Guest Post: Europe Is Drowning Under Too Much Government

Tyler Durden's picture

Submitted by Alasdair Macleaod via Peak Prosperity,

The Christmas and New Year's break, when Europe shuts down and stops thinking, is now well and truly over, and we are reawakening to the same old problems: Greece, Spain, Cyprus, Portugal, Italy, France... all with their hands out for money from Germany, Holland, Finland, and Austria.

The holiday from the banking crisis, which was the result of the determination of the ECB to put a lid on it, is also over, with yields on the supplicant countries’ debt rising again.

However, joining the bad news list is the United Kingdom. Ominously, the pound is sliding in the foreign exchange markets, providing a very tricky background for Chancellor Osborne’s budget on March 20th. I shall examine the UK’s position later, but first let’s update ourselves on developments in the Eurozone.

The reality is that all the problems of the Eurozone are still with us, despite the fall in bond yields and their modest subsequent recovery. There is now the likelihood that we are about to enter the final phase of the end of the Eurozone experiment, with far wider consequences. So we need to pick up the story where we left off.

First, let’s look at the trend of government-debt-to-GDP for selected countries (the numbers are from the ECB):

As we can see, government deficits for these countries took off from the time of the banking crisis and are still increasing beyond the charts’ cut-off point into 2012. They reflect poor economic performance, a lack of desire to slash government spending, and contracting bank credit. Only Spain and France were below Carmen Reinhart and Ken Rogoff’s tipping point of 90% government debt-to-GDP (see their book, This Time is Different), but in Spain’s case for 2012, if you add in €27bn raised to pay the backlog of bills incurred by regional governments and the €40bn so far (and rising) to bail out the mortgage banks, today Spain is closer to 100% debt to GDP, and France’s is now over 90%.

Bank credit continues to be withdrawn by European cross-border lenders, as the figures from the Bank for International Settlements, which run from the time of the banking crisis, show in the next chart:

This is a deflating credit bubble. Italy, France, and Ireland have seen the largest withdrawals. Italy has been pursuing aggressive tax collection, driving wealth abroad and deterring economic activity, Ireland has seen a contraction in its financial centre, but France is the surprise suggesting that deflationary forces are stronger than generally understood. The decline in bank lending from European banks has been compensated for by generous Americans, presumably too-big-to-fail banks on instruction from the Fed, putting up an extra $850bn in the first three quarters of 2009. Meanwhile, UK banks have maintained business as usual, slightly increasing their exposure from 2009 onwards. This is shown in the next chart.

Of course, domestic bank lending in all of these countries, with the possible exception of France, has equally been constrained by capital flight from domestic banks, reflected in TARGET2 balances building up in Germany, Netherlands, Luxembourg, and Finland, as shown in the next chart.[1]

This capital flight has come from the other countries on this chart, and interestingly, there is early evidence that money is now leaving France.

Overall the pressure has come off these imbalances, the natural consequence of a pause in the flow of bad news perhaps, and reflecting the ECB’s success in bringing back a degree of stability. This is also reflected in the next chart, which groups central bank loans to credit institutions in the weak, the strong, and others:

We can clearly see the effect of last year’s crisis on the GIIPS banks, but there is also a worrying pick-up in France, which makes up the bulk of “others”.

This quick tour of European statistics sets the scene. It is clear that some short-term stability has returned, but there is not enough evidence that the underlying position has actually changed. One should bear in mind that European politicians and their economic advisers, with very few exceptions, do not understand markets, and believe that they mostly require confidence. While there is some short-term truth in this belief as recent market performance suggests, the European political establishment appears to go further, believing that confidence is everything. The current economic strategy is therefore little more substantive than to talk markets up.

The reality behind this short-term façade is very different. As time marches on, government employees have to be paid and welfare distributed. Those combined government deficits for the Eurozone need feeding by extra taxes and borrowing at the rate of $40bn per month and rising. And this is only part of the story; along with as central governments, regional governments, cities, and towns (particularly in the periphery) are in deep trouble and have even suspended salaries for employees such as doctors and teachers, as well as payments for essential services.

