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On Europe's Phantom Austerity Spending Cuts

Tyler Durden's picture




 

When you were a child and did something wrong, the worse possible words your mom could say were "wait til your father comes home!" and that dreaded anticipatory angst is what Europeans must be feeling now as the threat of austerity hangs like the sword of Damocles over their heads. The reason we say this is that in fact, as Veronique de Rugy of National Review Online notes, the 'savage' spending cuts in Europe have yet to show up anywhere. All the rhetoric of how Europe's austerity has failed, all the hand-wringing and election-winning, and yet all the major nations are spending more than pre-recession levels; France and the UK did not cut spending at all, and even in Greece and Spain cuts have been small (and any meaningful reforms failed to be implemented). In fact, the epicenter of the current meltdown - Spanish banking - has seen only de-minimus headcount reduction over the past few years - so who is tightening their belts? The trouble, of course, is that while the threat of austerity has struck fear in the hearts of every European voter, the action of raising taxes has hurt just as much and perhaps the "trumpeting the failure of austerity as a reason to go full-Keynesian again" chatter will recede as facts overtake fallacies. As Mark Grant recently noted, there's a big divide between austerity pledged and austerity implemented, as it appears its more about raising taxes than cutting spending.

 

Spanish banking headcount is basically unchanged - and yet remains the absolute epicenter of the crisis...

 

Fiscal Austerity in Europe Doesn't Mean Large Spending Cuts

We are told that austerity in Europe has failed. The elections in France and Greece, for instance, are supposedly evidence of people’s opposition to severe cuts in spending. However, the growing anti-austerity backlash against Europe ignores one fundamental point: If there is austerity in Europe, in most cases it hasn’t taken the form of massive spending cuts.

 

Following years of large spending expansion, Spain, the United Kingdom, France, and Greece—countries widely cited for adopting austerity measures—haven’t significantly reduced spending since “austerity” supposedly started in 2008.

 

First, France and the U.K. have not cut spending. Second, when spending was actually reduced—between 2009-2011 in Greece, Italy, and Spain—the cuts were relatively small compared to the size of their bloated European budgets. While Italy reduced spending between 2009-2010, it also increased spending in the following year by an amount larger than the previous reduction. Most importantly, meaningful structural reforms were seldom implemented. Whenever cuts took place, they were always overwhelmed with large counterproductive tax increases.

 

This so-called balanced approach—some spending cuts for large tax increases—has been proven to be a recipe for disaster by economists. It fails to stabilize the debt, and it is more likely to cause economic contractions.

 

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Tue, 05/08/2012 - 09:13 | 2406076 GetZeeGold
GetZeeGold's picture

 

 

Sorry....no austerity today....check back tomorrow.

 

Tue, 05/08/2012 - 09:22 | 2406114 MillionDollarBonus_
MillionDollarBonus_'s picture

Now that Hollande has defeated Sarkozy and his far right policies, France can get back to the good old days. Spending cuts are a discredited policy. There is simply no need for 'personal sacrifice' as more prosperous future generations will be happy to pay for the spending of current generations.

Tue, 05/08/2012 - 09:29 | 2406137 earnyermoney
earnyermoney's picture

mediocre. Step it up dude.

Tue, 05/08/2012 - 11:19 | 2406706 Paul Atreides
Paul Atreides's picture

Hollande is just another Bildeberg stooge...meet the new boss same as the old boss.

Tue, 05/08/2012 - 09:33 | 2406164 BandGap
BandGap's picture

Absolutely agree on your point. This is stupid, Europeans for geneartions have benefitted from a variety of social programs, and in turn, have given back to the world much of our modern day culture and thinking.  It is only right that they put the pedal to the metal and spend their way ot of this mess, just like the US. If you were trying to escape the sun's gravitational pull, you would aim your spaceship at the sun, using your momentum to propel your way clear once you had whipped on by. Same here, hit the gas! Things will only get better on the other side as the world propels itself to even newer horizons.

