The problem in Euroland is not just a problem of a few countries which are no longer competitive. There is a problem of too much government debt. The same issue haunts the US, where there is a poltical war over how to get the deficit down. The UK now has a government which says its main purpose is to eliminate the deficit.
The problem of the west rests in a series of countries that could properly be called DOGS – Democratic overspending government sovereigns. In Euroland these dogs are in trouble, as well as the Pigs. The pressures of democracy have led politicians of many different parties and persuasions to offer both higher public spending and lower taxes than they need to cover the spending in the pursuit of electoral success and wider popularity. They have decided they can get away with this, as they have been able to borrow large sums to cover the gap. In more recent years some have even argued that borrowing more is essential to sustain demand or to lift their economies out of the slump their boom/bust policies created.
In Euroland countries are discovering there are distinct limits to how much markets will lend to governments. As interest rates rise, so countries become unwilling to borrow. They seek subsidised credit from elsewhere. The US and the UK during the recent deep recession turned to printing money. This was advertised as a policy to augment demand at a time of falling output, but it became a convenient way of sustaining very high public borrowings at low interest rates. The new money created was used to buy government bonds to keep the government borrowing rate down.
Euroland is having an internal row about whether it too should extend the eternal credit approach to public budgets by printing more, or whether it just needs to get tougher to control deficits. The US and UK are pledged to cut deficits by raising more in tax and reducing the increase in spending, but meanwhile print some more money.
When you look across the world at the rise of China and India, you see that the west does not have a sufficiently competitive model for modern conditions. Parts of western business and economic activity are still world beating, and earn their producers good incomes in the global market. The more western economies rely on state activity and subsidy, the narrower the base of competitive activity, and the more money the country needs to borrow to sustain its relatively high living standards.
Euroland needs to worry not just about the Pigs but also about the Euroland Dogs. German cars, French food and wine, and Italian fashion may still be world beaters, but in too many areas now the production and the incomes are moving to the east from the west. That is why the west needs to change its model and get on top of its debts.
December 8, 2011
So which political parties in which countries are pushing the – what absolutely needs to be done by government – message?
In the UK does any party argue for privatising health, post-primary education etc?
December 8, 2011
I saw a clip of Reagen from the early 1980s when he was talking about government being the problem, not the solution. It was a real shock – it has been a generation since we have heard political leaders talking in this way.
December 8, 2011
How many things does our government, or any government for that matter, do that is world beating?
We see bigger and bigger government every day and then scratch our heads wondering where it’s all going and the answer from the politicians invariably is ‘more government’.
December 8, 2011
The west does need to change its model – or more precisely the state/private sector model needs to change. Individual businesses have no problems dealing with the rise of China and India. They see these countries as being important new markets and an excellent place to locate manufacturing facilities. It’s only the state that looks at emerging markets fearfully, with a mercantalist eye. I was struck recently by Hillary Clinton’s description of China as a rival and potential enemy. Why should we in the west look at a billion people pulling themselves out of poverty following an era of collectivist repression and think of it as a threat? (And no, I don’t think the current Chinese state model is desirable either, but at least it has given aspects of the free market their head)
December 8, 2011
Vast amounts of tax-payers’ money have been used by Labour to change the culture of Britain. This is political ideology not economics or for the good of the people. Lib Dems are currently immersed in this ideology through the European Liberal Democrats.
The welfare state is out of control as is the mass immigration policy. These are things that a government can change if it wants. It does not take two years for the current Tory led Coalition to stop or severely reduce immigration. Lib Dems wanted more immigration at the last election, that is one reason why they came last. it has not prevented them from continuing this aspiration in office.
In the Autumn statement cuts to public sector pay were announced a freeze for two years followed by an increase of 1%. Pensions would cost more, work longer and get less in return. In contrast welfare lifers were given a 5.2% increase and the following week Clegg was saying on national television that pensioners could give up more!! How about the 370.000 households where NO one has worked since the age of 16 yrs? What is Clegg doing about these?? At least public sector workers work and help the economy and help the notion that people should work. Clegg’s policies make it clear that it does not pay to work if you are a welfare lifer. Lib Dems are also resisting a cap of £26,000 being put on welfare households.
