Reports from the Economic Front

The U.S. economy continues to stagnate and our political leaders continue to embrace austerity.  One major reason for this policy stance is that stagnation has done nothing to dent the earnings of our top corporations and their owners.

The challenge for our political leaders is convincing the rest of us to accept this situation.  For sometime now their strategy has been to predict recovery right around the corner.  All we need, they say, is a bit more austerity to reassure financial markets and growth will naturally resume.

Their claims were initially buttressed by a few highly touted economic studies, but those studies have now been discredited.  See here and here.  Practice also makes clear that austerity is not the solution to our economic problems.

This strategy was tried first and most aggressively in Europe.  The chart below, taken from a blog post by the economist Ed Dolan, provides one indicator of the self-reinforcing consequences of austerity.  Half the countries in the euro zone are in recession, and several big ones are heading that way.  For example, Germany’s average annual growth fell from 0.7 percent in 2012 to 0.4 percent in the first quarter of 2013.

The European experience holds another lesson for people in this country.  It will take sustained popular organizing to get policy makers to change course.

The Pew Research Center recently published a report titled “Pervasive Gloom About the World Economy.” The following two charts come from Chapter 4 which is called “The Causalities: Faith in Hard Work and Capitalism.”

The first suggests that the belief that hard work pays off remains strong in only a few countries: Pakistan (81%), the U.S. (77%), Tunisia (73%), Brazil (69%), India (67%) and Mexico (65%). The low scores in China, Germany, and Japan are worth noting. This is not to say that people everywhere are not working hard, just that many no longer believe there is a strong connection between their effort and outcome.

The second chart highlights the fact that growing numbers of people are losing faith in free market capitalism.  Despite mainstream claims that “there is no alternative,” a high percentage of people in many countries do not believe that the free market system makes people better off.

GlobeScan polled more than 12,000 adults across 23 countries about their attitudes towards economic inequality and, as the chart below reveals, the results were remarkably similar to those highlighted above.  In fact, as GlobeScan noted, “In 12 countries over 50% of people said they did not believe that the rich deserved their wealth.

It certainly seems that large numbers of people in many different countries are open to new ways of organizing economic activity.  This is a hopeful development.

Greece has been in recession for close to four years and its economy continues its downward slide.  Its unemployment stands at 20.9%, youth unemployment at 48%.  In the words of the Guardian’s economic editor:  

Greece is broke and close to being broken. It is a country where children are fainting in school because they are hungry, where 20,000 Athenians are scavenging through waste tips for food, and where the lifeblood of a modern economy – credit – is fast drying up.

According to the conventional wisdom, Greece’s current economic problems are the result of years of too much public spending on social programs and too little tax collection.  Foreign borrowing enabled the Greek state to finance its ever larger budget deficits and sustain growth.  However, this strategy reached its limits in 2008.  The global crisis dramatically increased the country’s deficits and foreign lenders grew worried about Greece’s ability to pay its debts.  Unable to tap credit markets, the Greek state and economy entered into crisis.  

In response to the crisis, European institutions and the IMF have offered the Greek state special loans (so they can pay their debts to foreign banks—mostly German and French).  In exchange, the Greek government has agreed to slash its spending.  This has meant massive cuts in state employment and social programs and, of course, a worsening of the country’s economic downturn.

Interestingly, while the media has demonized Greek workers for creating the deficits and moralized about their need to readjust to the realities of Greek economic capacities, little attention has been paid to military spending as a cause of the deficits and the unwillingness of European leaders to demand a significant change in Greek defense spending.

 Here is what a Guardian reporter has to say:   

The current EU-IMF bailout remains conditional on further austerity measures, including reducing pensions, the minimum-wage and civil service jobs. However, one area of the Greek budget doesn’t seem to have received much scrutiny: its huge military spending. . . .

In 2006, as the financial crisis was looming, Greece was the third biggest arms importer after China and India. And over the past 10 years its military budget has stood at an average of 4% of GDP, more than £900 per person. If Greece is in need of structural reform, then its oversized military would seem the most logical place to start. In fact, if it had only spent the EU average of 1.7% over the last 20 years, it would have saved a total of 52% of its GDP – meaning instead of being completely bankrupt it would be among the more typical countries struggling with the recession. 

