Monday, May 14, 2012

Thoughts on the European Economy

The austerity program in Europe doesn’t seem to be working all that well.  Restructure your debt, and live within your means by immediately and drastically cutting government expenditures, sounded like good common sense advice, and certainly something had to be done.  Bureaucracies in the so called PIIGS nations (Portugal, Italy, Ireland, Greece, Spain) were bloated and inefficient.  Guaranteed social benefits were overly generous and unfunded.  Deficit spending and national debt had climbed to unsustainable levels.  Banks were under capitalized.  What a mess!
What appeared to be the common sense solution just is not working.  As it turns out, Keynes was right, you cannot financially starve a country into prosperity.  All it produces is a deepening recession accompanied by very unhappy citizens verging on riot and revolution.  Add some strong arm tactics to put down civil unrest and it’s a path toward authoritarian rule. 
So what might work?  How about focussing on reforms of a more prosaic nature?  Some of these countries, Greece and Italy especially, are well known for massive tax evasion by just about everyone.  The very rich report only a fraction of their income.  Lower classes don’t report at all.  Shops collect the VAT on every sale, but forward only a portion, or none, to the state.  It’s hard to run even a slimmed down government under circumstances like that.  Honest enforcement of the tax laws might produce enormous revenues for the state without jeopardizing anyone’s well being.
What about reducing bureaucracies through attrition while enforcing simple rules promoting efficiency and punishing bribery?  It would require a change in organizational culture, but, I suspect, a welcome one.
What about phased in changes to working hours, retirement ages, and paid leave benefits in ways that would enable ordinary families to prepare and adjust without feeling like they have had it shoved down their throats?
Instead of shutting down public expenditures altogether, what about a carefully designed plan of additional investment in appropriate infrastructure, both physical and social?
It would still require a massive restructuring of debt, and, perhaps, Greece at least would still find its way out of the Euro and back to the Drachma.  It would not be a quick fix, but it might stave off a European wide depression while setting the groundwork for long term economic recovery.  
To me, that’s common sense.

3 comments:

pastormack said...

I think medicine takes time to work its way through the system. Sometimes the medicine tastes bad, but that is no reason to spit it out. I'm quite certain that the populace in these countries does not like austerity (think about the reaction in the US to any mention of touching Social Security). The unhappiness of the mass of welfare state junkies does not mean that Keynes was right, however.

Country Parson said...

Mark,
Medicine is one thing, policies that can only lead to economic depression are another. The German/French cocktail may have been the necessary hit to get things moving, but leaving it at that would lead to disaster, is leading to disaster. Parenthetically, I am certain that the Tea Party - Ryan budget path would drive us into a depression deeper than the 30s. It scares me because I think it's possible if the right wing can win control of congress and the administration. Keynes may not have been right about everything but he wasn't wrong about everything either.

Anonymous said...

Long centuries of cultural traditions of tax evasion, bribery, nepotism in hiring (one risks family ostracism by refusing to do so, the corrupt Pope Alexander VI was the nephew of Pope Calixtus III), padding of the bureaucracy with surplus sinecures (look no further than Chicago, Boston,etc.)are so "hard-wired"into Italian, Greek, Afghan, Chinese, Indian, all Middle Eastern and African cultures that it would take a cultural seismic shock to change them. Weber, who invented the term Protestant work ethic thought the Reformation had brought such a change to northern Europe once, and maybe this explains the German bankers angry irritation with the Greeks, Italians and all the southern (and Irish)countries who will not pay their taxes! Dr B