Europe is Heading the "Right" Way

The landslide victory of the Conservative “Popular Party” in Spain ( a couple of weeks ago ) should be analyzed not only from a national context but from a rather wider perspective . In other words, I claim that the Spanish return to the Right is just another brick in an almost completed Conservative European wall . The following paragraphs will try to show that this is not just a mere “feeling” but an almost unprecedented event.

I’ve run a very simple test to understand the magnitude of the Right wing European orientation:

Will 2011 turn into 1938?

" History Does Not Repeat Itself, But. It Sure Does Rhyme"(Mark Twain)

This is not an exercise in mathematics, it´s about Economics and History. Western governments have lately adopted serious measures aimed to reduce the growing deficit of their public accounts. The list is impressing: The governments of Greece, UK, Spain Italy, Portugal Germany and other countries decided to reduce costs and impose austerity measures expected to inflict a serious ( and additional ) economic stress on their ( more modest ) citizens. Just for the record, alternative or complementary measures as increasing the tax burden (which affects the more affluent classes) or improving the tax collection system are inexistent or of secondary nature.

Such measures can be justified only if that their expected benefits exceed the negative impacts of such measures on the economy. Put it in other words the hidden assumption is that economy is already on “the right track” so the demand of public sector is less crucial than before. However, the propagandist effort pointing on the imminent “recovery” (Green Shots, “We saved the world “ and so on) relies upon a not very solid ground : GDP growth figures are still fragile, interest rates extremely low and unemployment rates high. My claim is that such policies the wrong cure for the wrong disease and they could easily exacerbate the economic recession we are still suffering.

That debate resembles the situation along the mid 30 when the Great Depression was still around but growing pressures for “balanced budget” forced the US administration to cut expenses. True, history does not repeat itself, but it definitively “rhymes”, so the lesson in that case could be interesting.

From the Wikipedia

General
"The Recession of 1937–1938, sometimes called the Roosevelt Recession, was a temporary reversal of the pre-war 1933 to 1941 economic recovery from the Great Depression in the United States. Economists disagree about the causes of this downturn. Keynesian economists tend to assign blame to cuts in Federal spending and increases in taxes at the insistence of the US Treasury while monetarists, most notably Milton Friedman tended to assign blame to the Federal Reserve's tightening of the money supply in 1936 and 1937".
Background….
“…….. In June 1937, some of Roosevelt's advisors urged spending cuts to balance the budget. WPA rolls were drastically cut and PWA projects were slowed to a standstill.
The Results ….
"...The American economy took a sharp downturn in mid-1937, lasting for 13 months through most of 1938. Industrial production declined almost 30 per cent and production of durable goods fell even faster”. Unemployment jumped from 14.3% in 1937 to 19.0% in 1938, rising from 5 million to more than 12 million in early 1938.Manufacturing output fell by 37% from the 1937 peak and was back to 1934 levels. Producers reduced their expenditures on durable goods, and inventories declined, but personal income was only 15% lower than it had been at the peak in 1937. In most sectors, hourly earnings continued to rise throughout the recession, which partly compensated for the reduction in the number of hours worked. As unemployment rose, consumers' expenditures declined, leading to further cutbacks in production".

A few Graphs for illustration




2011 = 1938¿

As can be noticed, the 1937 brilliant cut ( it was a cut, not an increase of taxes) wiped out 2 years of unemployment reduction bringing back the figure to the 20% area. The figures beyond 1939 are irrelevant as the mobilization following the outbreak of WWII changed the rules of the game.

The risks of repeating 1937 1938 experiences are high which means social, economic and political devastating consequences. If history can teach us something, how can we explain the risk approach of policy makers? Given the timing and the nature of these measures, I cannot escape the thought that political decision makers are disproportionally prone to respond to any short term oscillations of financial markets. Personal interest? Class interest? Lack of intellectual skills? Opportunism? Just name it. An honest leadership with a longer run and civic perspective, and even with some “historic” touch would probably adopt a more human and economic measures.

Let us hope that 2011 does not turn into 1938, as the real risk is that 2012 would turn into1939.

60.2 Millions Silent Votes in favor of the Euro

During the last weeks we have been witnessing the spectacular collapse of the common currency: Just a month ago the Euro value was ap. 1.35 USD while today ( 19.5.2010) we are at 1.22, a devaluation of app. 10% within a very short period. Such violent movements between currencies are very unusual across the majors ( i.e. the most liquids currencies of the big economic superpowers) and have the potential to trigger financial and economic turbulences.

One of the typical outcome from huge financial movements is the sudden proliferation of real, imaginary and /or self proclaimed "experts". These people do not limit themselves to a post mortum analysis of known facts, but tend to extrapolate the current state of affairs into future doomsday scenarios. In the case of the recent Euro collapse the perceived ZeitGeist can be described as the expectation of experiencing in the near future more volatile markets and a possible collapse of the Euro as a single currency of the EU. The story does not end heresd : such developments could carry the potential to drag the whole project named “European Union” into the abyss. WOW !

These experts claim (correctly) that the EU lacks the economic and political mechanisms needed to maintain the cohesion of the Union sufering from severe economic disruptions. According to that logic, the ACTUAL self interests of the EU countries are against the EU and tge Euro , so the common currency is deemed to demise , sooner or later. The last violent shifts of the currency valuations reflect the markets´ perceptions of these difficulties , a mere reflection of the real weakness. In economic jargon, at present the cost of the Euro exceed its benefits so its future is more than questionable. Clear Cut.

As a matter of fact that line of thinking is not new at all, it´s just a modern adaptation of a 50 years old theory (“Optimal Currency Area” OCA) developed by the Noble Laureate R. Mundell. So, if both theory and common sense advocates against the formation of a common currency in European style circumstances, the natural question should be as follows : Why Europeans countries engaged in such “impossible mission?. Were European leaders so fool (or G-D forbid, corrupt), to lead their people into an economic inferno?

That question as it´s presented describes the line between abstract theories and an historical perspective of the economy. THe common economic analysis tends to be based upon abstract models which are supposed to resemble the real life. However, from a "pure" theoretic perspective, economists tend to forget that even the most accurate theoretic models respond to a specified set of assumptions. That principle applies to the OCA theory as well.

Now, it is permitted even under the most abstract models to change the assumptions as long as they are relevant and reasonable. Now, if we will modify the analysis but only incorporate a slight and sensible modification: Lets assume that an OCA tends to reduce the number and magnitude of armed conflicts ( since a common economic policy generates common interests ,,, etc.) . Wouldn´t the sensible change of the assumptions have some impact on the outcome of our respected OCA model?

Going back to the 50 , this is probably the question European leaders asked themselves when they established the first foundations for an economic (and political) union. However, this is where the historical perspective of the analysis enters and practically changes the outcome.

Let us not forget that by mid 50 the silence of more than 50 million people killed a decade ago was louder than the cries from “frenzy markets”. Although economic models were as abstract as ever, the huge economic cost of two world wars was still fresh in minds and was determinant at the moment to decide whether to maintain the old and risky European model or advance toward an economic and political mechanism that would be able to prevent a future WWIII. I guess European leaders were very conscious about the hardships of such an entrepreneurship, but they understood that the alternative for Europe and the world are much worst. One of the consequence of their decisions is the Common currency and one of the longest peace periods in Europe (more than 60 years w/o serious wars!!).

My last point is that I hope that the proper historical perspective is present in front of the European leaders when they are asked to evaluate the pros and cons of maintaining the cohesion of the Union. There is only one thing that they can count on it for sure: 60.2 millions of silent votes would probably vote in favor of the EU and the Euro despite the conjectural difficulties.