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Euro-zone Sovereign Government Debt, Too Many Emergency Meetings in Europe

Politics / Global Debt Crisis Aug 16, 2011 - 06:35 AM GMT

By: Gary_North


Best Financial Markets Analysis ArticleIf the sovereign government debt situation in Europe is anywhere near a final economic solution, why do the heads of Germany and France keep meeting? These meetings are getting more frequent.

Why didn't all the previous meetings solve the economic problem of PIIGS debt?

What public relations statement do they expect will bring financial stability to the PIIGS?

What new program will they suggest, only to be disavowed as impractical by the European Central Bank, and then adopted a week or two after the official denial?

What program will they ever submit to their respective parliaments, to be debated openly in front of voters? None, you say? I see. Just like before.

What opportunity will voters in France and especially Germany be given to express their view of the new program? None, you say? I see. Just like before.

What indication will investors see that there is any new program that is not merely another Band-Aid?

What program, other than more deficit spending by France and Germany to lend more money to the PIIGS, will ever come forth from one of these meetings?

What solution, other than more purchases of the IOUs of PIIGS bonds by the ECB, will ever be presented?

What will they ever suggest, other than more of the same?

What evidence will ever be presented that the latest round of more of the same will not be followed in a few weeks and months and years by even more of the same?

As always, investors dream of a final economic solution. They keep returning, like a dog to its vomit, to the capital markets, euros in hand, to get in on the boom that lies ahead – must lie ahead – because of the final infusion of capital, the final expansion of the monetary base, the final round of more of the same.


The New York Times published an article by two European correspondents on whether Europe is moving into a recession. It is obvious from the official numbers that it is doing just that, but an open admission of this in a news report would of course be unprofessional.

The article began with a human interest story of some hard-pressed Englishman whose small company has laid off workers. The company installs home heating systems. These days, there is not much construction going on. The owner says it is the toughest market he has ever seen.

It occurs to me that heating systems break down. They must be replaced. People still need to keep warm in the winter. But selling heating systems in summer is tough. The firm should be promoting discounts for installing heating systems. This is a hard sell. Most people do not turn on their heaters in summer. They do when it gets cool, and some find that the system does not work. They call the repairman. He may try to sell them a new system.

I get their main point. The new housing construction industry is comatose. It's comatose in the USA, too. The bubble has popped, and it will not fly again prior to mass inflation.

But modern economies are service economies to an extent that we do not perceive. This sector is also slowing. The official numbers for the overall economy are bad.

In France, the second-largest economy in the European Union after Germany, growth came to a standstill in the three months through June, according to official figures. Meanwhile, industrial production in the 17-nation euro area fell 0.7 percent in June compared with May, more than analysts had forecast.

On Tuesday, economists expect a report on euro area economic activity to show that gross domestic product slowed to 0.3 percent in the second quarter, from 0.8 percent in the first three months of the year.

When GDP is at 0.3%, the economy is as good as in a recession. Statistical errors in sampling are in that range. An economy that is slowing, but which is already at 0.3%, is heading into a recession.

The article admitted that there are recessions in Greece and Portugal. It follows the Keynesian party line. It blames austerity measures. Even if this assumption is true, these are not true austerity measures. Nobody in power in Europe suggests that these governments can or should balance their budgets this year, let alone run fiscal surpluses in order to pay off their debts slowly over time. Oh, no. Nothing that radical. But still there is austerity compared with a year ago.


The authors pushed the thesis that the recession is due to austerity measures imposed on PIIGS by the north.

Government austerity measures have cut into consumption in countries like Ireland and Italy, and the belt-tightening is spreading. President Nicolas Sarkozy of France, in an attempt to reassure bond investors that the country can service its debt, last week told his budget and finance ministers to come up with new measures to cut the budget deficit to 3 percent of gross domestic product by 2013, from a projected 5.7 percent this year.

The problem is not the preposterously named austerity measures, contrary to the financial press, which is Keynesian to the core. The problem is far more fundamental: the end game for Keynesianism.

The Keynesian game has been to spend, spend, spend: tax, borrow, and print. This is not working any more. It is in fact visibly failing.

Now the gray sky Keynesian politicians in northern Europe are demanding that the sunshine Keynesian politicians of southern Europe (and Ireland) cut back on government spending, meaning slow the rate of growth in government spending. Why? So that the happy-go-lucky PIIGS can make interest payments on their debts to northern European banks. Then what is the reward offered by the north to get the south to change? Cheap loans from northern European governments, the ECB, and the IMF. To be used for what? To make interest payments to the banks. And what is the result? Greater debt. With what result? Even larger interest payments to northern banks.

Get the picture? The key phrase is "interest payments to northern European banks."

This is the meaning of the so-called austerity: an austerity for governments and therefore also for those citizens who are dependent on government funding. That is a lot of people. They resist this austerity. They vote in blocs. The politicians are afraid of them. So, there is no real austerity. There are no government surpluses to pay off existing debts. The opposite is taking place in the PIIGS. The northern governments, the IMF, and the ECB are lending money to them, so that they can sell additional IOUs.

There is a hue and cry by Keynesian economists against any austerity measures.