So, what is driving this military spending—well just as German and French banks have been among the biggest lenders to the Greek state, German and French arms producers have been among the biggest arms sellers to the Greek state.  As the Guardian article explains:

In the five years up to 2010, Greece purchased more of Germany’s arms exports than any other country, buying 15% of its weapons. Over the same period, Greece was the third-largest customer for France’s military exports and its top buyer in Europe. Significantly, when the first bail-out package was being negotiated in 2010, Greece spent 7.1bn euros (£5.9bn) on its military, up from 6.24bn euros in 2007. A total of £1bn was spent on French and German weapons, plunging the country even further into debt in the same year that social spending was cut by 1.8bn euros. It has claimed by some that this was no coincidence, and that the EU bail-out was explicitly tied to burgeoning arms deals.

Greece has finally begun to reduce its military spending, but the cuts in the military budget have been far smaller than those in social programs.  In fact, Greece remains in the top spot in the EU for spending on the military as a percentage of GDP and is still one of the world’s biggest weapons importers.

An article in the German press offers the following picture of how military spending is being handled relative to social programs:

In 2010 the military spending budget should have been cut by only 0.2 percent of economic output, or by €457 million. That sounds like a lot, but the same document proposed to cut back on social spending by €1.8 billion. In 2011, according to the EU Commission, Greece was to strive for “cutbacks in defense spending”. The Commission, though, didn’t make it explicit.

The Greek Parliament was quick to exploit this freedom. The 2012 budget proposes cuts to the social budget of another nine percent, or about €2 billion. The contributions to NATO, on the other hand, are expected to rise by 50 percent, to €60 million, and current defense spending by up to €200 million, to €1.3 billion – an increase of 18.2 percent.

And the German Federal Government’s stance? According to a spokesman, responding to an enquiry, the German government supports “the policy of consolidation of the Greek Prime Minister Papademos. The government’s guiding assumption is that the Greek government will, on its own responsibility, contemplate meaningful cuts in military spending.”

On June 17, Greece will hold national parliament elections.  As the Washington Post explains: 

Let’s recall the background. Greece owes a whole bunch of money it can’t repay. In February, the country received a $140 billion bailout from the IMF, the European Central Bank, and the European Commission. In exchange, Greece is supposed to make a bunch of sharp spending cuts. Greek voters don’t like this, given that their country’s economy is already in tatters. But if they don’t accept further austerity, they might not get the bailout. . . . So that’s the context for the upcoming Greek parliamentary elections.

The two parties leading in the opinion polls are Syriza (Coalition of the Radical Left), which rejects the austerity agreement and is promoting a restructuring of the Greek economy (of course, more is at issue than just military spending), and Nea Dimokatia (New Democracy), which has basically endorsed the status quo.  Here is an article that provides some background on the main parties contesting the upcoming election and here is a statement of Syriza’s program for economic transformation.  The statement is well worth reading; it includes policies that would be helpful for people in many countries.

It is no secret that our public sector is in trouble.  Our roads and bridges desperately need upgrading.  Our schools and libraries are being forced to slash staff and activities.  Our social services and program are being cut.  And the reason: not enough money.  

Yet at the same time, it is also no secret that our most powerful and profitable corporations are merrily finding countless ways to avoid paying taxes.  It might seem like this situation would produce a serious discussion about societal aims and values—but it hasn’t.  Our political and business leaders appear quite content that business as usual should not be inconvenienced for the sake of the economy.

The New York Times recently provided an excellent study of, in its words, “How Apple Sidesteps Billions in Taxes.”  How does the company do it?  The answer is tax loopholes and a number of subsidiaries in low tax places like Ireland, the Netherlands, Luxembourg and the British Virgin Islands.  Why does it do it?  We are talking real money here.  According to the New York Times, Apple “paid cash taxes of $3.3 billion around the world on its reported profits of $34.2 billion last year, a tax rate of 9.8 percent.”  By comparison, Wal-Mart was downright patriotic—paying a tax rate of 24 percent.