General government in the Eurozone (which for statistical purposes includes regional and local governments) takes up approximately 50% of GDP. This is the Eurozone’s weakness: The productive capacity of its economy is overwhelmed by the burden of too much government.

Now go back to the first chart, showing the trend of government-debt-to-GDP for selected countries, and worry. It is indicative not only of the suffocating burden of government debt, but because government dominates individual economies, it is also tells us that their private sectors cannot backstop this debt through future taxes.

Therefore there’s no way economic recovery will provide the get-out-of-jail card for the weaker group of countries. The transfer of wealth from a relatively limited private sector to high-spending governments is no solution, as France has found out. If you raise taxes to balance the books, taxpayers walk.

Welfare Costs

No one in Europe mentions escalating welfare costs. So far as I am aware, there are no estimates for the net present value of future welfare costs for Eurozone countries, such as the one by Professor Kotlikoff of Boston University for the United States. The element of “baby-boomers” in European demographics varies, but the state pensions, healthcare costs, and other benefits are very high, as shown in the following table (data mostly supplied by the OECD “Pensions at a glance 2011”). Over the last year, pension costs as a proportion of GDP will have risen above these figures due to the increasing retirement rate, and even more sharply in those countries where GDP has fallen. These figures will therefore be under-estimates for the current position.

We know from Professor Kotlikoff’s estimates that the net present value of the US’s future welfare costs rose $11 trillion in 2012, we also know that free healthcare in the eurozone is more advanced – meaning more expensive - than in the US. With the eurozone’s public pension costs on average nearly twice that of the US, we can see that the baby-boomer and longevity problems faced by the United States are nothing compared with key Eurozone countries. It is also important to note that the cost on government finances of a retiring wage-earner is two-fold: The state loses tax revenue and gains a cost.

The only Eurozone countries in the table with lower pension costs are Ireland and the Netherlands, both smaller population countries. Furthermore, all Eurozone countries, with the exception of Ireland, have a higher proportion of pensioners than the OECD average, implying again that future welfare costs are substantially greater than those of the U.S.

The level of unemployment (the last column) must be taken into account as well, because an unemployed person does not pay the taxes to fund pensions. The countries with a high level of unemployment and higher-than-average numbers of pensioners as a proportion of the working population are in deep trouble. The worst, in descending order, are Greece, Italy, Spain, Portugal, and France. Furthermore, Spain, and Ireland have raided their public pension funds to support general government finances.

We can therefore conclude that even if somehow the Eurozone extracts itself from its current difficulties it will have to address the burden of these future welfare costs as a matter of urgency.

While on the subject of welfare and pensions, it is worth mentioning the impact on Scandinavian countries with their exceptionally high taxes, which vary from Norway’s 57.9% of GDP to Sweden’s 51.4%. These countries, which everyone assumes are financially stable, will be badly hit by the demographic time-bomb.

So far, welfare has not been a headline issue anywhere and until fairly recently politicians have stayed off the subject. However, it is now being recognised as a growing problem to which there is no easy solution. Properly accounted for with reasonable provisions made, it is obvious that including the net present value of these future commitments true government deficits are multiples higher than officially stated.

Eurozone Politics

The political balance has changed substantially over the last year, from the cosy days when Merkel met Sarkozy and Monti kept the Italians in order. First, Sarkozy was dumped by the French electorate, which preferred welfare to austerity, and now Monti has been dumped for similar reasons. The idea that Chancellor Merkel can trade greater fiscal control over the Eurozone debtors for her own electoral support in Germany has been disproved. The ramifications of the hung Parliament in Rome are likely to be profound, not least in Berlin.

Germany faces full elections in September this year, and it will be difficult for Chancellor Merkel to win, given that her party, the Christian Democrats, did badly in the local German elections in January. The German voter has generally been more concerned with Germany’s relative economic success, bringing low unemployment, than the intractable problem of supporting other Eurozone nations. This may be changing, with Germany’s more dynamic export markets China, Russia, and the other emerging economies slowing somewhat. If this trend continues and unemployment rises, the Christian Democrats will find it a struggle to get re-elected.