Many economists warn that the austerity measures could be counterproductive by making people fearful of unemployment and afraid to spend. "Austerity has become the problem, not the solution," said Ian Harnett, a managing director at Absolute Strategy Research. "Me saving is great. You saving is great too. But if we all save it's not good."

Keynesians are contemptuous of saving, by which they mean investing in the private sector. They love saving when it means purchasing government bonds. This, they call investing. They think of private saving as crowding out true investment, which is government spending. They resist private saving, for it reduces consumption and the sale of government bonds.

But does government austerity reduce consumption? No. The money that would have been loaned to the government is now either loaned to the private sector or else spent on consumer goods. It has to go somewhere, after all. If it goes to investments in the private sector, the money will be spent on producer goods.

The shift in capital allocation from the purchase of government bonds into the private sector changes the structure of production: the array of capital prices. It makes old investments look foolish – rather like the popped real estate bubbles. But it does not reduce overall consumption. It merely changes the income streams of the nation. Who gets how much will change, but everyone will get something. What the government does not spend, private participants will.

A government deficit requires saving to fund it. Keynesians are always favorable to government spending, with or without deficits, but preferably with. They want government spending to crowd out private spending. The more that a nation's GDP is based on government spending, the more they like it. The more that private spending is based on being on the receiving end of government spending, the more that consumers become dependent on the government.

This is the Keynesian game. It always has been. It is fascism – the corporate state – by salami slicing. It is fascism on the installment plan. This is why Keynes wrote this in the Foreword to the 1936 German edition of his General Theory.

The theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire. This is one of the reasons that justifies the fact that I call my theory a general theory. Since it is based on fewer hypotheses than the orthodox theory, it can accommodate itself all the easier to a wider field of varying conditions. Although I have, after all, worked it out with a view to the conditions prevailing in the Anglo-Saxon countries where a large degree of laissez-faire still prevails, nevertheless it remains applicable to situations in which state management is more pronounced.

If there were real austerity – a reduction of government spending by at least 30% – the private sector would have to adjust to a world in which economically productive customers, not those receiving government handouts, increasingly drive their economies.

The economic costs of making this transition would be high. Capital is not homogeneous. It is not digits on a balance sheet; it is a structure of the tools of existing production. It has been misallocated because of the Keynesian interference with the economy for six decades. Today's capital must be re-priced and re-allocated. There would be a stock market crash, as capital is re-allocated. Today's tools are priced in terms of government spending. This is the benefit of austerity: a shift back to greater private sector productivity. It would come at a cost.


The solution for the PIIGS' economies is the same as the solution for all economies: to get out of the government debt trap, not to take more debt. But Keynesianism is based on government-subsidized debt. So, there is therefore no solution for Keynesians, other than more of the same.

The recession in two or three small PIIGS nations points to the future of German exports. The authors warn: "Worse-than-expected results from companies like Daimler, Deutsche Bank and Siemens in the last month have reinforced the feeling that Germany's extraordinary boom is near an end." Indeed! That is because it really is near an end.

Yet Merkel once again felt compelled to get into another of her famous gurgling sessions with Sarkozy. She was expected once again to reassure the PIIGS that Germany's government will come to the rescue.

How many times will Germany come to the rescue? How many times will Merkel write a check on the personal bank accounts of German taxpayers before the taxpayers revolt? Many more, I suspect. Voters refuse to throw out all politicians who do not oppose the bailouts. But at some point, they will.

Then what will happen to the PIIGS?

It is clear what is coming: a great default. It is clear to everyone except Keynesians. They believe that government debt will grow forever. There will never be a default. What Latin American governments have done over and over for 180 years cannot happen here. Why not? Because it just can't.

This is the religion of Keynesianism: government debt forever, interest payments to big banks forever, and bailouts by other governments forever.

This economic nonsense sells fairly well in political circles in surplus trade nations like Germany, China, and Japan. Why? Because the export sectors want it. They want government subsidies. They get these subsidies directly and indirectly. The main way they get them is to pressure their governments to pressure their central banks to inflate, using the newly created money to buy IOU's from negative trade nations. This holds down the value of their domestic currencies: more sales to foreigners. It also holds down interest rates on government debt in negative trade nations, which is always acceptable to politicians everywhere.

It cannot go on. So, it will stop. It will stop only when the PIIGS default. They will default.

To find out what will happen after they default, read this. It will scare you. It scared me. (Skip page 2, which is off target.)

It does not scare conventional investors. They believe in assurances by Keynesian economists that this can go on indefinitely, and in any case must go on for the foreseeable future.


You may think you are out of touch because you see no solution coming out of these official meetings.

You are out of touch . . . not with reality, but with Keynesian economics.

You are out of touch with the politicians who reassure their listeners endlessly that the latest meeting has provided a framework for a long-term solution to the PIIGS problem.

You are out of touch with the fund managers who believe them.

This is the price of being in touch with reality.

Gary North [send him mail ] is the author of Mises on Money . Visit . He is also the author of a free 20-volume series, An Economic Commentary on the Bible .

© 2011 Copyright Gary North / - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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