 

Tue, 05/08/2012 - 09:46 | 2406233 NotAMathWhiz
NotAMathWhiz's picture

I like the 'aim at the sun' comparison.  Here are a couple of other likely outcomes:

1) You burst into flames (most likely)

2) You get whip-sawed through the space-time continuum and end up back in the middle ages (less likely)

3) Things all work out just honky-dory (extremely unlikely)

Tue, 05/08/2012 - 10:46 | 2406559 Bicycle Repairman
Bicycle Repairman's picture

We're headed for a train wreck anyway.  Why not party?  See France in the 1930s.

"Fireworks at Dusk: Paris in the Thirties"

Tue, 05/08/2012 - 09:34 | 2406169 azzhatter
azzhatter's picture

No need to remove that cancerous tumor of debt, have another hit of morphine, I'm sure you'll live

Tue, 05/08/2012 - 11:11 | 2406670 jal
jal's picture

All that I see from those charts is NO INCREASES. Is that the meaning of austerity?

Tue, 05/08/2012 - 09:13 | 2406080 Banksters
Banksters's picture

BoA wants to give me 100 dollars to deposit 100k for 10 years.

 

Woot!

Tue, 05/08/2012 - 09:35 | 2406178 Dermasolarapate...
Dermasolarapaterraphatrima's picture

Buy Greek Bonds...get 3,000% yield.....better then the "high yield accounts" at most banks that give 0.09%.

Right?

Tue, 05/08/2012 - 09:36 | 2406181 BandGap
BandGap's picture

The hell you say! That's a major award! "Mind power, Swede".

Tue, 05/08/2012 - 09:14 | 2406081 ZeroPower
ZeroPower's picture

Actual austerity measures isn't what the old continent had in mind. Changing politicians - that right there alone - should be MORE THAN ENOUGH to solve the problem.

Or so the sheep believe.

Tue, 05/08/2012 - 09:26 | 2406126 whstlblwr
whstlblwr's picture

It's not the sheep, it's the military. They NEED spending.

"Between 2008 and 2010, the 26 nations that work within the EDA – all the EU minus Denmark – cut their defence spending by five per cent to reach a total of 194 billion euros ($A258.9 billion) last year – dwarfed by Washington’s nearly $US700 billion ($A699.97 billion) defence budget.

"Austerity endangers Europe’s military
December 1, 2011"

Tue, 05/08/2012 - 09:15 | 2406091 midgetrannyporn
midgetrannyporn's picture

austerity is a sharpened guillotine.

Tue, 05/08/2012 - 09:19 | 2406106 Fake Jim Quinn
Fake Jim Quinn's picture

Governments will never cut sending since it reduces their power and re-election capabilities. Better to deploy raw, ham fisted power by confiscating those who have wealth, then blame the very wealth providers for the ultimate collapse that stems from unbridled spending.

Tue, 05/08/2012 - 09:28 | 2406139 GetZeeGold
GetZeeGold's picture

 

 

I thought that memo was supposed to be top secret?

 

Tue, 05/08/2012 - 10:56 | 2406604 Sauk Leader
Sauk Leader's picture

“The American Republic will endure, until politicians realize they can bribe the people with their own money.”

“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world's greatest civilizations has been 200 years.”

Alexis de Tocqueville

Tue, 05/08/2012 - 10:52 | 2406155 Mercury
Mercury's picture

Gee, one could argue that the governments are acting as if they are in business for themselves.

Tue, 05/08/2012 - 09:31 | 2406159 Joe Davola
Joe Davola's picture

If only the EU had Harry Reid and Nancy Pelosi to demagogue reduced rates of growth as forcing Granny to eat dog food.

Tue, 05/08/2012 - 11:05 | 2406643 Sauk Leader
Sauk Leader's picture

Im sorry but Pelosi is not demagogueing, that is incoherent rambling. Someone better check to make sure she is taking the proper dose of meds. She reminds me of the Mom in Requiem for a Dream. "Im gonna be on television!"

Tue, 05/08/2012 - 09:33 | 2406160 adr
adr's picture

They cut future planned speding from a 20% increase to a 18% increase, so using Clinton logic they did make massive reductions in spending which caused the austerity related problems. If only they increased spending by 25%, everything would have been fine.

