Living in Euro Hell

Our job market is still pretty bad, and as mortgage interest rates start to rise the housing growth we expected to resume is likely to stop or at least slow and our stock market has become a roller coaster, presenting even more volatility than even the trading junkies on Wall Street demand. Europe is still shuddering from a failure to beginning anything that looks like a recovery, consumer confidence in France has plunged to new lows, and Germany’s Angela Merkel isn’t offering much in the way of German concessions to ease the pain... she faces some tough voter sentiments in the upcoming elections.

Still, as a technical recession has resumed for much of the Eurozone, the cry from conservative EU politicians is that the pain of austerity is a continued necessity. But the debate on continuing this tough march of continued cutbacks, without much to show for it but further contracting economies, has placed new questions about the efficacy of this German-directed march to frugality.

On June 27^th, unions shut down most of Portugal, a debtor nation with a rescue package from the European Union. “In their fourth general strike in two years, trade union leaders hailed the massive turnout of five million [roughly half the population], though no official figures were released… Workers are angry over new austerity measures being imposed… ‘I’m unemployed for the second time, businesses are closed, there are no places to work,’ exclaimed one protester… Trains, buses and the metro remained idle as the strike hit public transport the hardest. Support outside the public sector was scant – as one worker put it – if they don’t work, they won’t eat.”EuroNews.com, June 28^th.

The tradeoff for a $102 billion bailout (given two years ago) is continued implementation of one of the most severe programs of governmental austerity imposed on any rescued nations. Yet Portugal’s leadership is committed to staying the course, even as the pain in that country is overwhelming.

“Nevertheless, the outlook for Portugal is grim. The jobless rate, currently at a record 17.8 percent, is forecast to hit 18.5 percent next year. The bailout creditors predicting a contraction of 2.3 percent this year after the Portuguese economy shrank 3.2 percent in 2012. The budget deficit stood at 6.4 percent of annual GDP in 2012 – higher than the 5 percent target for that year though much lower than the 10.1 percent recorded in 2010.

“Already, the government has raised sales tax to 23 percent from 13 percent, while income tax hikes have costing many middle-class workers more than a month’s pay. A European Commission report published Wednesday forecast further declines in household income this year and next… Unions are also angered by the government's latest plans, which include increasing the working time of state employees to 40 hours a week from 35; increasing their monthly pension deductions while lowering their pension entitlements; and laying off some 50,000 government workers out of the total of about 583,000.

“The crunch won't stop there, however… The government, which has to find another 3.4 billion euros of savings in 2014, is due to present next month details of a deep and broad reform of how the state is run. The proposal is expected to order a further streamlining of state services and will likely fuel more protests.” Huffington Post, June 27^th. The Portuguese constitutional court has rejected some of the austerity measures, and clearly they are anything but popular except with the most fiscally conservative players. So it is no small surprise that Portugal’s Finance Minister Vitor Gaspar quit on July 1^st. Next Finance Minister: Maria Luis Albuquerque. That’s just Portugal! And then there’s Greece… and Spain… and Italy…

We all know that unsustainable government spending has to stop. But we also have to look at mistakes that other nations make in cutting back. In Europe, the issue is cutbacks when economies are still deeply in trouble. Suffering lower-end Europeans will have lost exceptional opportunities for longer term growth, just in terms of the timing of their sacrifice. Further, as some unions are learning, there really can’t be any clear sacred cows that cannot be spared the axe. In Europe, it is social programs and labor benefit mandates. In the United States, it’s the military. We need to look at the biggest expenses and ask exactly what we are getting for the money spent… and not cut programs that prepare our nation for a tough competitive world, programs that can generate the longer-term growth that can in fact reduce that deficit.

I’m Peter Dekom, and the clearest lesson from all of this is that there are no simple, slogan-driven solutions to complicated economic quandaries.