Foreign Travel

Get your passports ready.  If a U.S. consumer buys an Apple product like a song from iTunes or an iPhone the royalties earned are routed to an Irish subsidiary.  That is because Apple assigned the rights to royalties on patents developed in its California operations to the subsidiary.  The royalities gathered in Ireland are then transferred, with few tax obligations thanks to Irish law, to another Apple subsidiary in the British Virgin Islands, where tax rates are extremely low.  Thus, not only does the U.S. lose out on tax revenue, so does Ireland.  And in case you have forgotten, Ireland is suffering massive cuts in public spending because of a lack of revenue.

If a product is purchased by someone residing outside the U.S., the patent royalties are routed to a different Irish subsidiary.  Apple then transfers those royalties through the Netherlands, tax free thanks to European laws, back to its primary Irish subsidiary and then on to its Caribbean subsidiary.  

If this is confusing check out this graphic.  How important is Ireland to Apple? In 2004, the country received more than one-third of Apple’s world wide revenue.  The U.S. corporate tax rate is 35 percent.  The Irish corporate tax rate is 12.5 percent.  And the British Virgin Island tax rate is even lower.  

Of course Apple’s profits are not limited to patent royalties.  That is where its Luxembourg subsidiary comes into play.  As the New York Times explains:

 when customers across Europe, Africa or the Middle East — and potentially elsewhere — download a song, television show or app, the sale is recorded in this small country . . . In 2011 [the revenue of this Luxembourg subsidiary] exceeded $1 billion, according to an Apple executive, representing roughly 20 percent of iTunes’s worldwide sales.

The advantages of Luxembourg are simple, say Apple executives. The country has promised to tax the payments collected by Apple and numerous other tech corporations at low rates if they route transactions through Luxembourg. Taxes that would have otherwise gone to the governments of Britain, France, the United States and dozens of other nations go to Luxembourg instead, at discounted rates.

“We set up in Luxembourg because of the favorable taxes,” said Robert Hatta, who helped oversee Apple’s iTunes retail marketing and sales for European markets until 2007. “Downloads are different from tractors or steel because there’s nothing you can touch, so it doesn’t matter if your computer is in France or England. If you’re buying from Luxembourg, it’s a relationship with Luxembourg.”  

Back Home In The U.S. 

Of course Apple also makes money from sales in the United States.  But it has a way of handling that “problem” as well.  The company’s headquarters is in Cupertino, California but it has a Reno subsidiary, Braeburn Capital, collect and manage its profits.  According to the New York Times:

When someone in the United States buys an iPhone, iPad or other Apple product, a portion of the profits from that sale is often deposited into accounts controlled by Braeburn, and then invested in stocks, bonds or other financial instruments, say company executives. Then, when those investments turn a profit, some of it is shielded from tax authorities in California by virtue of Braeburn’s Nevada address.

Since founding Braeburn, Apple has earned more than $2.5 billion in interest and dividend income on its cash reserves and investments around the globe. If Braeburn were located in Cupertino, where Apple’s top executives work, a portion of the domestic income would be taxed at California’s 8.84 percent corporate income tax rate.

But in Nevada there is no state corporate income tax and no capital gains tax. What’s more, Braeburn allows Apple to lower its taxes in other states — including Florida, New Jersey and New Mexico — because many of those jurisdictions use formulas that reduce what is owed when a company’s financial management occurs elsewhere.

California has lost billions of dollars in tax revenue—oh yes and is deep in a budget crisis.  

In fairness to Apple it is far from alone in using these tricks of the trade.  Almost all technology companies do it.  So, here is the thing—if we really care about our public infrastructure and programs we have to start getting tough on these companies.  Their success was aided by past public investment–there should be payback.   But then again perhaps there is no such thing as society–only the corporation counts.   

The media is full of stories about the ever more heated debate over the best way to reignite growth: austerity or deficit spending.  

Paul Krugman, a leading proponent of the deficit spending side, puts it like this:  

Britain has fallen into its first double-dip recession since the 1970s, according to official figures released Wednesday, a development that raised more questions about whether government belt-tightening in Europe has gone too far. Britain is now in its second recession in three years. . . .

In a packed British Parliament, Prime Minister David Cameron had to defend his austerity drive against critics like Ed Miliband, head of the opposition Labour Party, who called the economic numbers “catastrophic.”

The raucous scene was the latest manifestation of growing popular frustration with the strict fiscal diet that has been prescribed by the European Central Bank and German leaders in response to the euro zone’s sovereign debt crisis. While Britain is not a member of the euro zone, its economic fortunes are closely linked with those of the currency union.

