Archive | July 2012

The Counter Productive Austerity of a Dysfunctional Europe

I find the situation in Europe to be increasingly dire. Since the crisis in Greece erupted, the policy in Europe has been of austerity in exchange for loans from European institutions and the IMF. The policy does little to resolve the crisis that initially wrecked Greece and now ravages Portugal and Spain. It is a policy to buy time, to avoid a breakdown in the financial system. But behind any stalling tactic there is an objective, to hold off long enough for some force to support the first response with a lasting solution. In Europe, this reinforcement of the initial austerity policy was supposed to be a greater Europe, a Europe of deeper integration. Greece, Portugal and Spain have let their economies crumble all to hold out for this ultimate and final rescue. This deeper, integrated Europe, however, seems to be nothing but an illusion for which Southern Europeans have paid a deep and painful economic cost.

I am increasingly convinced that Germany won’t commit to a fiscally integrated Europe. All the austerity packages in Greece, Portugal and Spain were interpreted as Germany holding their feet to the fire, for those countries to prove their commitment to budget discipline. It was a high price to gain Germany’s confidence but it was a price carried for nothing as no such confidence has been earned. Take the most recent “bailout”, this of the Spanish banking system. Spain after several austerity packages asked for Europe to share the cost of rescuing its banks. Instead, Germany insists that money be lent to the Spanish government, placing the debt burden from the bank rescue entirely on the Spanish state. This debt burden is now bringing Spain to the brink of either defaulting or asking for IMF and EU assistance.

Europe is nearly out of bullets to fight the crisis. Any ammunition left may only buy it weeks or months at best. Political paralysis has taken hold, from Lisbon to Athens, all the way north to Berlin. The constitutional court in Lisbon struct down a major policy piece of austerity for 2013, leaving the conservative government scrambling to bring the “bailout” program back on track. In Greece, further austerity is being demanded by the country’s creditors but the coalition government fears the social explosion to be provoked by the measures. In Berlin, Merkel is increasingly powerless as she faces mounting parliamentary and constitutional hurdles if she is to attempt deeper fiscal integration in Europe.

This merely addresses the political and financial aspects of the European crisis. The social crisis is quickly coming to the front as the largest challenge to policymakers. In Greece, a defeated political class has lost support to the neo-Nazi Golden Dawn party and the left-wing SYRIZA party. Italy is seeing a similar dynamic as an unelected technocratic regime turns voters away from the two main parties who have enabled this government to exist. In Spain, long standing regionalist movements have strengthened with the loss of confidence in Madrid, a majority of Catalans for the first time supporting independence from Spain.

Much is at stake in Europe, including the post-Cold War peace and stability long taken for granted as permanent. Illusions of European identity are quickly being lost. Europe is broken and it appears helpless in battling the daily episodes of this crisis, let alone altering or preserving the European Project’s long term ambitions.

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The Austerity Plot Thickens in Portugal

European and IMF officials have made great efforts to convince the public that the Euro Zone crisis is the result of Greece’s failure to comply with austerity measures and not the fault of the measures themselves. This narrative is taking a series of hits as the economic crisis deepens in Portugal, a country that passed just last month an evaluation on its compliance with the Troika’s structural adjustment program.

Last week it was revealed that the budget deficit for the first quarter of 2012 was 7.9%. To compare, the first quarter of 2011 saw a budget deficit of 7.5%, this before the Troika intervention and their deficit reduction policy prescription. The deficit spike is being blamed on a fall in tax revenue with record unemployment shrinking the number of people paying taxes. In short, the austerity is killing the economy faster than the government can extract wealth out of it to pay international creditors.

The impoverishment of the country has been reflected in recent news headlines in Portugal. Wages in the country are experiencing a generalized fall with public sector workers living through a sharper decline. In the past few days, reports of medical workers receiving hourly wages of less than four Euros have illustrated the trajectory of the economic program by the ruling center-right Social Democrats. This isn’t a temporary downturn before the clouds clear, it is a conquest of wages and if it’s to be stopped it requires a social reaction to first halt the program but ultimately reverse it.

Crucially, the political consensus that has supported this austerity program is fading. The constitutional court just struct down a key part of the program which cut 13th & 14th month bonuses to public sector workers. The measure was struck down on reasons of inequity, the government having canceled the bonuses for civil servants while private sectors workers were exempt.

This court decision leaves the Passos Coelho government at a crossroads. It can try to renegotiate the “bailout” program with the IMF and European Union so that the terms are eased, thus providing the government budgetary space next year after this setback in the courts. Voices within the ruling party are already suggesting this.  Prime Minister Coelho may choose to avoid renegotiation and double down on austerity to meet the current deficit targets. This would be a huge gamble with unemployment already at 15.2% and sectors like the construction industry warning it will rise far higher in the months ahead. A deep recession may very soon become a crippling depression if Prime Minister Coelho chases the generalized austerity that would comply with the constitutional court’s decision.