For this reason, it is likely that Merkel’s room for manoeuvre will be increasingly limited. It is apparent to the German voter that the government has no prospect of recovering money lent to the Eurozone periphery through the banks, reflected in TARGET2 balances, nor directly through the European Stability Mechanism (ESM). So far, the ESM has only lent €40bn to Spain to recapitalise the Spanish mortgage banks, but the demands on the ESM are bound to increase. Germany’s contribution to date is €21.72bn, which can be increased, if required, to €190bn.

Given Merkel’s political difficulties, she is likely to be slow to subscribe Germany’s full commitment and can use the excuse that she can only be expected to match the other large contributors who are by the way, France, Italy, and Spain. It is likely to be a political virtue for her to take a tougher line.

It would therefore be a mistake to think that Germany is going to continue to fund profligate governments. Since the ECB has already created the precedent (quote from Mr Draghi: “Whatever it takes”), the ECB will have to end up creating the money required.

In Part II - Europe: Welcome to the Domino Effect, we conclude therefore that the Eurozone is now on track for a hyper-inflationary outcome, rather than a deflationary collapse, similar to prospects for the other major currencies. Its collective banking system is also extremely vulnerable to shocks with accumulated bad debts from prior bubbles and prospective bad debts from insolvent government debts.

To understand how this will play out, one needs to understand the likely future in store for each of the most unfluential, unstable players in this unfolding melodrama: Spain, Italy, France and a recent addition, the UK.

Click here to read Part II of this report (free executive summary; enrollment required for full access).

[1] This and the next chart are reproduced with kind permission from the Institute of Empirical Economic Research, Osnabruck University.

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Shell Game's picture

Flee to the Golden Deutche Mark, Germany, flee..

All Risk No Reward's picture

Government is not the problem, it is the symptom of the problem.

The problem is that governments are run by a private international banking cartel that controls the definition and issuance of currency and credit.


If buggy whip manufatcurers ran the world, every solution to every problem would be more buggy whips.

That alone tells you WHO RUNS THE WORLD knowing that every "solution" is more "banker widgets" (debt).

Debt Money Tyranny is their modern day Trojan Horse - even better it works its evil in a near complete covert manner...

Until this information, THIS REALITY, goes mainstream, we don't stand a chance.



Give it some time and your daughters and/or grand daughters will be whoring themselves out for a few bucks just to eat when these criminals are done with you.

Who knows, may a Rothschild will dress down and take your daughter for a $10 ride - the new royalty doesn't have to rape the peasant girls, they put them in poverty so they line up to f* 'em with a smile!


Spread the word - the hard work of visually depicitng the method of operation has already been done.

Your part is easy.


Shell Game's picture

Only fools believe our problems can be solved politically. That is the assumption when people say 'Government is not the problem'.  They are fully corrupt accesory to crime.  Those who replace them will be fully corrupt in time. 


The ONLY way out is to not have government that can be corrupted. That means minimal government and a monetary system that can not be leveraged and conjured!

lolmao500's picture

Germany should do what many of us ZH said a long time ago : tell the bankrupt EU to go fark themselves, go back to the Deutschmark.

The real question of all this : how many European people are gonna have to die before freedom reigns in Europe? A million? 10 million? 100 million?

TruthInSunshine's picture

Germany should follow Bernankrugmanpig's lead, since IT fixed everything. Here's just a short case study as to how it's done:

Just looking at the S&P; it has gained 128% since the lows put in as of March of 2009, compliments of...

....wait for it....

...the 1.5 trillion USD companies listed on the S&P 500 have expended in buying back their own shares of stock (why wouldn't they when they can float a 3 year corporate bond for 1%?).

"In this run-up, nearly all the buying has come from companies repurchasing their own stock in an effort to boost its value. Companies in the S&P 500 have bought $1.5 trillion since the Great Recession began in December 2007."

See Dow closes at all-time [nominal] high, beating 2007 record

I'm trying to find similar ratios for the Fab 30 Dow and the Nasdaq, but I'd imagine it's roughly proportionate on a market cap ratio basis, as that excerpt suggests.

