Pain for Europe

July 15th, 2010 at 5:30 pm by David Farrar

Many of us are waiting to see if Europe crashes, pushing the world into a second recession. The Business Roundtable tweeted this article, which I thought made some great points:

A SPECTRE is haunting Europe: the spectre of public debt. The debt-to-gross domestic product ratio for the European Union is projected to reach 80 per cent this year. Some recent growth in public indebtedness reflects weak economic conditions, but structural budget deficits have also increased sharply.

That’s not just Greece and Spain, but the entire . 80% of GDP is far far too high a debt level. Hell I think even 20% is too high.

First, particularly after the industrial unrest of the late 60s, labour market regulations entrenched union power while shutting young people and older workers out of the labour force. Second, as rigid labour markets undermined productivity and fed excessive wage claims, greater, increasingly opaque subsidies were provided to businesses. Third, as subsidies proved insufficient to maintain private sector jobs, public sector employment and the pension system were expanded, locking in entitlements to future public expenditures. And fourth, governments tolerated erosion of the tax base through tax evasion and the growth of the black economy.

Inevitably, the outcome was a loss of competitiveness.

Lessons we should not forget.

Can the situation be turned around? History shows that durable fiscal consolidation involves cuts to public expenditure, rather than increases in taxation. Such cuts are not impossible. After all, between 1995 and 2006, general government expenditures as a share of GDP declined by 10.8 percentage points in Sweden, 8 percentage points in Denmark and 12.7 percentage points in Finland.

And we should be aiming to get expenditure as a share of GDP down to under 30%.

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33 Responses to “Pain for Europe”

  1. JC (909 comments) says:

    Here’s some cheery news for NZ. The Chinese Dagong International credit ratings have us as just one of seven nations worthy of a triple A rating. Us, UK, France and so on come well down from that.

    http://www.dagongcredit.com/dagongweb/english/pr/show.php?id=69&table=web_e_zxzx

    It isn’t so much whether one agrees with the ratings as an Asian perception about NZ as a place to do business.

    Good stuff.

    JC

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  2. GMDI (71 comments) says:

    Remember when the left wanted us to spend, spend, spend? while I notice they have shut up, there is as usual no apologies for promoting a lack of fiscal restraint that would have killed our economy.

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  3. Danyl Mclauchlan (1,065 comments) says:

    First, particularly after the industrial unrest of the late 60s, labour market regulations entrenched union power while shutting young people and older workers out of the labour force.

    Was that before or after Veldemort killed Harry’s parents?

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  4. mattyroo (973 comments) says:

    NZ is hardly in a much better place, although, our debt is privately held, which makes us a bit more immune from the attacks of the bond vigilantes.

    But, if the bond vigilantes get sick of toying with Europe, we will most certainly attract the their attention. Hopefully that eventuates, therefore making English slash spending, about time some of the bludgers in this country got a rude wake-up, they’ve been on the pigs back for far too long.

    By the way – If you want excellent regular analysis of the situation in Europe and the UK, read Ambrose Evans-Pritchard at the Daily Telegraph.

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  5. mickysavage (786 comments) says:

    Just as well Michael Cullen paid back so much debt. Without his reign as Finance Minister we would be in deep trouble.

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  6. big bruv (13,279 comments) says:

    Sigh…….You just don’t get it do you Micky.

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  7. mattyroo (973 comments) says:

    Bruv, With the fall in the housing market, the two-bit back-street lawyer Greg Presland has no conveyancing work to keep him entertained.

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  8. dime (9,424 comments) says:

    micky – youre not serious are you?

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  9. side show bob (3,660 comments) says:

    “And we should be aiming to get expenditure as a share of GDP down to under 30%”, damn right David. Sadly most of the population are like P addicts, most hopelessly addicted to the socialist state. And our loving government are running the crack houses. The population will not come off their habits till the dealers lose the addiction that is socialism or in more simpler terms, the nanny fucking state goes out of business.

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  10. big bruv (13,279 comments) says:

    Never mind all that stuff lads, pop over to the general debate thread, TVNZ has just announced some great news re the 90 day trial period and unions.