The discontent was on view in French elections last weekend and played a role in the collapse of the Dutch government on Monday. Greece, Spain and Italy have been the scene of mass demonstrations for months, but the turmoil now seems to be spreading to countries that were not seen as being at the heart of the crisis. Britain joined Belgium, the Czech Republic, Greece, Italy, the Netherlands and Spain in recession.

Of course, as Krugman notes, that doesn’t mean that the austerity defenders have given up. Here is the solution to the crisis put forward by Mr. Draghi, head of the European Central Bank, as reported by the New York Times:

He urged national leaders to take steps to promote long-term growth even when it is politically difficult. Some leaders have raised taxes or cut infrastructure projects, when instead they should be reducing government operating expenses, Mr. Draghi said.

Tragically, those in Mr. Draghi’s camp continue to blame Europe’s crisis on too much government spending when its roots lie far more in the collapse of speculative bubbles driven by private financial interests and German austerity policies.  Of course, this understanding would require taking a critical stance against dominant capitalist interests; far easier to make the working class pay.  

However, we should also be careful about assuming that the bankruptcy of the austerity strategy proves the wisdom of relying on deficit spending to solve our economic problems.  The fact of the matter is that spending to stimulate growth will not solve our problems.  The reason is that existing economic structures operate to generate what the United Nations Development Program has called “savage growth.”  Savage growth refers to a growth process that enriches the few at the expense of the many.  In other words, a process that is neither desirable nor sustainable.  Therefore, unless we change the nature of our economy, deficit spending will just temporarily postpone the start of a new crisis.

Here are two charts from an Economic Policy Institute report that highlight the workings of savage growth in the United States.  The first shows a sharp divergence, beginning in the mid-1970s, between productivity and hourly compensation for private-sector production/nonsupervisory workers (a group comprising over 80 percent of payroll employment).  In other words, the owners of the means of production have basically stopped sharing gains in output with their workers.  This wedge between productivity and compensation helps explain both the growth in inequality and the need for debt to sustain consumption.

The second provides a closer look at post-1973 trends.  A key point: median hourly compensation basically stopped growing starting early in the 2000s, even though the economy continued to expand for several more years, and it continues to fall despite the end of the recession.

In sum, if we are serious about improving economic conditions we need to move past the austerity-deficit financing debate and begin pressing for adoption of trade, finance, production, and labor policies that strengthen the position of workers relative to those who own the means of production.  Anything short of that just won’t do.

As growing numbers of countries face renewed austerity pressures, there is a tendency to explain the trend by searching for specific policy failures in each country rather than considering broader structural dynamics.  Key to the credibility of those who argue for a focus on national decisions is the existence of countries that people believe are performing well.  Thus, the argument goes, if only policy makers followed best practices their people wouldn’t find themselves in such a bad place.  Recently, German has become one of these model countries.

 Here is a typical framing of the German experience:  

At a time when unemployment rates in France, Italy, the UK, and the US are stuck around 8%-9%, many are turning to the apparent miracle in the German labor market in search of lessons. In 2008–09, German GDP plummeted 6.6% from peak to trough, yet joblessness rose only 0.5 percentage points before resuming a downward trend, and employment fell only 0.5%. In August 2011, the standardized unemployment rate was about 6.5%, the lowest since the post-reunification boom of 20 years ago.

In other words, Germany seems to be doing things right. Despite suffering a deep decline it actually enjoyed a lower unemployment rate. So, how did it do it?  Often cited are recent German policies which have increased labor market flexibility. But are these the best practices that should be adopted elsewhere?  One way to answer that question is to look at what these changes have meant to German workers.  A Reuters report concluded: 

Job growth in Germany has been especially strong for low wage and temporary agency employment because of deregulation and the promotion of flexible, low-income, state-subsidised so-called “mini-jobs”.

The number of full-time workers on low wages – sometimes defined as less than two thirds of middle income – rose by 13.5 percent to 4.3 million between 2005 and 2010, three times faster than other employment, according to the Labor Office.

Jobs at temporary work agencies reached a record high in 2011 of 910,000 — triple the number from 2002 when Berlin started deregulating the temp sector. . . .

