“Get Your Money Out While You Can”

One can only wonder how long it will take before Europeans particularly in Spain, Greece and Italy, begin to take that advice.

The Euro system amplifies shocks. Monetary union without fiscal union, economic integration without high levels of interstate mobility, enforced austerity in the weakest economies. And now the precedent of deposit confiscation. The only indicator that seems to be rising throughout the Eurozone is the number of protest signs comparing Angela Merkel to Hitler.

Romano Prodi famously noted that the Euro system was weak, and that necessary reforms would be made when the time came in order to make it sustainable. Well, the Cyprus bailout and deposit levy, the national and international outcries and the subsequent “no” vote in the Cypriot parliament are all signs that in the wake of all the bailouts of the periphery that Europe is far from fixed. The necessary measures have not been taken. While the ECB may have taken measures to lower government borrowing costs in the periphery, the situation is in many ways — especially unemployment — still deteriorating. In fact, it seems like Eurocrats are trying to enforce the opposite of what might be necessary for sustainability — rather than installing a mechanism to transfer money to weakened economies suffering from high employment, Eurocrats seem to be trying to do everything to drive unemployment higher in the periphery, spark bank runs, as well as aggravate tensions with Russia.

This is a crisis of institutions and a crisis of leadership as well as a crisis of economics. Merkel cannot lead Europe and Germany at the same time, because taking steps to revive the ailing Southern economies hurts her standing with the German and Northern public.

The Eurocrats have asked for a bank run by demanding depositor haircuts in Cyprus. The public would not be at fault for giving them one. Farage’s advice is wise.

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Britain’s Greatest Depression

This is just a disaster — and more prolonged than the depression of the 1930s:

GDP to January 2013

And even more of a disaster when we consider the impact this has had on youth unemployment, which has climbed far above the EU and OECD averages (although nothing like as badly as Spain or Portugal):

o-UK-YOUTH-UNEMPLOYMENT-570

This is not just a failure of government austerity, although that in itself has totally failed to ignite any kind of growth or recovery. The fiscal trajectory is important (not least for business expectations) — and trying to cut public spending and raise taxes during a severe depression in private activity has been shown repeatedly to just exacerbate the private slump — but it’s just one aspect of a greater problem — the failure to create a favourable business environment that can attract capital and growth to the UK.

Lending to UK business remains severely depressed:

LendingtoUKbusiness

Given that the British government owns the bailed-out commercial banks, it’s a shock that they haven’t leveraged this power to reignite lending to business, and particularly to business startups. So long as businesses are allowed to either succeed or fail on their own merits, it would not be a malinvestment of time, energy or capital to use publicly-owned bailed-out banks to break through the lending freeze.

It is something of a chicken-or-egg problem to say exactly how much of the problem is austerity, and how much of it is a weak business environment. But either way, we are on the wrong track. Business confidence levels are still deeply depressed — lower than they were when Cameron and Osborne came to power:

uk-pmi-services-buisness-confidence-feb-2013

We’re now half of the way to a Japanese-style lost decade. If we carry on on the same track, we may end up with exactly that.

If British businesses don’t have confidence in Cameron and Osborne’s policies, if their policies don’t lower unemployment, don’t create growth, don’t boost imports and exports, don’t result in recovery, and don’t even result in less borrowing  (their stated aim), why do they continue to pursue them?

Cameron’s EU Policy Uncertainty

So, David Cameron wants a referendum?

I believe that small is beautiful, and that the European Union system is big and fragile. I am all for free trade, freedom of movement and immigration. But as for regulatory, monetary and fiscal integration — which is the direction that Europe has taken, especially since the self-inflicted Euro crisis that grew out the fundamentally flawed Euro system — how can Europe be responsive to its citizens when they are so numerous, so diverse and so geographically and linguistically dispersed? How can it be viable to have the same regulatory and political framework for Poland, Spain, Austria, Britain, Denmark and Greece? Political and monetary frameworks that are local and decentralised are usually responsive and representative. Big bureaucratic juggernauts are very often clunky and unresponsive.

That means that I am quite open to the idea of Britain leaving the political union, so long as we retain the economic framework that Britain voted for in a referendum on joining the European Economic Community — the predecessor to the European Union — in the 1970s. Britain never voted for political union, and the British public has been shown again and again in polls to be broadly against such a thing.

But David Cameron’s plan for an In-Out referendum in 2017 — but only if the Conservatives win the 2015 election — is misguided. It will just create five years of totally unnecessary policy and regulatory uncertainty.

There is empirical evidence to suggest that policy uncertainty can be very damaging to the economy. A 2013 paper Scott Baker, Nicholas Bloom, and Steven Davis used automated text analysis techniques to count key words relevant to uncertainty in the media. They combined the news analysis with data from tax code changes, disagreement among economic forecasters, and information from equity option markets to create an “uncertainty index”:

UncertaintyIndex

They looked at changes to gross domestic product, private investment, industrial production and unemployment, and found that spikes in uncertainty foreshadow large and persistent declines in all four. First, GDP and private investment:

GDPInvestment

Next, industrial production and unemployment:

Policshocks

The last thing that Britain needs is five years of policy uncertainty. If Cameron wants to have a referendum on E.U. membership, why not do it now? 82% of the public favour such a referendum — presumably not only UKIP and Conservative voters, but also Liberal Democrats and Labour voters. If we vote to leave, then we leave, if we vote to stay, we stay. We — and the markets — will know exactly where we stand.

