Fiscal Irresponsibility 25: Spain Panic, More Eurozone Woes

Just a continuing proof that BIG government is wrong, is also the continuing debt and financial turmoil in Europe. Of course, the same heavy debt burden is also experienced in North America, Japan and other developed economies, regardless of their forms of government -- parliamentary, presidential, federal, centralized, unitary, etc.

Here are some news headlines yesterday, June 5, from BBC, CNN, FT, WSJ. They look self-explanatory.

A good chart from The Economist, Crunch Time, May 28th 2012.

...According to The Economist's credit-crunch index, credit is now tighter in the euro area than it was at the height of the financial crisis (see top-left chart). This is having a detrimental effect on the real economy, as demonstrated in the following three charts. When the index was last at a similar level during 2008-09, economic output tanked, unemployment shot up and stockmarkets plummeted. Unless policymakers find a lasting and credible solution soon, it seems likely that the same will happen again.

Another chart below from the same magazine, A rebalancing act, May 22nd 2012.

GREECE is in a bind. Because it is stuck with the euro, it cannot become more competitive by currency depreciation. Instead it must lower its real exchange rate, by cutting prices and wages. This is proving a painful process. One measure of progress, unit labour costs (the average cost of staffing per unit of output), is declining and will continue to do so, according to the OECD’s latest Economic Outlook. Cheaper labour should result in cheaper goods, making Greek exports more attractive to foreign buyers and helping to improve the trade deficit. But with less money in workers’ pockets domestic demand—the sum of consumption, investment and stock-building expenditure—is likely to fall further. The OECD recommends that trade-surplus economies, such as Germany and the Netherlands, push up costs. This would make Greece more competitve, without dragging on Greek workers' incomes.

And one more chart, also from The Economist, The German motor, May 15th 2012.

(Germany's) economy surpassed expectations by managing to grow by 0.5% during the first three months of the year. As a whole, the euro area registered stagnant growth, and without Germany its economy would have declined by 0.2%. Germany accounts for about 28% of euro-area output, yet its contribution to euro-area growth has increased markedly since 2004. It was responsible for 65% of the region's growth in output on average since 2007. Meanwhile the euro zone's peripheral countries—Portugal, Ireland, Italy, Greece and Spain—have seen their contribution decline from a pre-crisis average of 45% to a drag of 10% since 2007.

Look at that, a 0.7 percent GDP growth is already "high" in EU situation these days. The economic contraction, negative change in GDP size, has spilled over beyond the PIIGS, now covering Britain and the Netherlands.

Being an advocate of lean and limited government -- for limited coercion, regulations, restrictions and taxation -- it does not make me happy either to see these figures of bad economic performance by those economies under BIG governments.  But since those governments and the respective political parties and political groups and NGOs that support them, cannot be convinced easily of the mistake of further expanding government size and costly welfarism, we have to allow the natural course of events to teach them, the public, some hard lessons.

Some libertarian anarchist friends would question, "Why have limited coercion, why not zero coercion by abolishing government entirely?" Well, sports and gun clubs, rotary and other civic clubs, village and professional associations, etc. are mini-governments actually. They have their own bureaucracies, their own set of rules and regulations with respective rewards and punishments, collect mandatory annual dues and other fees that appear like taxes. In the event of conflict among their leaders, or an inter-club (say gun club) disputes, there is a need for a bigger force with its own coercive power, to settle disputes with finality. And we are referring to the promulgation of the rule of law, enforcement of contracts, between and among people, private enterprises, various civil society organizations, as the main "raison d etre" of government.

Suffice it to say that somehow we need government, but it should be a lean one focused on implementing very few functions. Big and expansive, highly intrusive government is wrong.

Ok, one last data for now. The world's largest economies in terms of GDP size, in trillion US$ current prices, 2001, 2006 and 2011.

Source: CNN Money

* Trivia: If the basis for G8 membership is being the "world's largest economies", then Russia and Canada should be out of G8 and China and Brazil should be in. One way to correct this is to expand the association to G10 and Russia and Canada can remain. But it's all about politics by the G8 member-governments.
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See also:
Fiscal irresponsibility 17: Cut Spending and Borrowing, September 19, 2011
Fiscal Irresponsibility 18: Greece Bailout, October 29, 2011
Fiscal Irresponsibility 19: Rich Countries' Debts, November 24, 2011
Fiscal Irresponsibility 20: Trade and Budget Balances, January 06, 2012
Fiscal Irresponsibility 21: Eurozone Debt, GDP and Unemployment, March 06, 2012
Fiscal Irresponsibility 22: China Borrows, China Lends. April 16, 2012
Fiscal Irresponsibility 23: High Debt and Unemployment and Parliamentarism Hard Sell, May 02, 2012
Fiscal Irresponsibility 24: More on the PIIGS and European Debt, May 16, 2012

Fiscal Irresponsibility 24: More on the PIIGS and European Debt

Below are some charts that I got from various sources, on some fiscal and economic data of Portugal, Italy, Ireland, Greece, Spain (PIIGS) and the other major EU economies. I will limit commentary to the sub-heading in each chart. These images are mostly self-explanatory anyway.