Data from the Organization for Economic Co-operation and Development shows low-wage employment accounts for 20 percent of full-time jobs in Germany compared to 8.0 percent in Italy and 13.5 percent in Greece.

New categories of low-income, government-subsidized jobs – a concept being considered in Spain – have proven especially problematic. Some economists say they have backfired.

They were created to help those with bad job prospects eventually become reintegrated into the regular labor market, but surveys show that for most people, they lead nowhere.

Employers have little incentive to create regular full-time jobs if they know they can hire workers on flexible contracts.

One out of five jobs is a now a “mini-job”, earning workers a maximum 400 euros a month tax-free. For nearly 5 million, this is their main job, requiring steep publicly-funded top-ups.

“Regular full-time jobs are being split up into mini-jobs,” said Holger Bonin of the Mannheim-based ZEW think tank.

And there is little to stop employers paying “mini-jobbers” low hourly wages given they know the government will top them up and there is no legal minimum wage.

This development was far from accidental.  It was the result of policy changes implemented in the early 2000s by then Chancellor Gerhard Schroder.  In 2005, Schroeder proudly announced at the World Economic Forum in Davos, Switzerland, that “We have built up one of the best low wage sectors in Europe.”

The New York Times described the German employment miracle as follows:  

But hidden behind the so-called German economic miracle is an underclass of low-paid employees whose incomes have benefited little from the country’s stability and in fact have shrunk in real terms over the last decade, according to recent data.

And because of government policies intended to keep wages low to discourage outsourcing and encourage skills training, the incomes of these workers are not likely to rise anytime soon.

That, in turn, means they are likely to continue to depend on government aid programs to make ends meet, costing taxpayers billions of euros a year.

The paradox of a rising tide that does not lift all boats stems in part from the fact that Germany has no federally set minimum wage. But it also has its roots in recent German politics, which have favored measures to keep unemployment low and win support from employers. . . .

The Confederation of German Employers’ Associations says the introduction of a minimum wage would push up labor costs and lead to more unemployment. Jobs would simply move out of Germany and to Eastern Europe or Asia. 

These new labor policies have not only taken a toll on German workers, they have also greatly contributed to the growing crisis in Europe.  The low wages and insecure employment conditions have both enabled German employers to boost exports and limited imports. Global Employment Trends 2012, an ILO report, highlights this connection.  According to an article summarizing its contents:

“The rising competitiveness of German exporters has increasingly been identified as the structural cause underlying the recent difficulties in the Euro area,” the report said. Crisis countries had not been able to export enough of their goods to Germany as domestic demand there was not strong enough because of low wages.

The ILO said German policies to keep down wages had created conditions for a prolonged slump in Europe as other nations on the continent increasingly saw only even harsher wage deflation as a solution to their lack of competitiveness.

The body called on Germany to enact swift changes. “An end to a low-wage policy would create positive spillover effects to the rest of Europe and restore a more equitable income distribution,” it said in the study.

   As the chart below shows, German wages have been stagnating for over a decade.  

No wonder that Germany has been exporting so successfully and that other economies in Europe have found it difficult to compete.  While German politicians blame these other economies for their problems, the fact is that German growth has depended on the high consumption and borrowing in these other countries.  As one analyst noted:

Germany, remember, accounts for 28% of the whole Eurozone economy.  It is not fanciful to imagine that imbalances in the German economy are capable of driving — or at least amplifying — imbalances within the entire region.  Indeed Germany’s capacity to buy from Europe is even more limited than its stagnating wages would suggest.  Because on top of this Germany has experienced a sharp increase in inequality.  This means wealth has been redistributed from poor, who tend to spend, to the rich, who tend to save.  

In short, if we are going to meaningfully address our economic problems we need to begin looking critically at how capitalist accumulation dynamics actually work.  Trying to emulate so-called success stories is not the way to go.

There is big trouble brewing in Europe.  John Ross, in his blog Key Trends in the World Economy, highlights this brewing crisis in a series of charts, some of which I repost below. 

Chart 1 (below) shows the extent of the recovery from the recent economic crisis in the U.S., the EU, and Japan.  While the U.S. GDP has finally regained its past business cycle peak, the same cannot be said for Europe (or Japan).  As of the 3rd quarter 2011, EU GDP was still 1.7% below its previous business cycle peak.  The Eurozone was 1.9% below. 