December 8, 2011
“How about the 370.000 households where NO one has worked since the age of 16 yrs? What is Clegg doing about these??”
Nothing, as the private sector won’t create any jobs and the unemployed can’t afford to emigrate.
December 8, 2011
You have certainly identified and articulated the problems very well. As you no doubt realise in a democracy governments are constrained from taking the necessary actions quickly and decisively enough to stop the problems escalating into a crisis which is the point that has now been reached. The next step of course is economic and social collapse. You know as well that that cannot now be avoided because market forces are going to break free from the shackles imposed upon them by socialist policies and practices and seek equilibrium. What form that collapse will take and it’s consequences is anybodies guess. A few things are certain everybody is going to be financially very much worse off and the state will contract to a point that the nanny state will no longer be able to do much nannying. If the left or the far right emerge the political beneficiaries of the collapse then the future is not one anyone will find agreeable. If the right emerge as the beneficiaries then there are enough assets, infrastructure and modernity to build upon that can promise a more hopeful future.
December 8, 2011
If such a scenario unfolds (and it’s difficult to see any other as more probable) I fear that capitalism and free markets, of which we’ve seen precious little over the last 20 years, will end up being made the scapegoat.
We have the odd voice crying in the wilderness, John Redwood, Douglas Carswell, Dan Hannan immediately spring to mind, but the forces arrayed against them are legion.
December 8, 2011
Yes the left have an almost divine ability to blame their failings on others. Having little conscience when it comes to the means justifying the ends. Bullying pig ignorant attitude and an ability to close down dissent by claiming dubious moral high grounds and shouting down and over talking are just a few of the malevolent tactics they employ. Which of course helps them achieve their divinity. Oh, must not forget their jumping on the bandwagon when it suits them as their recent conversion to quasi euro-scepticism attests.
December 8, 2011
I agree Norman, the forces internally and in the media are arrayed against them. Out here in the reality based community they have enough support amongst the public that should they choose to do the right thing and abandon the unelectable Conservation Socialist Party and form a new party they would break the tribal mould of British politics quite easily.
The “gap in the political market” has been sitting there waiting to be exploited for some time now
December 8, 2011
Indeed it need to change to a smaller state and fewer regulations but Cameron just keeps heaping more and more onto business and increasing further the size of the state. How is his “clearly vital” happiness index coming along how many does it employ? How many in the climate change face industry and “green deal”? I wonder and how many real jobs wealth and tax creating jobs in the real economy these employments destroy ?
Perhaps three times the number?
December 8, 2011
You are absolutely correct John. Have you seen Dan Hannan’s oft-made point about the EU’s share of global GDP falling from 25% to 15% in just 20 years? Restrictive legislation and uncompetitive behaviour at every turn is destroying the EU, just as it did the USSR before it, a decline accelerated by corruption and excessive taxation.
Reply: I am giving a talk with forecasts of the EU’s share of world GDP by 2020 later today. I will post the slides with the basis of the forecast. I had not seen Dan’s piece, but I agree the EU is likely to be around 15% of world GDP (PPP basis) by 2020.
December 8, 2011
Indeed and it could be the best place in the world to live and work if only it had sensible governments – it has so many natural advantages and variety.
December 8, 2011
Could you not wear a microphone and record the session on your pc? (Audibilty of questions might be a problem). If your site wont accept audio files, they could be posted elsewhere with a link.
December 8, 2011
Given the rate that the BRICS have been growing at it’s no surprise that the EU’s share of the global GDP has been falling. There are more rich countries now than there were 20 years ago when Communism was collapsing.
December 8, 2011
One answer to your question as how much in wealth and taxes has been created by the ‘green deal’ lies in the suspension of the EU’s emission trading scheme in January of this year after a five billion Euro fraud was uncovered.
That’s a five billion Euro hit for EU tax payers.
December 8, 2011
We need sound money.
China and indian are coming off a low base so a lot of their monetary problems will be masked, but unless they too get sound money they will also be blighted with boom and bust. China already may be headed for their first bust.
Sound money means you first increase the demand for money and then you create new money. Not the other way around. You let the price of money be set by the market, not some quango. You let the supply of money come from the market. Let the market decide what money is used. Under these conditions rates will rise to throttle unsustainable booms, people will tend to only accept money that retains its value. Companies will have to innovate and become efficient to compete, they cannot rely on the soft option of debasing the currency. Financial middle men, who produce no real wealth would whither. Govt would shrink, welfare would end, wars would be unfundable.
