Austerians Versus Keynesians

The battle between the 'Austerians' and the 'Keynesians' remains front-and-center in Europe (and elsewhere for that matter). As Sean Corrigan noted recently Frau Merkel is sticking to the only strategy that she can - of insisting that future aid is tied to the construction of budgetary oversight, reduced national sovereignty, and the implementation of labor market reforms - paying lip-service to her nation's unwillingness to pay for what they view as their counterparts' indolence or improvidence. How long this can last is an open guess. Stratfor's Kristen Cooper provides a succinct clip of the state of European Austerity (seeing little progress in reality and in fact a pull-back by Italy and France at the realization that their electorate won't be happy!!). Perhaps, as Corrigan notes, the real lesson is to be had from the Baltics, where 'drastic devaluation' has accompanied genuine 'austerity' - and as a result of this bitter medicine, they are now growing private GDP. As Corrigan sums up, [Austerity as it is being implemented in Europe] is aimed not so much at reinvigorating individual endeavour as at minimizing the reduction in the reach and importance of the state (satisfying neither the Keynesians nor the Austrians) and that is what is self-defeating about such measures.

Stratfor's Kristen Cooper sets the stage for the Effectiveness of Austerity in Europe...



and Sean Corrigan, of Diapason Commodities provides more color on the 'real' Austerity debate:


Perhaps the real lesson is to be had from the Baltics where drastic ‘internal devaluation’ has accompanied genuine ‘austerity’ in the form of government cut backs stretching from 10% in Estonia, to almost 20% in Lithuania, and near 40% peak?to?trough in Latvia. As a result, of the bitter medicine swallowed there, private GDP is now on the rise, with growth rates of 0.9%, 4.9%, and 3.9% annualized over the past six months in Estonia, Latvia, and Lithuania, respectively.

Ireland and Portugal, to give them credit, have seen something similar occur, with the state’s slice of the pie shrinking 13% in the first and 15% in the second, but Spain has barely managed a 5% cumulative cut and Italy is already well on its way back to unchanged from the peak, despite all Mario Monti’s protestation about his performance in trimming the excesses of the past.

‘Austerity’ which not only forces those who have become dependent upon the state to go out and seek other ways of making a living, but confiscates more of their and their private sector neighbour’s earnings when they do so, by imposing swingeing increases in taxes (and so pushing down marginal returns to labour and capital at just the wrong moment), is, as we have said before, a very luxurious form of achieving budget balance, indeed.

Aimed, as it is, not so much at reinvigorating individual endeavour as at minimising the reduction in the reach and importance of the state, this is truly a policy prescription to satisfy neither those who would apply Keynes’ soothing nostrums, nor Austria’s much tougher love.

THAT is what is ’self?defeating’ about such measures, not the simple fact of trying at last to live within one’s means and to re?orient one’s activities more to wealth creation than wealth destruction ? as we fear the unfortunate citoyens de L’Hexagon—the French—are about to discover under their newly installed, traditional left?wing, tax?and?spend, New Dealer leadership.