Recent GDP estimates for the 4th quarter show European GDP once again contracting, which strongly suggests that the region is headed back into recession without having regained its previous business cycle peak.  This development implies that Europe faces serious stagnationist pressures.

Chart 2 (below) looks at the growth record for the 5 largest European economies.  Germany has regained its previous GDP peak.  France is making progress toward that end.  These two countries account for 36.2% of European GDP.  However, things are quite different for the UK, Italy and Spain.  These three countries account for 34.7% of European GDP and not only do they each remain far below their respective previous GDP peaks, their economies are once again heading downward. 

Chart 3 (below) highlights the economic performance of the three countries which have received the most media attention because of fears that their governments will be unable to repay their respective debts.  They are clearly in trouble, adding to the downward pressure on European GDP.  However, despite all the attention paid to them, their combined economies are only one-eighth the size of the combined economies of the UK, Italy and Spain. 

Charts 4 and 5 (below) highlight the fact that economic trends are also dire throughout much of Eastern Europe. 

The take-away is that European economic problems are not limited to a few smaller countries.  Some of the largest are also performing poorly and apparently headed back into recession without ever having regained their past business cycle peaks.  It is hard to see Europe escaping recession.  And it is hard to see the U.S., Asia, and Africa escaping the consequences.

Europe is experiencing a growing economic crisis.  Tragically, the recent meeting of the 27 European Union nations in Brussels produced an agreement, which if ratified, is bound to make things worse.

Growing numbers of European countries are running large national budget deficits which their governments are finding increasingly difficult to cover through borrowing.  According to the New York Times, “Euro zone governments have to repay more than 1.1 trillion euros, nearly $1.5 trillion, of long- and short-term debt in 2012, with about 519 billion euros, or $695 billion, of Italian, French and German debt maturing in the first half alone.”  The Wall Street Journal provides the following national breakdown:

The danger is that some European governments will be unable to secure the funds required to pay their debts.  Such defaults would threaten the financial stability of a number of large European banks, which are major holders of government bonds, and eventually the U.S. financial system because of the close ties between many large European and U.S. financial institutions.

At the Brussels meeting, government leaders agreed to raise some $270 billion and give it to the IMF which is supposed to use it provide loans to those governments in need, with its usual austerity conditions attached, of course.  The leaders also agreed to speed up the introduction of a new European rescue fund that would do much the same.  This determination to impose austerity on European workers stands in sharp contrast to another agreement. According to the New York Times, “The leaders sent an important signal to the bond markets by scrapping a pledge to make private investors absorb losses in any future bailout for a euro nation.” 

The leaders rejected what would have been the most useful action—empowering the European Central Bank to directly buy government bonds, much like the Federal Reserve does for the U.S. government.

The leaders did approve two major long term policy initiatives.  As the Wall Street Journal explains:   

After a marathon session of negotiating that started Thursday and ran until early Friday morning, the leaders emerged with two principal achievements: Euro-zone members who run outsize government deficits will face automatic penalties, and all governments will put balanced-budget procedures of some form in their national laws.

Germany had wanted this limit on government borrowing made part of the EU constitution, thereby giving EU institutions the authority to enforce it.  It was unsuccessful in achieving its goal only because of UK opposition; such major changes require unanimous approval on the part of all 27 member countries.  As a result, the other 26 leaders have agreed to implement this “fiscal stability compact” by winning approval for it in each of their respective national parliaments.

This fiscal stability compact reflects the continuing belief of European political leaders that the current crisis was caused by runaway government debts and can only be contained through adoption of a balanced budget amendment.  This is precisely the argument being made by conservatives in the United States.  And it is just as wrong headed in Europe as it is in the United States.

Paul Mason, the economic editor of Newsday put it well, saying:

I can only add at this stage that, by enshrining in national and international law the need for balanced budgets and near-zero structural deficits, the eurozone has outlawed expansionary fiscal policy. . . .

It has done what the US Republicans would like to do – and if you think about it, it has made what Gordon Brown did, and what Barack Obama (and indeed Wen Jia-bao) is doing illegal. 

The result, if it works will be stability. It is hard to see how it promotes long-term growth.

