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.
From Alternet:
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.
azizonomics 
succint, informed, clear sighted.
Default from both Greece and Italy would be disastrous too costs of entire EU credit. It would smash confidence for all EU govts paying down their (pretty high in their own rights) debts and force them all to either pay much more while borrowing, or balance budgets. Also, if Greece defaulted 100% they might have problem with any kind of borrowing at all. They’d still have to cut entire deficit down… though it’d be much easier with entire interest off their back. From my point of view – only positive developments. If govt can’t borrow it’s almost like one less stealth tax. If they want the money – they have to take it or print it and both of these are more invasive and bring more resistance than just “running small 3% deficit”.
BTW Most of Greece’s debt is to Greeks (at least from what I’ve read), so while no one will cry for the bankers, these are in the long run pensions that they’d mostly default on.
Another take on this from (argh!) Roubini:
http://www.project-syndicate.org/commentary/roubini44/English
Says structural reforms & austerity necessary but need to be coupled with reflation by ECB.
Well — Roubini is right. I don’t really like how he gets to his conclusions, and I don’t agree with his proposed solutions (and I wouldn’t agree with him on the underlying cause), but again he has come to the right conclusion.
Though I prefer the phrase “Too fucked to bail” to “Too big to save”.
My take on this: no one is right because everyone assumes the “system” (globally) is fixable. Some sort of a new Bretton Woods v3.0 is required, and we’d better prepare for it now instead of waiting for everything to come crashing down.
Yes — I agree. Roubini will get there, though. Slowly.
And history repeats. It must be a human gene or very clever string pulling.
Lets assume that from one tribe came many. If genetic variations in the tribe caused conflict between leadership, then it is assumed that the tribe split into other tribes based on empathy of the group to the attitudes and style of the respective leaders. This become engrained over successive generations to form nation states and languages. A case in point is Ishmael and Izak sons of Abraham. Arabs and Jews. Total conflict.
It is therefore impossible to “herd cats”. If Technocrats try to do this, it will incite Nationalism.
A solution is separate countries and currency, but free flow of labour. i.e. no immigration controls. This will allow integration of the population. Only once the nations are “European”, can you then try to integrate.
I completely expect this to incite pretty hard nationalism, Buddy. I believed before this crisis that perhaps with 100 years of open labour markets and mixing Europe would be able to integrate, like America. Now, I think that that is becoming increasingly impossible. The miserable truth is European fracture, or even a new European war is more likely than wilful and happy European integration.
The answer is simple. Firstly, avoid going broke in the first place. If you do go broke, then go broke. Wipe all debts, and only be able to borrow at prohibitive rates to avoid at all costs.
I never thought that this would ever make a good analogy, but now i’m convinced it does. When i was a boy, i used to play monopoly with my brother. But when i went bankrupt, my brother would force me to take out a loan (on threat of punches), knowing i could never pay it back (sound familiar yet?). The point was to make even more money by being able to buy all of my mortgaged properties so he could own everything. The bankruptcy was inevitable beyond a certain point, and only benefited the lender/s.
If you loan money at cost + premium, then the premium is your benefit in return for risk. In other words, if you are making a premium for loaning money, then you run the risk of never getting the money back. But due to inappropriate influence, they have their cake and eat it too.
They need to be made to lose their money so as to make them take more care in who they loan their money to. Let ’em lose their money. Let ’em learn the hard way. Send them to the poor house. Let the better lenders survive and the weak lose the shirt off their backs.
All we can do in our democracies is to stop tolerating this (while we are still democracies in more than name) and make them, and their political mates, pay at the ballot box.
In Australia, Tony Abbott has vowed to repeal the Carbon Tax, however with Gillard showing signs of recovery in the polls, Malcolm Turnbull is sharpening his knives to regain the leadership over Abbott. Do you think the former Goldman Sachs bankster will repeal the Carbon Tax that will become a carbon trading scheme? The other candidate is Joe Hockey, a lawyer who represented banks and is a politician, and whose wife is an executive in one of the big four banks. We’re screwed!
Sounds like Australia needs a Ron Paul, Twodogs.
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