Frankly this strikes me as more of a political ploy. The Conservatives are haemorrhaging support to UKIP. They are roughly ten points behind Labour in the polls. This strange announcement just seems like an attempt by Cameron to claw back support and distract from the disastrous state of the economy which just entered a triple-dip recession and which has been depressed since 2008. Ironically, this announcement may actually worsen the economic woe.

The European Union is Destroying European Unity

So we know that the pro-bailout parties in Greece have failed to form a coalition, and that this will either mean an anti-bailout, anti-austerity government, or new elections, and that this will probably mean that the Greek default is about to become extremely messy (because let’s face it the chances of the Greek people electing a pro-austerity, pro-bailout government is about as likely as Hillary Clinton quitting her job at the State Department and seeking a job shaking her booty at Spearmint Rhino).

It was said that the E.U.’s existence was justified in the name of preventing the return of nationalism and fascism to European politics.

Well, as a result of the austerity terms imposed upon Greece by their European cousins in Brussels and Frankfurt, Greeks just put a fully-blown fascist party into Parliament.

From the Telegraph:

The ultra nationalist far right party Golden Dawn supporters celebrated on Sunday after exit polls showed them winning between 5 to 7 per cent of the vote, enough for them to gain representation in parliament for the first time in Greek history. Golden Dawn Leader, Nikolaos Michaloliakos shouted “The Europe of the nations returns, Greece is only the beginning” as he walked towards party headquaters and pledged to deal with illegal immigrants first.

For doubters of their intellectual lineage, here’s their logo:

I (among many others) have argued since at least last year that increased nationalism would be a result of the status quo, which is of course deeply ironic.

Winston Churchill famously noted that a new European unity was the path to the people of Europe forgetting the “rivers of blood that have flowed for thousands of years”.

Well it looks like some of the memories of those rivers of blood are about to be unleashed. How was it possible that a regime set up ostensibly to create more and deeper European unity seems to have sown the seeds for division and nationalism? Quite easily, really.

By designing a system that allowed for governments to spend freely in a fiat currency they could not print more of, Brussels effectively set up member states for fiscal crises. But the fiscal crisis hit at the worst possible time, one of global economic contraction. And by enforcing contractionary policies on states that were already in a depression, economies in Europe are getting to Great Depression levels:

The key here is that the Euro system is not giving the public the idea that all peoples are in the same boat. It is giving the impression that some nations are benefiting at the expense of others.

For there can be no doubting the perception on the ground in Europe that Germany (the first nation, lest we forget, to violate the Stability and Growth Pact) is sado-masochistically brutalising the periphery in the name of its own prosperity. And the facts back that up:

Certainly, the steep austerity policies have in Portugal, Spain and Greece only produced bigger deficits as tax revenues have fallen. But what really matters is that Europeans more and more are coming to see the E.U. and the policies it enforces as counter to their interests and harmful.

While Britons have long resented the E.U. and its micro-managerial regulatory regime, it is becoming clear that much of Europe is coming to distrust the E.U. and its institutions:

In the wake of WW2 there was deep and genuine grassroots concern throughout Europe for unity, and Europe should never have to go through another war. Yet the actions of this bureaucratic, centralising, technocratic institution are jeopardising that reality. This is top-down fragility transmitted throughout Europe by the actions of misguided planners.

I don’t believe that many Europeans really want to go down this path again. But as the European economies continue to bleed, as millions of youths remain jobless, those deep scars that thousands of years of war and violence created, culminating in the rise of Nazism and WW2, are rising again to the surface.

Voters become radical when they are denied economic opportunity. That’s the reality I think we should all take from Hitler’s rise to power, and that’s the reality of Europe today.

Krugman on Why the Eurozone is in Big Trouble

I’ve been quite explicit about my disagreement with Paul Krugman. His view is that the main problem in America’s economy is a lack of demand that could easily be reversed by a big enough fiscal stimulus. My view is that lowered demand merely reflects underlying structural problems, very often at a global or systemic level. Big stimuli would make the problems go away for a few months or years, only to re-emerge at a later date if the underlying causes aren’t addressed (as I discussed in more depth here).

But he’s definitely onto something (as opposed to on something) today. Here’s a Venn diagram of the road ahead for Europe:


The real question is whether or not Professor Krugman would include a fake alien invasion (to create spending and raise demand) in the “things that might actually work” category.

Reindustrialisation

I’ve talked a lot recently about reindustrialisation. Now, I’m fairly certain David Cameron hasn’t been reading what I write. But I’m also fairly certain we have been looking at the same statistics: Manufacturing has shrunk from nearly 40 percent of Britain’s gross domestic product in the late 1950s to not much more than 10 percent now. And while Cameron might not put it this way, that has left Britain as a shrivelled husk of an economy: overly reliant on services, foreign oil, Chinese manufacturing, junk food, corporate handouts, and too-big-to-fail-too-big-not-to-fail financials. So it’s no surprise that Cameron has been talking up manufacturing. From Bloomberg:

Prime Minister David Cameron has latched on to manufacturing as a cure for Britain’s economic hangover and its 7.9 percent jobless rate. U.K. Business Secretary Vince Cable says that for sustainable, long-term growth, “manufacturing is where we need to be.”

“One of the main growth sectors of the economy in recent years has been banking,” Cable said in an interview. “For reasons that are blindingly obvious, that’s not going to be so important in future.”

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