Mason is probably overoptimistic that such a policy will even prove able to ensure stability.  As for the claim that the current crisis is the result of out-of-control deficits, take a look at the chart below:

As you can see, Spain and Ireland, two of the countries with the biggest debt problems, were actually running strong surpluses before the crisis.  On the other hand, Germany was in violation of the Euro zone agreement to keep yearly budget deficits below 3% of GDP from 2001 to 2005.  Not surprisingly, once the crisis hit, almost every country was forced into running large deficits.  Said differently, in almost all cases, large budget deficits are the result of the crisis not the cause.     

In short, pushing austerity will produce a deeper economic downturn, resulting in bigger government deficits and a worsening debt problem.  As the economist Kevin O’Rourke explains:

One lesson that the world has learned since the financial crisis of 2008 is that a contractionary fiscal policy means what it says: contraction. Since 2010, a Europe-wide experiment has conclusively falsified the idea that fiscal contractions are expansionary. August 2011 saw the largest monthly decrease in eurozone industrial production since September 2009, German exports fell sharply in October, and now-casting.comis predicting declines in eurozone GDP for late 2011 and early 2012. . . .

What is needed to save the eurozone in the medium term is a central bank mandated to target more than just inflation – for example, unemployment, financial stability, and the survival of the single currency. . . . This will require a minimal fiscal union; a full-scale fiscal union would be better still. Yet none of this was on the summit’s agenda.

Europe’s current approach to its crisis is crazy, and one can only hope that few if any national parliaments will endorse it.  I suppose there is some reason to be optimistic.  As the Wall Street Journal reports:

One particular complication is the bid to make sanctions automatic. It recycles an idea that the euro zone rejected in October 2010. At that time, the European Commission, the bloc’s executive arm, proposed that penalties for violating the fiscal rules be automatically imposed; unless the countries voted affirmatively to block them, they’d stand.

The longstanding rules work the other way around. Penalties are imposed only if countries vote for them. That led to the ignominious spectacle, in 2003, of France and Germany each breaking the deficit ceiling and each voting against condemning the other, killing enforcement efforts.

In the meantime, governments in Europe, much like in the United States, continue to defend the very economic structures and patterns of economic activity that led to the current economic mess while demanding that working people pay the costs.  What a nightmare.

Good old Ireland—according to the leaders of France and Germany, things would be a lot better in Europe if all the countries were like Ireland.  Their reason: the Irish have generally accepted their austerity “medicine” quietly while workers in other countries (like Greece and Spain) have been in the streets protesting.

The problem with being the “good” country is that while austerity helps ensure that the Irish government is able to make payments to the country’s international investors (especially French and German banks), the Irish people are suffering and their economy is close to sinking back into a new recession.  Some deal.

Not so long ago Ireland was known as the Celtic Tiger.  Ireland’s recent economic rise, which began in the 1990s, was fueled by multinational corporate investment, much of it from US high-tech firms.  As Andy Storey explains:

Ireland, accounting for a mere 1% of Europe’s population, managed to attract 25% of all US greenfield investment into the EU in the early 1990s. US investment in Ireland, at $165 billion, is greater than US investment in Brazil, Russia, India and China combined. Multinationals, the majority of them from the US, account for 70% of Irish exports.

The attraction: Ireland’s extremely low tax rates and tariff-free access to the EU.

Unfortunately for Ireland, the 2001 collapse of the US high-tech bubble meant the end of US investment in the country.  Ireland was “saved,” however, by a debt-driven housing boom. Sound familiar? 

Irish banks were able to borrow cheaply thanks to the country’s 1999 adoption of the Euro.  And with manufacturing in a slump, they aggressively and profitably pushed loans to Irish home buyers and builders.  Storey highlights the importance of real estate activity to the Irish economy as follows:  

Investment in buildings accounted for 5% of output in 1995 but for over 14% in 2008. By 2006/07, the construction industry was contributing 24% to Irish income (compared to the Western European average of 12%), accounting (directly and indirectly) for 19% of employment (including high levels of migrant labor) and for 18% of tax revenues (property transaction taxes have now collapsed as construction activity has nosedived).  