We need courageous leaders who will implement this. It will be like turkeys voting for christmas
December 8, 2011
This is all very true. Unfortunately although the Coalition came together to tackle the deficit problem, and has taken some steps towards doing so, it continues to pursue some very perverse policies. High on my list of perverse policies are the unreformed tax system, taxes which disincentivise effort and investment, an energy policy which adds to costs and reduces effective energy capacity, self indulgent spending on pet, foreign aid projects and a failure to introduce competition for state monopolies. It seems to me that the Coalition lacks the sense of urgency to reform and to control spending which the present situation demands and the recent OBR forecast so clearly demonstrated.
In Euroland they have resorted to appointing EUligarchs to run the worst cases (Italy and Greece). This is fraught with danger as Hayek pointed out in his Road to Serfdom.
December 8, 2011
I noticed there was no hint of irony in choosing someone called Papa Demos to run Greece.
December 8, 2011
Time to quote de Toqueville yet again:
[Democracy] can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.
It’s coming true, isn’t it?
December 8, 2011
Andrew, a very relevant quotation.
This is the flaw in democracy, we all vote for a better tomorrow on promises of more for less.
Politicians have learnt to seduce us of our vote, with first our own money and then with someone elses borrowed money.
With the money running out and democracy faltering in Europe lets hope we get a benevolent dictator!
December 8, 2011
So what to do ? It’s obvious, remove the ability of politicians to bribe the electorate. That is precisely what sound money does.
December 8, 2011
Black Friday, America’s biggest shopping day was dominated by people buying guns, which was the item that stood out among many others.
How do you turn off the benefit culture in a country where the whole population has guns? Have the ratings agencies really thought about this?
The USA is making a huge fuss about Europe to take its population’s minds off its own intractable problems.
There are no easy and palatable solutions left for anyone, but if we play our cards right, Britain actually has more opportunities than a lot of other countries, provided we do not allow ourselves to become entangled in other country’s problems.
December 8, 2011
Many guns are bought for hunting and hunters like more than one rifle. Apparently 132 million meals, based on hunted game, have been supplied to soup kitchens and the like this year.
December 8, 2011
Sorry the figure was 11 million meals.
December 8, 2011
JR: The UK now has a government which says its main purpose is to eliminate the deficit.
Very good!
Of course, I am talking about the irony.
December 8, 2011
“…..reducing the increase in spending”. Weasel words if not meant ironically, Mr Redwood. It is easy enough for the Treasury to produce a spending forecast then claim that good financial practice has enabled the government to spend less than was planned for. In reality, the Government has spent exactly what it wanted to. Reducing government spending in real terms is the only way to alleviate Brown’s economic devastation.
December 8, 2011
Only a fool worries about the debts – its paying them back they need to worry about.
December 8, 2011
This is worth reading, because it explains how lack of Banking oversight will multiply the eventual damage of any Sovereign default by 4 or more.
It explains too why Banks are scared of unknown off balance sheet liabilities in their counterparties, contributing to the global liquidity crisis.
http://newsandinsight.thomsonreuters.com/Securities/Insight/2011/12_-_December/MF_Global_and_the_great_Wall_St_re-hypothecation_scandal/
December 9, 2011
Hypothecation & Re-Hypothecation
We need to be sure what we are protecting in the City? and why we are bailing them out.
When is too much leverage too much? for the system as a whole?
I am resigned to think we are all going to be reset to zero at this rate, except the insiders, but i think they will be zero’d as well.
We need positive money, full reserve banking.
Read more at Zero Hedge and Golem XIV.
December 8, 2011
I am always amused by the way rabid Eurosceptics refer to the Eurozone as if it was a single economy, doomed to fail due to excessive government spending and lavish social welfare. May I remind them that Germany, Austria, Finland and the Netherlands are in the Eurozone.
These countries have far stronger and competitive economies than that of poor Blighty whose trade deficit keeps on rising (nearly £100bn / year !) despite endless bouts of devaluation (the Peso Pound is worth barely DM2.30 in old money).
