Monday, April 23, 2012

This "just in" from the Eurozone: Greeks Aren't Lazy

The unfolding crises spreading throughout the Eurozone continues to inflict unnecessary pain and poverty.  This pain has been continually made worse by the disastrous policies of those in charge of the Euro.  German Chancellor, Angela Merkel, is now starting to share in the pain her preferred policies have delivered to other Euro nations.  Today, Reuters is reporting that German manufacturing sector not only shrank last quarter, but shrank fast.

As the so-called "Sovereign debt crises" has hit several European countries, those countries have been forced to increase taxes and cut government spending.  These cuts have affected everything from social safety nets to education.  They "had to" because that was the deal when they started using the Euro.

The European Union is set up in a way that guaranteed that eventually, one of its members was going to have a debt crisis.  What makes the Euro so unique is that it was setup almost like a gold standard.   Each nation in the Eurozone does not issue it’s own money.  Money is always borrowed.  That borrowing must come from someone who has Euros.  This is very different from most other modern countries like the U.K., United States, Canada, or Japan.  The reason this becomes important is not during economic booms, but during the busts.  From my last Euro tirade:

During an economic bust – or recession – people are out of work and pay less taxes.  Therefore the nation brings in less tax money.  Additionally, the increasing unemployed add to the costs of the social safety net.  Therefore as the recession goes on, countries bring in less tax dollars, but are obliged to pay out more benefits.  This becomes a problem when you cannot have a budget deficit.  The U.S. states are having that problem right now.  Greece and other Euro zone nations aren’t supposed to have budget deficits greater than 3% of GDP.  That is impossible during a deep enough recession.
During a deep recession, a Sovereign nation like Japan or the United States could run a large budget deficit to counter-act the recession.  Eurozone nations cannot do that.  They must cut back along with the rest of their private sector.  Well, when a recession is caused by people cutting back, and then the government cuts back… it’s only going to make the recession worse!
Sure enough, as nations like Greece, Italy, and Ireland cut back their spending, it only exacerbates the problems with their economy.  No matter how much they cut, they still find themselves with large budget deficits.  And each time, the other Eurozone nations - especially Germany - have forced more austerity on them to try and enforce fiscal discipline.
Now those years of bad policy are coming home to roost in Germany.

Markit's manufacturing Purchasing Mangers Index (PMI) fell sharply to 46.3 from March's 48.4, according to a flash estimate released on Monday, well below the 50 mark which would sign al growth in activity.
It marked the fastest rate of contraction since July 2009 in the sector, which has been hit by a decline in some exports as the debt crisis in the euro zone has choked demand from key trading partners.
Wow, years of recession and forced austerity on their trading partners is hurting German imports.  Who could've predicted that?(answer: anyone with a brain)  I wonder when Germany starts hurting if Chancellor Merkel will try to enforce the same amount of austerity. I also wonder if there will be a vicious campaign to call German factory workers "lazy" and "overpaid" like there was against Greek workers during the early days of the Greek crises.

I don't blame the German people for their predicament.  Even on their government I cast only partial blame.  The root of the cause is bad economic policies driven by really bad economic theory.
Leave a Comment