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 Irresponsibility 21: Eurozone Debt, GDP and Unemployment

Europe and Eurozone's fiscal problems continue to wobble their macro economy as citizens keep paying more taxes and fees while their governments keep piling up more debts to the already high debt stock. Below are screen shots of a CNN feature, "Eurozone Crisis: How the figures stack up",  http://edition.cnn.com/SPECIALS/business/euro-crisis/index.html?hpt=hp_c1

All data accurate as of January 11, 2012.

(1) Debt/GDP ratio

Greece leads the pack in this infamous category. Out of the 17 economies here, 12 have exceeded the Eurozone cap. France and Germany's ratio at 83 percent of GDP.

(2) GDP size, $ billion

The largest economies, Germany and France, naturally are the one which have the biggest capacity to bail out the most troubled member-country of the Eurozone. Germany's GDP size in 2011 was $2.567 trillion.

(3) GDP growth rate, 2011

Last year, Greece and Portugal's economies have contracted, and only five economies were able to grow by 2.9 percent or higher. Heavy debt load will naturally lead to lower economic outlook and low or negative GDP growth.

(4) Bond yield, percent

Greece, Portugal and Ireland have breached the "danger zone" in terms of high interest rates for their new debts. Unless the new debts are able to really improve the overall economic productivity of the people and hence, improve the capacity to pay the old and new loans, new borrowings will only further worsen the problem.

(5) Unemployment rate, percent

More debt, more economic uncertainty, more unemployment. Spain's 21.3 percent joblessness rate is really troublesome.

(6) Youth unemployment

The situation is even worse for youth unemployment, with 11 out of 17 economies have 18.3 percent or worse in youth unemployment rate.

The governments of those heavily indebted countries in Europe and elsewhere like the Philippines, are not exactly "helpless" and "optionless" aside from more borrowings. Those governments have lots of assets, like government-owned or controlled corporations, banks and other financial institutions, lands and national parks, universities and hospitals, to sell and privatize. The governments will not abolish these, they will only be sold these usually monopoly bodies to private enterprises. Such privatization should be accompanied with deregulation so that it will not result in government monopoly to private monopoly.

Selling those assets are a lot more acceptable to the average citizens than more taxation. But I can imagine the opposition to such proposal by the employees and officials of those government-owned and controlled bodies and assets, especially for socialist-inspired or leaning governments.

But there should be a limit and stop to the endless borrowing mentality and policy. Because there is also a limit to the capacity of lenders, be there individuals, private enterprises and banks, or foreign governments. No one would keep lending to someone whose capacity to pay back in the future is next to impossible.
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See also:
Fiscal irresponsibility 11: US debt default talks, July 18, 2011
Fiscal irresponsibility 12: More on US debt default, July 28, 2011
Fiscal irresponsibility 13: Obama on debt limit, 2006, August 02, 2011
Fiscal irresponsibility 14: Debt crisis and government failure, August 08, 2011
Fiscal irresponsibility 15: Philippine government budget 2012, August 08, 2011
Fiscal irresponsibility 16: On government bail outs, September 11, 2011
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