The hard truth is of course that years of Tory/NewLab governments have turned the UK into a bust economy and a broken society.
Living in Germany, the UK looks to me more and more like a third world country plagued with a irredeemable underclass.
Perhaps it would be better for all concerned if the UK left the EU altogether.
December 8, 2011
Stop making it so easy, you tell us we have no case then make our case for us. Those countries you mention have stronger and more competitive economies than the likes of the UK, Spain, Portugal, etc. so shackling these under performing economies to the same currency as these stronger economies is a death sentence for the weaker.
A typical ad-hominen attack, no idea whatsoever about the issues but just dismissing any arguments being put forward as being nonsense on the grounds that we’re all carpet chewing rabid Eurosceptics.
December 9, 2011
Norman, may I remind you that the UK is not in the Euro.
Clearly your knowledge of economics is very poor. The option of devaluing one’s currency is not the miracle solution you claim it to be claim. If this were so, the UK would not have seen its trade deficit reach an historical record £98bn in 2010, two years after a 25% devaluation against the Euro.
The reasons for the success of the German economy and the weakness of the UK economy are more complex and deeply-rooted than simple variations in the exchange rate.
You should try to read about this subject (here is a clue – try socio-cultural factors) before resorting to idiotic attacks.
December 8, 2011
The problem is that the upper class have been so busy filling their pockets with money that they forgot that when the majority of the public can’t afford to buy the goods and services supplied by the rich the economy will crash.
At present we’re seeing the early stages, a dramatic increase in unemployment and a constantly increasing welfare system.
December 8, 2011
Why as the UK has become poorer in relative terms has our subscription to the EU not reduced in elastic £ terms?
Devaluation and inflation or rapid soft default as observed in the UK must irritate the ‘would be’ EU sovereign unless we are locked into unknown euro fx commitments?
Would it be overly cynical to think devaluation and increased subs were linked policies already pre-agreed? Would they have sin binned us otherwise?
At what point will the coalition realise that our subscription to the EU should be cancelled or suspended entirely until our economy has rebalanced? Perhaps are subscription would be better supporting ourselves and or the IMF in grave circumstances. Trade is global for the UK and in the case of the EU, less really is more.
How many NEW independent banks could be created with £10bn pa and with our penchant for flawed fractional reserve banking that could be £100bn in UK lending for infrastructure developments.
And with a general anti avoidance principal in place, a reduction in penal taxes could be implemented along with a minimum % income tax rate.
Then perhaps our government could start to govern the UK , without being tiedup in EU dictats. We may even see our bloated government as being useful if still bloated.
December 8, 2011
Morrisons has now opened in Wisbech, Cambs, where I live. It took just six months to change from the co-op. Traffic has vastly increased and the enormous car park is now completely full so you have to queue for spaces. Morrisons is open at the crack of dawn and it closes late at night. It has been just about totally rebuilt too.
We wanted to invite IES, a tested and reliable company to do the same for our Free School.
But no, the DfE got in there first and started organising things. The failing Comprehensive has now been totally rebuilt, but not restaffed.
So much for bureaucracy.
December 9, 2011
Aye, put the two together and what do you get? SCHWEINHUNDS the lot of them!
December 9, 2011
As Martin Wolf explains, the basic Euro problem is not debts, but lack of competitiveness of periphery countries. I agree. See:
http://www.ft.com/cms/s/0/396ff020-1ffd-11e1-8662-00144feabdc0.html#axzz1fxD7zIOg
Thus I think JR is correct to say competitiveness is a problem, but not correct to say debts are a problem. If you are competitive, you can service a debt. The UK is currently paying a NEGATIVE real rate of interest on its debt, and the US is not much different. Where is the problem there? We’re ripping off our creditors! Let’s carry on!
And if interest rates rise, what of it? As both Keynes and Milton Friedman explained, a deficit can be funded by either printed money or borrowed money. So if borrowed money to too expensive, then print. I don’t see the problem. And for anyone who wants to chime in with “Mugabwe” or “Weimar” chants, great minds like Keynes and Milton Friedman thought of that, believe it or not.
December 10, 2011
This DOG point is I think the only one the Occupy people should be concerning themselves with. But just try explaining it to them and their sympathisers.