(1) Declining GDP growth while rising unemployment, PIIGS.

source: NYT,   http://www.nytimes.com/2012/05/16/business/economy/leaving-the-euro-may-be-better-than-the-alternative.html?_r=1&ref=global-home#


(2) Government spending 40 to 60 percent of GDP (They need lots of taxes to finance it; taxes not enough, so they borrowed like crazy).

source: Dr. Ed's Blog,  http://blog.yardeni.com/2012/05/europes-wonderland.html

h/t: Prudent Investor Newsletters,  http://prudentinvestornewsletters.blogspot.com/2012/05/unraveling-of-europes-wonderland.html


(3) Governments of G7 countries notorious for fiscal irresponsibility.

source:  http://www.economist.com/blogs/graphicdetail/2012/05/daily-chart-4


(4) 13 European economies have unemployment rate of 10 percent or higher

source:  http://www.economist.com/blogs/graphicdetail/2012/05/european-economy-guide

Meanwhile, in a facebook discussion, my German friend posted that one has to "question the collective wisdom of markets a bit when you see them panicking on the news about Greece..."

I think those bankers and market traders were just watching how much other EU governments (Germany, France, Belgium, etc.) would use their taxpayers' money to bail out Greek pensioners, welfare dependents and the huge bureaucracy. Meaning if more taxpayers' money from other European countries are expected to flow in, those bankers and stock traders will do their usual stuff. If less taxpayers money from other countries are coming in, they will panick and head for the exit. So its a question of how much moral hazards problem is being contributed by those bail out money from other European taxpayers. The bankers and traders mainly react to those moral hazards problem and do their thing as profit-maximizing or loss-minimizing individuals.

Governments created those huge public debts, they are not personal or private debts. These are accumulation of past over-spending and excesses. So the bankers and market traders are watching how much of those excesses in the past will be reformed and thrown away, or how much will be retained or even expanded, via bail out money from other European (or Chinese) taxpayers. Internal reforms like deregulation, liberalization and privatization of some (or many) government assets, and more personal responsibility in many social sectors, do not seem to be highlighted there.

Fiscal irresponsibility, spending always larger than revenues,  living beyond one's means, heavy welfarism even if revenues are not enough to sustain it, reliance on endless borrowing. These are the marks of statism bordering on near socialism policies.

* See also Fiscal Irresponsibility 23: High Debt and Unemployment and Parliamentarism Hard Sell, May 02, 2012

Fiscal irresponsiibility 8: Finland's dislike of EU and bail-outs

The European Union (EU) is perhaps the biggest bureaucracy in the planet on a per capita basis. The bureaucracy's penchant for almost all sorts of subsidies, welfare and regulations is costing taxpayers from member countries lots of money.

While the EU is imposing certain fiscal "disciplines" like the budget deficit of member-economies should not be more than 3 percent of GDP on any given year, I think almost all governments of member-countries, except Norway, have regular budget deficit. Meaning they live beyond their means; they spend more than their annual revenues (taxes, fees, etc.).

Now many voters of Finland have supported a political party with harsh words against the EU, against the additional bail-out money to Greece and Ireland, and against heavy subsidies to many refugees. The voters are saying that they've had enough of more fiscal irresponsibility, of bailing out highly fiscally irresponsible governments like those in Greece, Ireland and Portugal.

There is one good news report today in NYT, Finland’s Turn to Right Sends Shivers Through Euro Zone
By SUZANNE DALEY and JAMES KANTER
Published: April 21, 2011

Mr. Soini... who is 48 and has been active in politics since he was 17 — repeatedly lashed out at the European Union. (He is fond of calling it “the heart of darkness.”) A true democracy, he has said, is “only possible in individual states.”

“Soini talks ordinary language with ordinary words,” said Ville Pernaa, the director of the Center for Parliamentary Studies at the University of Turku in Finland. “He told the voters that they were wasting money paying for other people’s debts. Why should they pay for that when we need more doctors in the small towns of Finland?”

Perttu Pouttu, a retired worker for a Helsinki energy company... “Of course the bailouts raise questions,” he said. “Will we get that money back? Where are the banks? This is their problem.”

