- (november 2012)
What do Greece, Spain, Italy, Ireland and Portugal have in common?
Greece fundamentally overspent. Its finances spiraled out of order in the 1990s
but nobody paid attention.
Spain, Portugal and Ireland (devastated by high unemployment just like Greece)
simply had a real estate bust, just like the USA.
The problem is that the USA has an economy that produces a lot of other things,
whereas Spain and Ireland had little more than the real estate bubble to
justify their GDP.
However, the bailout of these countries (and also of Greece) is mainly the
bailout of big investors who made bad investments. Unfortunately for the
citizens of those countries, bailing out the rich investors means forcing
"austerity" (i.e. higher taxes and lower benefits) onto those citizens.
You don't expect the big and powerful banks to pay a price for their bad
investments, do you? Hence, you shall pay higher taxes to cover what are
fundamentally their losses.
Spain spent much of the money it made during the 1990s into a modern
infrastructure. Ireland invested massively in Information Technology
(you even get free Wi-Fi on
longdistance buses). And, of course, the Irish speak fluent English, which
helps attract international investment.
On the other hand,
Italy's unemployment is a less dramatic 10%. Its GDP remains among the top 10
of the world. Its national debt was already high before the financial crisis.
The financial crisis is not the direct cause of Italy's problem
(See How Not To Solve A Problem).
Therefore these five countries don't seem to have much in common.
Even geographically, four of them are in southern Europe while Ireland is
in the north.
No political analyst seems to have pointed out the one thing that these five
countries have in common: they are staunchly anti-nuclear, which means that
their costs of energy are among the highest in the world, and will simply
get higher.
TM, ®, Copyright © 2012 Piero Scaruffi All rights reserved.
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- (june 2012)
European operetta.
For all those who heard that Europe (or at least the Eurozone) is teetering on
the edge of the abyss, the news will come as a relief: the presidency of the
European Union rotates and the next country to hold that prestigious position
at this time of crisis will be... Cyprus! Before you scramble to find out where
the heck Cyprus is, let me ruin the surprise: it's a small island in the
middle of the Mediterranean Sea. In the old days it was one of the oldest
and greatest civilizations on Earth, but these days the main thing to know
about Cyprus is that it is split in two: half of it is recognized by the
European Union
and it has been admitted to it, whereas the other half does not exist except
for Turkey, meaning that Turkey is the only country that recognizes the Turkish
northeast of Cyprus, that split from the Greek southwest in 1974. Since Turkey
has never annexed that part of Cyprus, and the rest of Cyprus has never
recognized the secession, Turkish Cyprus is one of the many nations that don't
exist (check out Taiwan, Tibet, Palestine, Western Sahara, Kurdistan,
Chechnya, Kashmir, etc). It would be comic enough that the European Union
admitted an island that is still split in two, but it gets better: Greek Cyprus,
just like Greek Greece, is broke. It is one of the countries that are begging
to be "bailed out" by Germany. Its economy is so tiny that the international
media do not spend much time talking about it, but, as a percentage, Greek
Cyprus can proudly claim to be as much a reckless spender as Spain (74% of GDP).
And who runs this proud debtor nation? A communist president. It turns out
that Greek Cyprus is one of the few plaecs in the world where a communist
was elected president by a fair election (if you don't count Russia as
democratic, then i'm afraid Cyprus is the only one). This communist president
is a good friend of Putin (Russia's not-very-democratic and
not-very-Eurofriendly president), admires Fidel Castro (the former
long-time dictator of Cuba) and has had good things to say about, of course,
the Islamic regime of Iran.
One has to compliment the European Union for the wonderful treaty
that allows maximum entertainment even at the time of maximum crisis.
TM, ®, Copyright © 2012 Piero Scaruffi All rights reserved.
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- (june 2012)
The collapse of the welfare state.
Over the last century Western Europe refined a model in which the state
has to provide a as much personal security as possible to its citizens.
In the old days this would have meant "arm yourself to your teeth".
