devaluation of the local currency).

Sweden, for example, does not share the same problems even though it has probably the largest welfare system and highest tax rate as a percentage of GDP in Europe.

viandante8• 15 years ago

Why Euro is a current factor of the crisis? Those people saying this are mostly old fashioned monetarists that would like to "pay" out the debt producing money and inflation. Italy 80s. Not sure that is a good idea. Especially, it doesn't solve the problem that is, again, too much spending compared to the income (yes, Europe crisis is as simple as that).

I am not sure about Sweden, but I know Denmark and it's like you say. But in fact the problem is not too much spending, it is too much spending in relation to the income generated by taxes.

nl4• 15 years ago

But that isn't true!

For example, Germany has a welfare system, but a budget defict that is ~3% of GDP (which seems pretty reasonable when you are trying to get an economy growing again)

Austria, The Netherlands, Denmark, etc etc all have similar (or better) welfare systems and low budget deficits.

The truth is that there isn't a single cause of the problems - Iceland was very different to Ireland, which was different to Greece, which is different to Italy. Each needs to be analyzed on its own.

But there is a good argument that taking private (bank) debts on as public debt isn't always a good way out of a problem this big.

viandante8• 15 years ago

Germany has 80% debt/gdp ratio.

nhaehnle6• 15 years ago

It concerns the welfare system that has grown too big to be sustained by income taxes.

Or, to put it another way, the income taxes have become too low to support the welfare system.

To be honest, the amount of spurious framing in these debates is annoying me. Of course the welfare system is sustainable. The only question is whether there is a will to sustain it.

One way to look at it (which, admittedly, may be a form of framing as well): Do we want to live in a perhaps demanding but still caring society, where you can focus on achieving great things, or do we want to live in an uncaring society, where the majority is forced to focus on maintaining what little they have.

Fear of losing status or real standards of living is a great productivity killer, because fear generally switches our brains into a narrow-minded tunnel vision mode. That mode may be useful when you're chased by wolves in the forest, but it's not such a great thing for being productive in a complex economic environment.

What is driving now the crisis are public expenses, don't fool around with other fantasies.

There are always two sides of the coin. Where you see high expenses, I see low income.

It is also important to note that public welfare systems tend to be more efficient than private ones. In the case of Germany, for example, the overhead of private pension funds is often around or above 4%, where the overhead of the public pension system is below 1%. So for the same amount of pensions provided, the private system is more expensive and less efficient than the public system.

viandante8• 15 years ago

All what you want. But Italy has a tax to gdp ratio close to 50%. Germany has it probably higher than 40%.

You want to increase taxes? Fine. Then say you want to nationalize the economy, because that is the end result.

bdunbar• 15 years ago

Of course the welfare system is sustainable.

Welfare is sustainable. Until you have more people on the roles than are working.

Then .. not so much.

I would say that welfare is sustainable at the time it was enacted, and for that time period.

A good example might be US Social Security. At the time, relatively few people lived more than a few years past retirement age. This is sustainable.

Time passes.

People live a lot longer, there are more people drawing on the system. There are more benefits _in_ the system than originally imagined: old people vote and they vote (as a block) for pols who will give them stuff. And then more stuff.

I'm simplifying of course but .. welfare is not sustainable because people want more stuff and initial conditions change.

nl4• 15 years ago

I suspect you are being voted down because the facts aren't on your side.

Firstly "Europe" isn't a single country, and by putting basket cases like Greece in the same class as Germany you weaken your argument.

It concerns the welfare system that has grown too big to be sustained by income taxes.

You need some facts to support that. Government spending in Germany is 43% of GDP, 45% in the Netherlands and 38% in the US. Most people would say the German and Dutch economies are stronger than the US economy at the moment.

Even having a taxation that is now close to 50% of the GDP

http://www.oecd.org/dataoecd/48/27/41498733.pdf lists tax as a percentage of GDP. The only country with tax close to 50% of GDP is Denmark (which has a strong economy). Greece is 31%, the US 28%. Australia and Canada (examples of developed nations with strong economies) are 30.6% and 33.3%. That doesn't seem to indicate a direct link at all.

What is driving now the crisis are public expenses, don't fool around with other fantasies.

The evidence doesn't seem to support that.

Please address the example of Ireland (where there was no public debt crisis until the government bailed out the banks) and Iceland (where banks weren't bailed out, welfare and tax are high but the economy is growing again).

It's Your Choice, Europe: Rebel Against the Banks or Accept Debt-Serfdom

Related Stories