At the same time, Mr. Pouttu said he was worried that Finland had admitted too many refugees. “It does not touch me personally,” he said. “But it bugs me that by law we have to give them apartments. When I retired, no one gave me an apartment.”

Mr. Soini, leader of the True Finns Party, may be urged to soften his attack of the EU and the proposed additional bailout money for some highly troubled European economies. But if he does so, then the voters who supported him and his party may get angry too.

It is a good start that a small but rich country like Finland will remind many European governments and the EU bureaucracy, that fiscal irresponsibility and ever-growing government size is wrong.

Tax Cut 2: Ireland, Turkey

Another good development in the "tax cut" and "tax competition" movement in the world -- N. Ireland planning to slash its corporate income tax from 30% to only 12%! Wow! And it looks like this tax cut can help unite further theProtestants and the Catholic Sinn Fein, which will further improve peace and order situation there.

The tax-hungry finance officers of UK are somehow panicking, naturally. More and more UK-based companies will start moving to N. Ireland and do business there. While N. Ireland's tax rate goes down, it does not necessarily lead to lower revenues as the revenue base -- the numberof companies doing business and paying taxes -- will go up*.

(* Note: Tax Revenue = tax rate x revenue base)

My country's legislators -- egged by Finance and congressionalbureaucrats -- raised corporate income tax, along with VAT hike,effective this year from 32% to 35%. This is 3x that being planned inindustrialized N. Ireland!

As I have posted in the previous blog re "flat tax countries in the world", the extent of tax competition in eastern Europe is really hot, and some economies in Western Europe, like Ireland, are simply adjusting. But EU rules and bureaucracies make their plans a little bit more difficult.

I hope the same tax competition will happen in Asia too!
A lower tax rate but plentier number of business and entrepreneurs doing businesses, expanding the production of various goods and services in the economy, should work well in creating more jobs and slashing poverty.

Below is the news report from the Financial Times:

http://www.ft.com/cms/s/b5807d8a-7358-11db-9bac-0000779e2340.html
12% business tax proposed for N Ireland

By John Murray Brown in Dublin
Published: November 13 2006 22:40

Companies in Northern Ireland would be exempt from corporation tax on the first 60 per cent of profits under a private sector plan to be put to the UK government on Wednesday in a bid to stimulate the province's economy.

The paper is published by the Economic Research Institute, a local think tank, and backed by Sir George Quigley, former chairman of Ulster Bank and head of the Northern Ireland civil service. It represents the most detailed case yet made for special tax treatment for the province, which is emerging from three decades of unrest.

Under the proposal, after the zero-rated first 60 per cent of profits, the remainder would incur tax at the prevailing UK rate of 30 percent. This would mean businesses based in the province would have a rate of 12 per cent, in effect, just less than that in the Irish Republic.

The issue has become embroiled in the political negotiations on therestoration of the assembly and power sharing executive. Both theProtestant Democratic Unionists and largely Catholic Sinn Féin arecalling for lower tax rates. Ian Paisley junior, son of the DUP leader Ian Paisley, says that without a tax deal the DUP will not agree to go into government with Sinn Féin by the deadline of the end of next week...


Meanwhile, I posted this last June 23, 2006:

Tax Cut: Turkey

Turkey will abolish (ie, drop to zero) the 15% withholding tax on income and dividends from financial instruments held by foreign investors starting January next year. While the rates applied to Turkish residents would be cut from 15 to 10 per cent.

Government though, will retain the 15 per cent withholding tax on deposits and repos held by domestic investors, while the tax exemption for derivative instruments will stay.
See FT report today, "Turkey to scrap tax for foreign investors" (www.ft.com).

Such moves are meant to help reverse the flight of capital from risky emerging markets that started last May.

Turkey is still waiting for EU nod to be admitted as a new member of the currently 25-countries union. EU is known for heavy regulations. Previously liberalizing countries that later on became EU members went back to multiple regulations. Dominant member-countries of the EU like France and Germany do not like low corporate taxes in other member-countries because the former are afraid that they might further lose some of their corporations and move to countries with lower taxes.

So this tax cut move by Turkey might not sound good to the ears of certain EU bureaucrats who want more, more taxes and avoid any competition in tax policies (ie, bringing down taxes as low as possible).


Finally, here are the corporate income taxes for the following Asia-Pacific countries, 2006 (in %):

Japan 40.1 (40.7 in '05)
S. Korea 35
Pakistan 35
Philippines 35 (32 in '05)
India 33.7 (36.6 in '05)
China 33
New Zealand 33
Sri Lanka 32.5
Australia 30
Bangladesh 30
Indonesia 30
Thailand 30
Malaysia 28
Vietnam 28
Taiwan 25
Singapore 20
Hong Kong 17.5