In the post-war world of peaceful Western Europe this meant protecting the
citizens from the unknowns of life. Governments introduced programs to
pay pensions to elderly people, to provide health care to everybody,
to pay salaries to unemployed people, etc. This vast system actually accounts
for quite a bit of Western Europe's economy, as it is handled by a vast
bureaucracy that employs tens of thousands of people.
Critics (especially in the one Western country that never fully adopted that
syste, the USA) have always expect this system to fail. One line of criticism
was that it makes people less motivated to find work and succeed at it.
Another line of criticism is that government bureaucracies are inherently
inefficient and end up providing lousy services at high costs to the taxpayer,
when that same taxmoney could be used by citizens to buy better services.
Western Europeans are mostly happy with their services, and defend the system
as something morally justified that makes everybody less likely to be struck
by life's tragedies.
In 2012 it appears that the critics are winning: the Western European
governments are collapsing under the weight of their costly welfare systems,
while countries like China that spend very little on their citizens'
health care, pensions, etc are booming.
Even worse: the idea that people in France or Italy are happier than people
in China or India is just an opinion. Statistics on suicide, for example,
show that France has the world record among large countries, hardly a sign
of happiness, and it is followed by the Scandinavian countries, also famous
for their welfare systems. In other words, pensions and socialized medicine and
unemployment benefits do not seem to make people happier.
Even the one thing that the welfare system is supposed to mitigate, the
wealth gap, might not be a cause but an effect: as the system gets bogged down
by high taxes, the middle class has fewer opportunities to catch up with
rich people, who, meanwhile, are the only ones with the capital to invest and
make more money.
The situation is indeed dire in Europe, where all sorts of categories demand
the benefits that they were promised over the decades, and all that money
is no longer available to pay for schools and infrastructure. If you are old
in Western Europe, you can live a very nice life (compared with other places
in the world), but if you are young, you are ten times more likely to be
unemployed than your Chinese or Indian counterpart. In the long run it is
obvious who is raising the most productive generation.
At the same time, though, there is an argument that right-wing politicians
make that is totally contradictory: they keep accusing "socialist systems"
of being inefficient and self-destroying, but they forget to mention that
the biggest success story in the world of the last 30 years has been China,
a socialist country, and that the biggest success story in the Americas has
been Brazil, who was ruled by socialist president Lula. And the one country
in Europe that is expected to save the PIIGS (Portugal, Ireland, Italy, Greece,
Spain) is Germany, which has one of the most extensive welfare systems in
the world.
If the capitalist system of the USA is indeed so much better, why isn't the
USA booming instead of mainland China?
TM, ®, Copyright © 2012 Piero Scaruffi All rights reserved.
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- (june 2012)
How not to solve a problem.
There is widespread consensus among economists and politicians that the
Eurozone needs to do more in order to help the countries that cannot repay
their debts (that's what it is, in simple words).
Historians beg to disagree.
The USA socialized the debt of its member states after its Independence War
against Great Britain. The result was a wave of overspending by the states.
On the other hand, the fact that today the USA doesn't even remotely think
of rescuing California (a state that is virtually bankrupt) is making every
state in the USA much more cautious about its own spending regime.
What has happened with Greece is a good example of how not to solve a problem:
Greece already swallowed almost 600 billion dollars in aid of one form or
another. That's double its Gross Domestic Product.
That's almost 200 thousand dollars per household.
Argentina's president was absolutely right when she said that billions
of people on this planet need that kind of money more than Greek citizens do.
And it didn't work: Greece still needs to borrow more money, and its economy
is in a tailspin. Any further help will only encourage the Greeks to postpone
solving the problem, and will encourage the other members of the Eurozone to
get into the same kind of trouble.
The real problem is a different one. To be precise, one can identify three
orders of problems. The most superficial ones are the direct causes of the
national debt. Those actually vary wildly: Greece is overspending to a
ridiculous degree, given its meager economy (what does Greek produce exactly
that justifies their lavish social benefits?); Italy is quite frugal these
days but unfortunately previous governments created a colossal amount of debt
(the joke is that if Italy's debt declared independent it would be the fifth
economic power in the world); Spain's debt is relatively low but its banks
are in trouble because an irrational real estate bubble burst; and so on.