So, the Fed has printed trillions from thin air, distributed this money base to Primary Dealers and banking/financial entities at near zero cost basis to "invest" (aka speculate, aka gamble), while at the same time, the Federal Reserve has swapped Treasuries for shitty assets banks and financial firms wouldn't otherwise be able to unload (aka "a way above fair market value transaction"), and corporations that are publicly traded on the Dow, Nasdaq & S&P500 have used near free loans to buy back a record amount of their own shares.

And that's your rally in a nutshell, which will end in tears for nearly every person who has purchased or will purchase anything stock "market" related with their own money; aka same as it's always been, but this one is the a 10 trillion dollar bubble inflated in 4 years that will ultimately (once the extreme leverage being utilized, even by recent, historical standards, is accounted for) dwarf the 2000 bust and the 2008 bust.

With a depression-esque economic backdrop, where nearly 1/2 of new cars sold are based on loans provided to individuals with subprime credit ratings (car buyers taking out bigger loans, set new record; 44% of new car loans provided to subprime credit applicants in Q4), the Federal Government (via FHA) guaranteeing 90% of all new home mortgages (FHA inches closer and closer to bailout), an unemployment rate that would easily exceed 15% if the same metric to calculate it during the 1980s were being used today by the BLS (Alternative Measures of the Unemployment Rate), a trillion dollar Student Loan Bubble underway, consumer debt rising to record 2.77 trillion USD , real wages & benefits falling, and the government and quasi-governmental agencies working hand in hand with the Financial/Banking complex to allow these financial & banking entities to get new, even greater leeway in valuing (unicorn & rainbow methodology) their assets, while the BLS and other governmental and Federal Reserve-related (is the Fed governmental or not? It depends on who is asking and why, according to the Fed) also manipulating every statistical economic data point, from the rate of inflation to the rate of GDP growth (which would show contraction for quite a few quarters, including the last one, if it weren't for understating inflation via statistical manipulation)...

...all is well.

Shell Game's picture

Antal Fekete with some interesting thoughts on Germany, gold repatriation and backwardation:


Will Germany make its way to her "finest hour"?


h/t ChanceIs

Accounting101's picture

If the Germans do that, how will the German banks survive? You do know that the austerity being forced on the peripheral countries is solely to bail out the corrupt and insolvent German banks, right?

Hedgetard55's picture

To the posters here familiar with Kafka's "In the Penal Colony".


What message would you have the machine tattoo/write into Ben Bernanke's back?

Hedgetard55's picture

"Gold bitchez"?


"QE 4evah"?


"Shit that hurts".


"Fuck, that REALLY fucking hurts".

DoChenRollingBearing's picture

One of the few places WORSE to start a business than the USA: Europe!

steve from virginia's picture




Typical Xero-Hedge hatchet job, long on ultra-reactionary politics short on facts, surprising the source is from Chris Martenson rather than von Mises Inc:


"General government in the Eurozone (which for statistical purposes includes regional and local governments) takes up approximately 50% of GDP. This is the Eurozone’s weakness: The productive capacity of its economy is overwhelmed by the burden of too much government."


On the other side of the fence there is the accusation that the productive capacity of the economy is overwhelmed by the burden of crooked bankers and other finance criminals.


Set the productive capacity of the economy free ... to make more automobiles and tract houses, more strip malls and gigantic highrise towers, oversized ships and airports, militaries and 'institutions' ... More! More! More ...!


The real problem in the economy besides the distracting noises from people who should know better is there is no such thing as productive capacity, gross output does not equal net output, in fact zero-productive capacity is self-evident! If enterprises could pay their own way, they would certainly have so by now ... there would be no crisis as the repayment of debts would be a matter of deploying greater numbers of productive machines.


Instead, more machines = more debts. There have been industrial endeavors for 400 years, during which time no industrial enterprise has ever come close to paying its own way ... during which time every single enterprise has been subsidized by exponentially increasing debt. As a fact, our modern money is itself debt, it cannot be anything else for our industrial economy cannot survive within its means.


So much for 'honest money' ... we have a dishonest economy, why should the money be any different?


All of this is obvious to a child, as clear as the nose on your face: the industrial economies of this world are bankrupting themselves all at once, now, at the same time together for the same reason: they cannot borrow because they cannot repay! Nations, firms, individuals must borrow continuously so as to roll over previous rounds of debts, all are now inundated with accumulated debt service costs.