The farce of the world economy continues. At least the euro elections are going to prove to the people that the government can't save them. Soon the heads will roll in France. Sadly we living in America will have one of 600 million hollow points put through our heads, or boiled alive with a microwave emitter before we can touch our wonderful politicians.

Tue, 05/08/2012 - 09:36 | 2406174 azzhatter
azzhatter's picture

If printing is good, why not just print enough to give everyone money to buy Ipads? Oh, that's right who will make the Ipads?

Tue, 05/08/2012 - 09:41 | 2406209 Whoa Dammit
Whoa Dammit's picture

Any politican who institutes austerity on the working people, who perceive themselves as having merely followed the rules they were given, while the elites are allowed to break the rules and prosper is doomed to fail. The politicans will have to bite the hand that feeds them (the elites) in order to survive. It's called painting oneself into a corner.

Tue, 05/08/2012 - 09:51 | 2406249 Marco
Marco's picture

Raising taxes is collective austerity ... and it does work at bringing down the trade deficit (which is ultimately the biggest driver of debt).

Tue, 05/08/2012 - 09:56 | 2406290 Shizzmoney
Shizzmoney's picture

Raising taxes isn't the issue for Europe.

It's collecting the motherfuckers thats the issue.

Tue, 05/08/2012 - 10:14 | 2406383 falak pema
falak pema's picture

Statist logic is headcount biased, meaning more consumption; so don't cut head count. Trade deficits mean that head count in non exporting sectors have to decrease for the exporting sectors to produce more and balance deficits by supply side economies of scale boosting exports. But unit wages stay high which means only leverage comes from productivity gains. That is typically the French model, and it doesn't export enuff today. So now the realisation comes that if export is essential, then unit salaries have to block and tax perks have to help exports via VAT adjustment and/or lower salary burden on exported articles. The urge is to go continent protectionist to protect aggregate supply intra europe and keep competition from outside constrained via quality or ecology content (carbon tax) barriers. France wants demand side keynesian boost from ECB and Eurobonds to keep peripherals in the euro zone. But Merkel <wants budget discipline and fiscal convergence and federation BEFORE Eurobonding. Chicken n egg and no time to go there as crisis is now burning the peripherals. 

The current Euro compact, as it is, will involve, tax increases, export boosting from the stronger as the Euro depreciates thanks to Club Med burning, and import squeezing via protection; with government spending decrease as last lever to maintain consumption and consequently tax revenues (obviously not the case for Greece and Portugal; maybe Spain as of today). We are heading there making the world very unstable; as financialisation, currency wars and trade barriers will bring us closer to 1930s. Already you can hear the totalitairan boots in Greece if democracia implodes under pressure of Oligarchy play. Portugal & Spain are next. Merkel has to choose and Euro group's destiny lies in the balance. 

If EU stays on but Euro explodes, we will see huge devaluations in south and ten years lost as individual nations fight to get their economies back. The euro market will ensure internal demand on price competition from its own members. Will both north and south survive split? Difficult to tell as world markets so interconnected. It may be a less painful solution than keeping Euro facade solid with a can of worms and inevitable decomposition going on behind the curtain. But it means the northern banks burn. And maybe their Anglo friends; sending the world to Armageddon in this alternative case, earlier than in the other case of Euro solid, where a technological miracle is always possible to change global energy/growth perspectives. Obamy wants Euro to stick...but can it to save Pax Americana and its surrogate money?

Tipping point moment for Merkel. Mutti must feel very lonely. Now that her Mishu "sarko" has disappeared. 

Tue, 05/08/2012 - 14:52 | 2407643 emersonreturn
emersonreturn's picture

falak perma: thank you for your succinct insight.

Tue, 05/08/2012 - 23:35 | 2409007 halfacanuck
halfacanuck's picture

Er... Spending goes up when unemployment goes up. Automatic stabilizers?

Tue, 05/08/2012 - 23:36 | 2409008 halfacanuck
halfacanuck's picture

.

Fri, 08/17/2012 - 18:55 | 2715656 Dina Strange
Dina Strange's picture

Does it say where the taxes increased? Those are general graphs that don't tell me much. And as far as i remember there were actual cuts in Greece.

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