A comment on the elections in France, Greece and Germany.
Let us start somewhere else: Paul Krugman
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“The basic fact about Europe right now is that the strategy of adjustment through austerity and internal devaluation isn’t working, won’t work, and is rapidly turning into a social and political disaster. The question now is whether there’s a way out that doesn’t involve breaking up the euro.”
Sorry to say: I think Krugman is missing the point.
First of all: They are not going to leave the Euro – if nothing else will, then their oil imports will shut them down as nations at the drop of a peseta. Oil exporters don’t accept monopoly money in case it has escaped Krugman’s notice.
“….Let Spain regain competitiveness by inflating more slowly than Germany, rather than by deflating, and this whole thing might, might, become feasible.”
Krugma has a point in so far as the (Danish) Consumer Price Index rose 2.5% in 2011 of that .2-.3% was due to rearrangement of taxes. I’m not totally clear as to how that is factored in in Krugman’s ponderings.
Of the rest a very large portion of it is due to higher food and especially energy prices.
But there is NOT going to be a German inflation. True the tarif negotiations in Germany will give a pay raise of around 5-6% when the ritual shouting has died down (I don’t if Krugman has seen two Germans in agreement – there is one hell of a yelling – before they find out they agree – an ethnic thing). But that is against a background of increased productivity. Germans only get pay hikes AFTER they have done the work. So there will be no inflation, there will be more consumption and more import – that export will thrive goes without saying.
France: What will the difference be for the French policy after Hollande has won? To put it plainly: France will follow exactly the same policy as Sarkozy would have been forced to. What about the election promises and renegotiation of the stability pact? That won’t happen, as the French banks will close if there were substance behind Hollande’s rhetoric.
There is a parallel situation in Denmark where all the social democrats election promises were shredded to the extent where the prime minister has gained a reputation for being monosyllable – in order to prevent her from contradicting herself in the same sentence.
Greece: True the conservative Nea Demokratia and the social democratic PASOK (especially PASOK) is clinging to majority by the skin of their teeth. There will probably be a lot of heated debate as to a new government, the length of which will depend very much on Germany’s patience – and they are getting short fused.
Now I’ve treated the two major, but unimportant elections – unimportant because the leeway is so incredibly limited – I will turn to the state election in Slesvig-Holsten of infinitely larger consequence. There the Red/green alliance won over the conservatives – but do not have a majority, so for the first time Sydslesvigsk Vælgerforening might get in local government. The alternative is a coalition between the social democrats and the conservatives. The main issue is here wind turbines.
Back to Krugman:
If we look at Spain, Italy and France the main problem is the debt – apart from the service on the debt the overspending is not desperate.
But the debt is to a large extent private – or has been taken over more or less by the states – and connected to housing. The crucial problem is debt service. Let’s ask the more pertinent questions:
Debt has to be serviced – why? The question nobody puts is: Who owns money to whom?
Balancing the debt is a huge fortune in pension funds of different ilk. Of course the pension funds have skedaddled out of dubious real estate and sovereign bonds and banks. The real issue for the pension savers is not what pensions they get; but what they get for their pension!
It is incredibly naïve for these funds to think that politicians will leave them alone. At the moment with negative real interest rates the pension funds are being steadily drained. When the pensions are paid out they will be taxed – how violently is difficult to say; but the suggestion that states will leave taxable income alone is ludicrous.
If you let inflation run rampant in order to ease the debt load the damage to the real economy will be very real. But the other consequence is that the pension fortunes will evaporate.
Care worker to senior citizen in nursing home: “So You want to go to the toilet? That is entirely doable; but it will COST …!”
Germany has tried that in the 1930íes and it is not going to happen again.
Krugman – as most other economist are trying to solve a financial problem with the real economy – that can be done provided the debt problems are of manageable size – which they aren’t.
So far governments have done everything to cope with the debt problems – except taxing the pension savings. Of all Rajoy’s budget slashing and frenetic slashing not one word about a real pension reform!
Will such reforms come? Eventually: Yes. Not from choice; but from necessity. The necessity is illustrated by the mentioned elections.
For the time being the main exercise is to trim the economy’s production to the needs. Again take Spain: If you are not a public employee with a retirement age of 50, you are building houses, making cars or serving cool drinks in the sunshine to retired persons from all over Europe.
– With 1.5 dwellings pr. household it seems to me that Spain has all the roofs they will need for a very long time.
– As cars shrink from the off-road monsters to something more practical – and cheaper – there is a limit to how many people that can employ.
– And just how many German tourist do you think go to Greece when they are being called Nazis by the waiter?
Britain is just as grotesque: 30% of GDP comes from banking! Wouldn’t it be easier to put your pension savings into a pension fund that owns housing, collect rent and provide a janitor service – and thus skip the whole financial circus? Excuse me! What do you think the Germans do? They are tenants!
Germany will rule Europe, not because they are any kind of master race; but because what they say and do actually makes sense. The Germans are in no way adverse to a structural EU investment fund; but those means should be put into something that actually have a chance of giving a return – hence the reference to the Slesvig Holsten local election and wind turbines.
Krugman’s proposal to stimulate by public spending only leads to forests of absolutely superfluous condominium-silos, legions of schoolteachers to fewer children and care workers to senior citizen in still better health (and thus perfectly able to take care of themselves) – why?
To me Krugman has lost perspective: One common feature of all major crises is that the world after is very different from the world before: Where are the landed gentry of the pre WW1 society, the big railroad tycoons? You don’t help anything by keep flogging a dead horse.