Each direct cause is actually different, although at the end the nation's
banking systems are equally at risk.
At a deeper level the problem is the euro. In the old days these countries would
have had a simple solution to their problems: devalue your currency. Devalueing
your currency makes you poorer, but stimulates the economy (your exports become
more competitive overnight) and lowers the deficit. The euro is controlled by
a central bank that acts in the interest of the whole Eurozone and therefore
does not devalue the euro just because Greece is in hot waters. Besides,
the real competitor in Europe is Germany, a member of the Eurozone: Germany has
benefited from having the same currency as Italy, Spain and so on, because its
companies are more competitive than companies in the other euro-countries.
If you are not a member of the Eurozone, you can compete against Siemens and
BMW by devaluing your currency and making your products cheaper, but nothing
helps you if you use the same currency that Germany uses.
At an even deeper level, though, the euro looks like an excuse, not a real
cause. The real problem is democracy. Each of these countries could solve
its problems if it stimulated economic growth. If they were booming, nobody
would be worried about their debt. Devauling a currency is not the only way
to make your products more competitive. There is another way, and it sounds
even more rational to me: lower your costs. What has happened in the 2000s
is that Germany's labor costs have slightly gone down, while labor costs in
Spain have gone up almost 20% and in Italy a shocking 40%. As of may 2012,
Italy's consumer prices were still rising faster than Germany's.
Blaming the euro only tells half of the story: the other half is that wages
and other costs have increased dramatically in the very countries that are
now in trouble, while they have decreased in the one country that is asked
to come to the rescue.
And, since Europe is now in the middle of a colossal anti-nuclear trend,
let me add that it may not be a coincidence that all the PIIGS (Portugal,
Ireland, Italy, Greece and Spain)
are nuclear-free countries. It does not help make you competitive worldwide
if your energy costs are sky-high.
So at this deeper level one sees that these are largely self-manufactured
woes by nations that behaved like they could afford a lavish lifestyle.
Basically, they were giving themselves a salary raise based on the assumption
that they were as competitive as the Germans, while the Germans were humbly
reducing their own salary in order to compete with Asia.
If that is the case, then one has to look even deeper to the causes of that
irrational behavior and to the reasons why it is now so difficult to undo
those privileges. That ultimate cause is democracy. These are democratically
elected governments that stay in power only if they give people what they want.
In fact, let's give credit to Schroeder who passed the painful reforms in
Germany and was promptly defeated by Merkel. No other reigning politician in
Europe has wanted to try the same strategy: do what is good for your country
in the long term but lose the election in the short term.
What i wrote about Italy in 2011
( Too big to be saved? The limits of parliamentary democracy and national sovereignty) is true for all of Europe:
This crisis is showing the limits of parliamentary democracy and national
sovereignty. The European nations that used to rule the world need to unite
or become footnotes in the history of the world. The euro was an excellent
idea and almost immediately rivaled the dollar as the world's most desirable
currency. Both these ideas were terrific, and the countries that looked down
on them are been severely punished by history (notably Britain, whose status
as a world power has become laughable given how marginalized it is in the
current world system). Note, however, that neither the European Union nor the
euro were created through democratic elections: both were pushed through by
governments without truly asking their citizens if they wanted them.
When the people were finally asked for an opinion in national referendums,
even the French objected (and the solution was to change the rules so that
the people would not be asked a second time).
Unfortunately, governments cannot get away with unpopular reforms at home:
those have a direct impact on their reelection chances.
Democracy keeps these governments from passing the reforms that would solve
the problem. Asking for "bailouts" from Germany is a way to say that democracy
makes them powerless to do the right thing, so they can only ask for the second
best thing: "someone richer than me please hand me the money". If Germany
eventually succumbs to this logic, it will regret it:
the beneficiaries will become even more dependent on external aid while
national governments will come and go, still incapable of finding a compromise
between being reelected and passing reforms.
