Ok, let’s start with a revelation. Austerity doesn’t work, that’s a no-brainer. Economists have been saying this for centuries and anyone living at the thin edge of the wedge in Europe will be living its failure. Incomes have been slashed, debts become unmanageable and few see any sign of improvement on the horizon. The amount of people without any health insurance is at an unprecedented high and the government telling us the same old story.
We must help bail out an economy that we were complicit in scuppering.
|Oh! those heady days|
Austerity purports to tackle the world recession caused by credit-happy shoppers like you and me consuming beyond our means. It is sold on the micro-economic understanding that if a household cuts spending on non-essentials for a while it can pay off its debts thus reducing expenditure and bring its outgoings below income. It is the credit-binge hangover that we are told we all need to take responsibility for. The belief is that by cutting back on the state’s expenditure and increasing taxation they will be able to wrestle the public debt back to a manageable level where we can all breathe a sigh of relief and get back to business as usual. This is not happening. The lack of investment is causing widespread unemployment and even more widespread underemployment. This in turn, is making it more difficult for the government to collect taxes while simultaneously putting increased pressure on social benefit systems. The result is that while we are paying and suffering for our sins.
That said, unless you have had your TV repossessed and your Internet cut, we all know that that is just a tiny piece of the story. Due to systematic deregulation of the markets by governments giving more power over sovereign currencies than the national banks themselves, they went ape-shit inventing new and more toxic ways to make profit from the movement of capital (read debt). Their abuse of their new-found freedom with currencies made them a systemic risk to national economies and thus “too big to fail”. And so, their private debts, far larger than any kitchen refit or big-screen TV have been transferred to the public balance sheet. However, yet again we are reminded that these same banks loaned us money and helped us buy our beautiful houses that cost more than we could earn in ten years plus interest. So, once again we are complicit. Incidentally, these houses could not have reached such prices were it not for the freely available credit in the market. We are also told that if we did let these banks loose, we would be in the middle of a zombie apocalypse and would die a horrible death. Tell that to the Icelanders.
Maybe we are all looking at the problem from the wrong angle.
Let’s consider firstly that this strategy was not implemented by my mum, it was devised by some of the most proficient macro-economists on the planet with access to the studies of the greatest economists of history from Adam Smith through Locke to Keynes and Hayek. They also had great social experiments such as Soviet Russia, Hitler’s Germany, New Deal USA, Thatcher’s Britain and more recently Iceland. In fact, to give any credence to the “Ooops!” factor would be to believe that the people running the world economy are less competent than my Mum when baking a pie. No, austerity is working if you consider that
Its goals may have very little to do with relieving public debt.
The economy at the centre of the euro-zone and one of the main architects of the current austerity strategy, the German has become strong due to exports. It has learnt that you become powerful by making stuff and selling it to the world. It was busy during the credit-binge selling the world and those naughty Greeks Mercedes, BMWs and Volkswagens, helping them to get in debt. It has worked hard to build a reputation for reliability and prestige and most of us will make a b-line for a German product from stationary to power-tools to supercars, given the choice. But, on the world stage they cannot support the whole of the euro-zone with their premium commodities. They have diversified, buying Skoda and other budget brands but this is not enough. If the EU is to be successful in the world economy.
It needs to make impact in the mass consumptions markets.
In order for the Euro-zone to compete with the huge production centres of China, India and the Far East, they need one more element. Traditionally, in order for a nation to increase the mass saleability of its exports it has devalued its currency making its products cheaper and more attractive. This is not so easy in the Euro-zone, not to mention the fact that when one currency does it so do others igniting a currency war with all currencies finding a similar equilibrium to where it started. There is one other factor which will allow this relative price index for exports; cheap labour. And it is here that austerity is doing the business. The highly educated, highly skilled workforce of Europe is now on sale. But in order to truly compete they will have to get a little cheaper.
Austerity is working.
It is producing a more cost-effective workforce by lowering the expectations of this and generations to come. This is not a conspiracy theory, it is a business plan. My conclusions are based on the evidence that we are living and take into consideration the business model of the central economy of the Eurozone. If it was a company, it would need to position its product line in the open market. Seeing as the premium market is not large enough to support the 350 million people of the EU, it would definitely need to reposition, at least some of is portfolio to high-volume markets.
In my next article I'll explore the next step of a strategy that could put Europe back at the centre of world production and how the current fall in oil prices could be the lever to expand the Eurozone.