Additionally, there is the cost of fuel to waste pointlessly, fuel that is now too valuable to burn up for nothing, stranding hundreds of trillion$ worth of sunk capital 'investment' ... a billion automobiles, a billion miles of roads to nowhere, billions of useless 'buildings' billions of hated giant governments, trillions in 'investments' all in the wrong places, stone heads on Easter Island.


Which is where we are going to wind up.

IamtheREALmario's picture

Well you are partially right, but mostly wrong.

Value is created through labor. Dirt becomes ore, ore becomes metal, metal becomes tools or girders or whatever. At each stage of the process the utility for people increases. In other words "value" is created through the labor put into it.

In a real economy value is only trade for value. Money is only created proportionate to the value available and the money is used as a convenient exchange mechanism only.

However, along the way the clever ones figured out that they could create as much money as they want and then they could not only sell money as a mechanism for the exchange of value, but as the main store of value as well. In doing this, they found out also that people would pay them money to be lent money. And this as you inadvertantly pointed out is where the problem started. When money is created sole for the purpose of creating debt and interest is paid there is never enough MONEY (not value) in the system to pay back all of the money created. It is a mathematical impossibility. Therefore there MUST be inflation so that interest can be paid and a growth paradigm is also created because for businesses to pay back the money they owe, they must grow.

The falasy with your arguments is both in tht assumptions you use such as: "If enterprises could pay their own way, they would certainly have so by now"  and in fact there was a time in the 1960 where a large number of companies were becoming debt free ... which is the absolutely worst thing that could happen for the banks. The banks would both lose the control they have over the corporations AND they would lose a large source of income (government being the largest source of income). The banks had to find a way to subvert the corporations that were becoming debt free and they did this by both corrupting company executives and making them part of an inner circle of massively overpaid parasites AND by promoting through multiple avenues the idea that ownership of assets was an inefficient use of capital. Instead companies should be judged based on how much money they made off of money (debt .. or OPM). The banks baking sure a company's stock price was highest for those companies that did exactly what the bankers wanted (findamentals be daned) ... and the financialization bubble was started... 30+ years later the chickens are coming to roost and know-it-alls such as yourself are spouting untruths, as if they are fact and must always be.

You also said that if enterprises could pay their own way "there would be no crisis as the repayment of debts would be a matter of deploying greater numbers of productive machines." Obviously this is not true for two reasons: 1. mathematically debt plus interest can never be paid in full by debt alone. 2. There are perverse incentives in the market which drive company executives and their interconnected boards to degrade the balance sheet of the company and take on debt to give the illusion of growth (through malinvestment and acquisition) for the benefit of the financial economy and the masters on and behind Wall Street.

The reason it will all eventually fail and disillusioned people will get very angry is because "money is debt. money is not value". In the end,those that hold the debt of others (created out of thin air), will make a claim on all value. Right now they are buying the value with fiat debt based money. In essence they are paying people with a promise that the Fed is breaking every day by devaluing the money.

Sandmann's picture

"Value is created through labor."  - the old Labour Theory of Value courtesy of Adam Smith and Karl Marx

Overfed's picture

The whole fuckin' world is drowning under too much government.

Accounting101's picture

Ah shit! Is that why we are in an economic depression? Too much government? I thought it was because the financial services industry ran amok as the result of deregulation (less government) and then socialized all their private debt.

The oligarchs love clowns like you.

Overfed's picture

WTF are you talkin' about? How many government employees, who produce nothing and are a drag on the productive members of society, do YOU think we need?

Accounting101's picture

So firemen, police officers and teachers are not productive citizens adding value to our economy? These "government employees" don't buy private sector products? Come on man! Think through things to their logical conclusion.

Sandmann's picture

They are a Cost Centre. Privatising all schools might yield benefits

Sandmann's picture

They deregulated credit to provide funding for Big Government through sales taxes and income tax at the same time letting corporations off the hook. It was done to finance a shift away from Corporate Taxes and to fund Producer Inflation. Britain had a dry run in 1972-75 before Thatcher did a re-run in 1986 and let the system explode on the back of N Sea Oil Petro-currency

Johnny Moscow's picture

-1000 Accounting 101.