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  11. Stuart Mackey (337 comments) says:

    mickysavage (685) Says:
    July 15th, 2010 at 5:58 pm
    Just as well Michael Cullen paid back so much debt. Without his reign as Finance Minister we would be in deep trouble.
    ***********************

    And if Cullen had actively reduced the size of state expenditure and given proportionate tax reductions, rejigged the tax system to better reflect consumption instead of income, then perhaps we would not be borrowing 240 odd million a week and have lower personal debt levels? hell, maybe we may have avoided recession if Cullen had not done such a half arsed job?

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  12. Johnboy (14,973 comments) says:

    Still Mickey Cullen got the trains running on time. What?….. Oh he didn’t!

    Must have been someone else then. :)

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  13. JC (909 comments) says:

    Micky.. time for some education.

    Net National debt under Muldoon was 31%.
    Net National debt under Lange.Palmer/Moore was 49%
    Net National debt under Bolger/Shipley reduced from 49% to 20%
    Net National debt under Clark reduced from 20% to near enough zero.

    Consider that Bolger and co reduced debt easily the most in the face of the 1990/91 recession, the impact of MMP and Peters, two severe droughts in 1997/98 and the Asian crisis.

    Consider that Clark had a smaller reduction on the back of the best period of prosperity in two generations.. albeit she allowed Kiwis to increase private debt (mainly mortgages) from around $60 billion to $160 billion.

    JC

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  14. Falafulu Fisi (2,176 comments) says:

    The EU countries is the classic case of clinging to disastrous Keynesian economic policies which originated in the heads of politicians (axiomatic or ideology first) rather than based on economic realities (data & empirical observations first).

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  15. JC (909 comments) says:

    Falafulu,

    By the end of the Berlin Airlift, a prostrate Europe recognised that its survival and security was almost totally in the hands of the Yanks, and on the security issue they have never changed that view.

    But whats the point of sovereignty if you don’t control your own security to a major extent? So spending up on your own comfort under the Yank security blanket is pretty attractive, and gets even better when the EU is formed to reinforce your feelings of collective comfort.

    JC

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  16. Hurf Durf (2,860 comments) says:

    Guys! Shut up! Keynesian economics work! Paul Krugman and a bunch of other boffins told me so!

    Spend, spend, spend and go for growth, growth, GROWTH!

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  17. Falafulu Fisi (2,176 comments) says:

    Yeah Hurf, Krugman is a (resurrection of) post-modern Keynes which socialists and the left worship. Here is a cut & paste from an opinion article that appeared in Nature journal (subscribed only), which gives a brief description about the misguided belief by leftist/socialists in Keynesian economics. This issue has been discussed in many refereed articles over the years by various scholars, but I just wanted to bring it up here, since most leftist/socialists don’t have a clue at all to the disastrous effects of Keynesian economics that they’re worshiping.

    Quote:
    ———–

    The notion that financial economies are complex systems can be traced at least as far back as Adam Smith in the late 1700s. More recently John Maynard Keynes and his followers attempted to describe and quantify this complexity based on historical patterns. Keynesian economics enjoyed a heyday in the decades after the Second World War, but was forced out of the mainstream after failing a crucial test during the mid-seventies. The Keynesian predictions suggested that inflation could pull society out of a recession; that, as rising prices had historically stimulated supply, producers would respond to the rising prices seen under inflation by increasing production and hiring more workers. But when US policymakers increased the money supply in an attempt to stimulate employment, it didn’t work — they ended up with both high inflation and high unemployment, a miserable state called ‘stagflation’. Robert Lucas and others argued in 1976 that Keynesian models had failed because they neglected the power of human learning and adaptation. Firms and workers learned that inflation is just inflation, and is not the same as a real rise in prices relative to wages.

    From : The economy needs agent-based modelling, Nature 460, 685-686 (6 August 2009)

    Unfortunately, the majority of world politicians today still believe in keynesian nonsense economics. David Cunliffe is one of them. Cunliffe had blogged at RedAlert on resurgence of Keynesians.

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  18. Jimbob (640 comments) says:

    Over half of China’s exports go to Europe. Still think the recession is over? The present credit system only works if people borrow money and spend. Can anyone see that happening anywhere in the western world? Just about everyone is tapped out, the system has to reset itself and that means deflation.

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  19. wikiriwhis business (3,883 comments) says:

    The Greece situation is very scary because Greece is an ancient civlisation that should be on top of its game.

    If its true that socialism has eroded Greece then we need to learn that lesson

    If its something else, that needs to be identified.

    If a strong aged nation like Greece directly suffered because of the US stock crash, the world is far frailer than first thought

    and always on a precipice of failure.

