Posted by: Dr Churchill | January 11, 2013

Eurozone going steadily down the tubes

The New York Times, ran a story a few mornings back on January 8th of 2013, titled :

“Unemployment Continues to Climb in the Euro Zone.”

According to the article, Eurostat reports that Eurozone unemployment has reached the record rate of 11.7 percent, with 18.8 million unemployed.

This represents an increase by two million unemployed people within a year.

“Youth unemployment continues to grow, with 5.8 million people under 25 classified as jobless in November, up 420,000 from a year earlier.”

In countries like Greece, Spain, and Portugal, youth unemployment tops more than 50% and just keeps rising.

Of course, as youth unemployment surges it becomes common for college graduates in the periphery to emigrate. The article shows that Berlin’s insistence on inflicting austerity on Spain and Greece has forced them into Great Depression levels of unemployment. Italy’s level of youth unemployment is also at Great Depression levels.

Here are the most prominent forms of madness discussed in the article:

First, “Economists surveyed by Reuters expect the European Central Bank [ECB] to leave policy unchanged Thursday, as the central bank waits for a clearer picture of the economic situation to emerge.” How many millions must lose their jobs and how many kids have to emigrate before the ECB can see “a clearer picture?” How many Eurozone nations have to be forced into Great Depressions?

Methinks, we need a new Marshall Plan to send Windex to clean the glasses of the ECB.

Second, the article concedes that: ” Attacking joblessness may require governments to ease back on austerity measures that many economists, including some at the International Monetary Fund, say might have gone too far.”

“Might” — “may” — “too far” — “ease back” — each of these terms is misleading. The worst possible response to the Great Recession was and is Austerity.

Austerity — which is what Berlin, using the leverage of its de factocontrol over the ECB — inflicted on the Eurozone is toxic poison. Because Austerity is a pro-cyclical policy that makes a recession or depression worse by causing already inadequate demand to become even more inadequate. Austerity in response to the Great Recession is an act of economic malpractice equivalent to the medical practice of bleeding patients. The proper response, which economists overwhelmingly support, is counter-cyclical policies (“automatic stabilizers”) that respond to a recession by increasing private and public sector demand through a combination of tax decreases and government spending increases.

There is no “may” or “might” about austerity causing recessions to worsen — we have run a “natural experiment” and it has produced the results predicted by economic theory and repeatedly demonstrated by history. The Eurozone tried austerity and the U.S. used (a very limited stimulus). The Eurozone was promptly forced back into a gratuitous recession — with much of the periphery forced into depression. The U.S.’s policy of (modest) stimulus (relative to the size of the demand shortfall) produced a modest but persistent recovery.

The correct analysis of the Eurozone’s responding to the Great Recession with austerity is not that the Eurozone went “too far” and needs to be “ease back.” Austerity takes the economy in the opposite direction of where it needs to go. To get to a town 100 miles to the north on level ground one does not walk southward for 50 miles and then walk northward 150 miles. Here, the Eurozone didn’t walk on level ground — it followed a steep path southward that descended into a second recession and it pushed its unwilling hiking companions of the periphery into the abyss of depression.

Third, and the most delicious irony, the Eurozone austerians are now relying on the U.S. stimulus to produce sufficient growth that we will increase our purchase of imports from the Eurozone so rapidly that our economy will pull the Eurozone out of recession and depression. It gets better — the fear in Europe is that the U.S. will mimic Europe’s self-destructive austerity policies by adopting a “Grand Bargain” (sic, “Grand Betrayal”) in our ongoing budget negotiations.

“External demand seems to be holding up better than we had thought,”  Mr. Moëc, a Deutsche Bank economist said. “Now we are to a large extent dependent on what happens in the United States,'”  he said, referring to the negotiations over the budget taking place between the US executive and Congress.

We should pause to acknowledge that our political classes and media are so insane that there is a huge danger than the U.S.A. will adopt austerity measures, and gratuitously force a second, global Great Recession. Our political classes and the media have just demanded that we avoid the “fiscal cliff” on the grounds that its austerity provisions would force the U.S.A.  into a gratuitous recession.

The crazy thing however is, that today the very same political class, cheered on by most of the media — despite the self-destructive devastation that austerity has wreaked on the Eurozone — now demands hysterically, that we make massive spending cuts…

Yesterday, it was essential to avoid austerity.

Today, it is essential to embrace it.

Go Figure…

The EU austerians on the other hand, hope that the US economy will act like such a powerful tow truck that it will be able to overcome the “fiscal drag” of austerity on the Eurozone’s economy.

This is a significantly insane idea…

Because one thinks: Why shouldn’t the Eurozone stop hitching itself to the garbage truck of austerity that is pulling its economy down into the dump?

The NYT article – by contrast – simply asks the Germans to slow down the speed at which the Germans are driving the Eurozone down into the dump so that it will be easier for the US economy to serve as a tow truck pulling the Eurozone in the opposite direction.

We should push and pull in the direction of Economic Recovery and Growth.

And that road is the opposite one from the Austerity alley…

So why our leaders not getting the clue?

Because it’s all about Leadership. Dumb Choices bring abut dumb leaders.

Expansionary Economics do not involve dump trucks and tow trucks usually, but there you have it…




This was in summation the views and exchanges with noted economist William Black who has served in the S&L crisis as a Senior Regulator, and is now Senior lecturer at the University of Missouri in — what else – Economics.

University of Missouri is the hotbed of Economics today with new ideas and old principles intermarrying and producing lush fruit.


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