U serious? Didn't anyone ever tell you that big government is a much to blame as any bank out there? The entire mortgage scam was largely due to the governement essentially forcing banks to lend to unsound borrowers on a massive scale, and all the insane behavior of Fannie and Freddie, Harold Raines etc. and the wacky politically correct multiculti crap about how 'everyone needs to own a home" and if you don't lend to minorities you're racist, etc.

So are you saying government gets none of the blame? And are you for Amtrack-style healthcare and ever-increasing public-service benefits with nobody to pay for it but the private sector?

Please explain. This is ZeroHedge not the NY Times - thx!!

kill switch's picture


An unusual rendition of Woodstock from Joni Mitchell

medium giraffe's picture

The only way that UK unemployment figure is right is if it doesn't include those without a British passport.  

The private sector has been shafted to within an inch of it's sorry life across the continent.  I'm not even sure if Belgium has a private sector... I think Spain had one for a while, well, when overweight lobster red Brits abroad could still afford to visit with their disgusting progeny and turn endless English breakfasts into endless rivers of running vomit by way of what ever local piss they were serving up in stinking English style Spanish boozers.  

And the European Parliment? Where 'value for money' doesn't appear in any of the cross-border-we're-all-best-freinds-now-reacharound bullshit to bullshit translation phrasebooks?  You could jail half of those greasy expense fraud bastards and not see a single percentage point drop in productivity.

Sandmann's picture

If you force someone onto an unpaid "work experience" scheme at Poundland they are classed as "employed full-time". If you put someone on "training" they are not "unemployed"

proLiberty's picture

In the Treaty of Lisbon, Europe defines its economic system as "social market economy", not caiitalism or free exchange.  It is soft fascism.  They have the amount of government they want.   They would rather die than give up their form of fasciam.  They may get their wish.


IamtheREALmario's picture

The USA is being waterboarded by too much government.

yogibear's picture

And Obama models the future of the US to be just like Europe. What does that tell you?

Europe has a 50% youth unemployment rate. "Yes we can!"

german Wunderkind's picture

Its not to much Goverment... the problem is a dysfunctional Goverment in southern europe.

nothern europe hasnt less Goverment, it just works way better and is much stronger, because it works FOR the people and not for the elite.

DeliciousSteak's picture

Government isn't really the issue here. It has worked in northern Europe because they have had strong industry and innovative ideas. Globalism is destroying their ability to compete too, so northern Europe is going down as well.

Nu Yawks hottest club is's picture

At least Europe is starting to get a proper grip on the finance industry.

Regulate bonuses today, hive off investment banking tomorrow.

Joe A's picture

In the Netherlands +40.000 signatures calling for a referendum on the EU have been collected. The parliament is now obligated to discuss this. They of course don't like this kind of civil activity. Allowing a referendum creates uncertainty but disregarding it will certainly piss off the voters. The result of a possible referendum by the way can be ignored but would piss off voters yet even more.

Ghordius's picture

Joe, the article is about "Europe drowning under too much government", i.e. it's about gov costs - the EU itself costs something like less than EUR 300 per head and year

having said that I'm always in favour of referendums

Joe A's picture

So what? Are you to decide who writes what? Sounds a bit like the recommendation given to the EC to appoint media supervisors who have the power to fine and sack journalists in Europe. That is why people want referendums: they are fed up with invisible burocrats in Brussels telling them what to do and how much to pay for it. Because as you probably know, the Dutch per capita pay to most to the EU.

Sandmann's picture

The EU is an overlay as you well know Ghordius. French Government is a huge cost burden and that is in addition to the EU. So let us not pretend that the EU is the Government of Europe it is simply an alibi for Politicians to act out Bilderberg Group fantasies

Ghordius's picture

interesting end: "In Part II - Europe: Welcome to the Domino Effect, we conclude therefore that the Eurozone is now on track for a hyper-inflationary outcome, rather than a deflationary collapse, similar to prospects for the other major currencies."

let's put it this way: before the eurozone enters hyper territory, there are a few other major currencies that are long dead