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  20. kowtow (7,614 comments) says:

    Over on Arts and Letters Daily there are lots of good pieces on this subject.
    wikirihis….see the link below. The Greeks once were great as was Europe but the whole living beyond our means and unearned luxuries is destroying it all.

    http://online.wsj.com/article/SB10001424052702303828304575179921909783864.html?mod=rss_Today%27s_Most_Popular

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  21. Guy Fawkes (702 comments) says:

    For the first time in years France has appeared on the Radar, and Germany has admitted that it cannot keep paying out for the rest of the Continental System.

    This has happened so many times before. So very many times.

    The good news for the UK, is that their mindset suits crisis and austerity. Club Med have been the biggest recipient of ‘Free Cash’.

    That is why Spain in particular is in such bad shape.

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  22. davidp (3,540 comments) says:

    Greece is a public service pension plan with a country attached.

    France is Greece with nukes.

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  23. Fale Andrew Lesa (473 comments) says:

    I sympathise with the German homeland on this issue. As a New Zealander of German descent, I have come to realise that because the German economy is in a much healthier position than every other EU member, it does have a greater responsibility to support smaller economies in strife.
    We saw this recently with the Greek bail-out and we are bound to see more of this as more EU member’s face decline. The reality of the union is that economic decline is felt by the entire union, even though it may just be a single European economy at the brunt of such collapse.

    Unfortunately, Britain faces a similar prospect, if the British government and the private sector fail to make the economic sacrifices that are crucial for it’s recovery. The British economy has been supported on vast amounts of credit, much of it based offshore. British residents have lived far beyond their actual means for many decades now. This pattern of borrowing should cease soon or the economic consequences are dire.

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  24. noskire (832 comments) says:

    Here comes the Super Depression http://www.examiner.com/x-1087-Denver-News-Examiner~y2009m5d31-Celente-predicts-super-depression-2012

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  25. mjwilknz (612 comments) says:

    wikiriwhis business, learn the lessons from Greece? Lesson 1) don’t go soft on government spending and lesson 2) don’t think you can recover without facing up to government spending. It’s remarkable the ability of Greek protesters to ignore that their economy is stuffed because their Government has spent up large for too long and they have few choices but adopt austerity measures! Instead, they shrug their shoulders and say, why don’t we burn some tyres and beat up some police officers – that’ll fix everything, won’t it?

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  26. tvb (4,202 comments) says:

    We are locked into Asia now. Europe is no longer our economic interest. And here is the big bonus we are no longer drawn into Europe’s security problems. Over the last 150 years we have had to attach ourselves to our trading partners’ security problems in order to get access to trade. We even attacked Turkey, lost thousands of our young men, on the orders of our major trading partner Britain. Imagine China telling us to attack Tibet???

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  27. freedom101 (462 comments) says:

    Doesn’t the description of where Europe has gone so wrong reflect almost perfectly what Labour in NZ spent the last 9 years doing?

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  28. Viking2 (11,128 comments) says:

    So whats new?
    Tell the National PartyConference this weekend.
    Some of us think this has been obvious for a long while.
    Wakey Wakey.

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  29. pollywog (1,153 comments) says:

    Many of us are waiting to see if Europe crashes, pushing the world into a second recession.

    unless there is some big event such as a second recession, or a major scandal, Phil Goff is unlikely to become Prime Minister.

    Phil must be hardout praying for a second recession and hoping Key is DPF’s is the prophet of doom then :)

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  30. Pita (366 comments) says:

    “Lesson we should not forget” indeed…however first you must learn them and then understand them so that they will not be forgotten. Regrettably the economic imperative is always outweighed by the political reality and that is why the lesson is conveniently forgotten.

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  31. Feanor (40 comments) says:

    “Inevitably, the outcome was a loss of competitiveness.”

    Competitiveness used like that is a meaningless term. If they mean productivity, then they should say productivity. They are not the same thing.

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  32. adam2314 (377 comments) says:

    Maybe Mr. Micawber’s statement on sixpence should be made compulsory.. For banks and finance companies..

    No money to lend.. No lending..

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  33. kaya (1,360 comments) says:

    NZ suffers like most Western countries from too many parasites, not enough producers. Scary part is that the biggest parasites aren’t dole bludgers, they generally work for the Govt and regulatory bodies. Not only do they cost money, they stop shit getting done.

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