The rest of Europe should be careful about insisting that Germany foots the
bill in order to save the euro: eventually Germany might wake up to the
alternative, which is not the expulsion of Greece or Portugal or Spain from
the euro, but the secession of Germany itself. If Germany leaves the euro and
returns to its mark, the euro will be precisely the weak currency that the
PIIGS need: in just one stroke that would solve the problem. After all, the
euro was introduced against the will of the German people (polls showed that
most Germans did not want to adopt the euro), in one of the many
undemocratic decisions made by governments that were ahead of their
electorates. Germany's motivation to leave the eurozone would be simple:
the domino effect will eventually hit Germany too. Germany can't keep bailing
out the rest of Europe forever without becoming itself the victim of large
debts (and being treated by foreign lenders the same way they are treating
Greece and Spain today).
If the problem is national democracy, the solution is obvious: abolish national
elections. If the whole of the Eurozone voted for one government, it would be
more likely that the majority of Eurozone citizens would vote for reforms
(most of the Germans as well as many in the troubled countries who understand
that in the long term there is no other solution). Anything shord of political
union is only a temporary patch. Without political union those troubled
countries will go bankrupt, and more countries (starting with France)
will get into the same kind of
trouble, and the whole of Europe will be affected, even Germany (the "good guy"
in this story of reckless behavior) and even Britain (the "smart ass" who is
not as immune as imagined).
You can bail out a debtor, but not logic.
TM, ®, Copyright © 2012 Piero Scaruffi All rights reserved.
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- (january 2012)
Bye bye Europe.
A century ago all of the world except for the Americas and Japan was ruled by European powers. The 21st century, however, is likely to be the century when
Europe becomes a footnote to the history of the world; and I wouldn't be
surprised if this were the beginning of an Islamic-style decline into
utter poverty and backwardness (Islam used to rule most of the world and
be on top of every other nation in science and politics before it
declined to become the poorest region of the world in terms of science
and democracy).
Many internal causes for the sudden decline of Europe can be listed, from
overspending to paralyzed democracy, but one factor probably matters more
than any other: the USA.
It was the USA that was responsible for the decolonization of the world.
The USA saved Britain and France from Germany. At the end of World War II
As a former European colony itself, the USA demanded that the old colonial
powers grant independence to their colonies. Within a few decades the
independence of India, Pakistan, Indonesia, Arab countries and all of Africa
dramatically changed the future of the world. Not only did this drain the
flow of wealth from the colonies to Europe, but it was just a matter of time
before all these new countries would start competing with their old
colonial masters.
The second blow came from another victory by the USA: the USA won the Cold War
against the Soviet Union. First of all, this weakened yet another European
colonial power: Russia had consistently expanded its territory and its sphere
of influence since getting rid of the Mongols. The year 1991 marked the first
time in centuries that its territory shrank. Secondly, the collapse of the
communist system in the Soviet Union caused a chain reaction around the world,
as all communist systems except three switched to the capitalist system.
These countries became vibrant economies that joined the other developing
nations in challenging the supremacy of the old European powers. One of these
countries, China, went on to pass all the European powers and become the
world's second largest economy. India will soon pass its old colonial master
Britain. The end of the Cold War also prompted the USA to let its own
half-colonies in Latin America move towards democracy: the old corrupt and
incompetent dictators were kicked out of powers and much better regimes took
their places. That meant even more competition for old Europe.
In 2012 came the last fatal blow: the president of the USA, Barack Obama,
announced a new strategy that is notably a withdrawal from Europe. Europeans
have frequently marched in the streets to denounce the interference of the
USA into their affairs: they are now getting what they wanted. As the USA
withdraws from Europe, it will become evident even to the blindfolded youth
of Europe that Europe is a tiny continent surrounded by Islamic countries to the
south (some of which are growing faster than any European country) and by
resource-rich Russia to the east. The mighty German manufacturing monolith
may not be enough to save Europe from political extinction caused by the USA's
three-step weakening of Europe.
TM, ®, Copyright © 2011 Piero Scaruffi All rights reserved.
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