Just like in the United States, this housing boom temporarily masked the fact that the country’s industrial base and public infrastructure was decaying, overall job growth was slowing, and household debt was soaring.  When the global crisis hit in 2008, triggered by the collapse of the US housing market, it was the end for Irish growth as well.  Irish banks lost access to foreign credit at the same time as their own real estate loans went bad.  The Irish financial sector was on the ropes and unable to repay its creditors.

So, what did the Irish government do?  In September 2008 it announced that it would guarantee all deposits and payments to foreign creditors.  Thus, the people of Ireland found themselves taking on all the debts of the Irish financial sector.  Not surprisingly, government debt as a share of GDP greatly increased.  

The main beneficiaries of this policy were the country’s foreign lenders, including French and German banks.  No wonder the French and German governments view Ireland as a good nation and role model for Europe.  This history challenges the notion, widely pushed by the leaders of France and Germany, that the region’s crisis was caused by out-of-control government spending.  

Of course, with low tax rates and an economy in recession the Irish government was in no position to pay the private debts it had taken over.  The answer, supported by European elites, was austerity.  The Irish government slashed spending on public sector projects and workers as well as social programs to free up funds.  But even that was not enough.  The Irish government had to borrow as well, an action that further increased the country’s national debt.   

The foreign creditors got paid, all right.  But the austerity only made things worse for Ireland.  The cuts drove the economy deeper into recession, again driving down revenue, and forcing the government to seek new loans.  However, foreign lenders could see the handwriting on the wall and were unwilling to substantially increase their lending to Ireland.  Instead of renouncing or renegotiating the debts, the Irish government went to the IMF and EU for help.  It was ”rewarded” with a major loan of approximately $90 billion in December 2010, at the cost of yet more austerity involving higher sales taxes and sharply reduced spending on social programs. 

And the consequences of this strategy for the Irish people?  As the New York Times reports:   

“This is still an insolvent economy,” said Constantin Gurdgiev, an economist and lecturer at Trinity College in Dublin. “Just because we’re playing a good-boy role and not making noises like the Greeks doesn’t mean Ireland is healthy.”

Ireland’s GDP fell by 3.5 percent in 2008, another 7 percent in 2009, and a further 0.4 percent in 2010.  The economy grew 1.2 percent the first half of this year but even this weak expansion will likely be short-lived.  According to the New York Times:

The Economic and Social Research Institute, based in Dublin, recently cut its 2012 growth forecasts for Ireland in half, to under 1 percent. It cited an expected recession in the wider euro zone, in part because the austerity being pressed on much of Europe by Germany and the European Central Bank is seen as worsening the prospects for recovery rather than improving them.

In fact, the Irish government announced in November that it will be forced to raise taxes and cut spending again in 2012.  The reason: despite all its efforts the size of the national debt continues to growth.  The budget deficit is projected to hit 10 percent of GDP this year, still sizeable even though down from 32 percent of GDP in 2010.  The government fears that without drastic action it will be unable to continue paying its debts. 

Perhaps not surprisingly, the Irish people are beginning to say “enough is enough.”  The New York Times highlights one indicator of the change:

On a recent frosty night in Dublin, David Johnson, 38, an I.T. consultant, stepped outside a makeshift camp set up by the Occupy Dame Street movement in front of the Irish Central Bank. “This is all new to Ireland,” he said, pointing to tarpaulins and protest signs that urged the government to boot out the International Monetary Fund and require bondholders to share Irish banks’ losses that have largely been assumed by taxpayers. “The feeling is that the people who can least afford it are the ones shouldering the burden of this crisis.”

The December 3rd Spectacle of Defiance and Hope in Dublin, captured in the video below from Trade Union TV, is another.  

[youtube] http://www.youtube.com/watch?feature=player_embedded&v=58wZmRadHwk[/youtube]

The following charts published in the New York Times highlight some of the trends discussed above.

Ireland’s road to debt and austerity is illustrative of the general situation in Europe.  Working people are being squeezed to protect profits and ensure the stability of existing economic relations.  Significantly, the leaders of France and Germany have just announced their long term plan for ending Europe’s crisis: adoption of tough new limits on government borrowing.  Clearly this is a desperate attempt to head off any meaningful challenge to the existing system.  At some point, and one hopes sooner rather than later, working people throughout Europe will see through this game, recognize their common interests, and take up the difficult but necessary job of economic restructuring.