In surely the dumbest news of the
week month year, Europe is giving austerity a last throw of the dice.
From the Washington Post:
ROME — Italy’s premier-designate Mario Monti began talks on Monday to create a new government of non-political experts tasked with overhauling an ailing economy to keep market fears over the country from threatening the existence of the euro.
Investors initially cheered Monti’s appointment, following quickly on Silvio Berlusconi’s weekend resignation, though concern lingered about the sheer amount of work his new government will have to do to restore faith in the country’s battered economy and finances.
Improving market confidence in Italy is crucial to the future of the eurozone as the country would be too expensive to rescue. A default on its €1.9 trillion ($2.6 trillion) in debt would cause massive chaos in financial markets and shake the global economy.
As in Greece, where a new government of technocrats also took over last week, the hope is that administrations of experts not affiliated to parties will be more willing to make the tough but necessary decisions [i.e. slashing spending to pay off bankers] that politicians have so far balked at.
Monti appeared to have the respect of many Italians, eager to see an end to the financial crisis that threatens their own well-being.
The likelihood is that these technocrat-driven austerity programs will totally fail to reduce the debt load and suck Europe even further into the abyss. Reducing government spending in an already depressed economy tends to leave the middle class with less disposable income in the short term, which tends to turn a bad situation into a worse one. A classic example of this is the Brüning administration, which led Germany from 1930 to 1932 — and whose technocratic austerity program made the German people hungry for change, and a charismatic new leader.
After just two years of “austerity” measures, Germany’s economy had completely collapsed: unemployment doubled from 15 percent in 1930 to 30 percent in 1932, protests spread, and Bruning was finally forced out. Just two years of austerity, and Germany was willing to be ruled by anyone or anything except for the kinds of democratic politicians that administered “austerity” pain. In Germany’s 1932 elections, the Nazis and the Communists came out on top — and by early 1933, with Hitler in charge, Germany’s fledgling democracy was shut down for good.
The issue is that if a nation is to lower the government’s participation rate in the economy (usually a very good idea — the market is usually a more efficient allocator of capital than central planners), it must not do so during a time of wider crisis. That’s because switching from dependence on the state is a stressor in itself. This can compound the problem.
Now obviously the debt is unsustainable — as was the load of war reparations that Brüning sought to pay down in Germany. A deflationary austerity program is the last throw of the dice creditors have to get an intact pound of flesh. The reality is that they made bad investments in the sovereign debt of countries without a sovereign printing press — and that means they will (in the end) have to accept big losses on their investments — either via direct default, or via nations leaving the Euro and printing huge inflationary quantities of their new national currency to maintain state spending and pay down debt.
Monti — and his Greek technocrat counterpart Papademos — must be aware how the Brüning administration ended. If they are not, I am sure there are millions of furious Greeks and Italians who would be willing to show them.