Skip to comments.Roubini Tells Europe to Stop 'the Savings Madness'
Posted on 06/12/2012 2:39:53 PM PDT by bruinbirdman
Governments in Europe should lower taxes and increase salaries to boost growth rather than insisting on austerity and continued saving, famous economist Nouriel Roubini told a German newspaper in an interview on Tuesday.
Roubini also said the German government should give its citizens incentives to go on holiday in countries in the south of Europe that were affected by the debt crisis to help those states recover.
Some leaders in major European countries have already shifted their rhetoric from austerity to growth, as tax increases and cuts in government spending have exacerbated the economic downturn, causing deep recessions in some euro zone countries. But Germany still insists on austerity as a way to bring budgets under control.
"The savings madness must be stopped. Governments must lower taxes and increase wages. Europe needs growth," Roubini told popular newspaper Bild.
"The German government should give every German household a 1000 euro ($1,250) travel voucher. However, it should only be used for holidays in crisis countries. That will help boost growth there. In addition, everyone who buys a holiday home in a southern European state should get a tax bonus, he added.
Pulling the plug on funding Greece, which has already been bailed out twice, would lead to the collapse of the single currency, Roubini
(Excerpt) Read more at cnbc.com ...
This sounds whacky, even though Roubini has been right often.
But, if you consider that a bailout through the EBC or the EFSF goes directly to the indebted country without benefitting any Germans, it makes a little more sense. This bails them out with vouchers that give the German citizens a bit of tourist joy. Also, the money is routed through the “industries” of southern Europe which are most competitive—namely tourism.
Unfortunately, I doubt that you could transfer enough money to make a difference in this manner.
Having lived in Germany for almost twenty years of my life....and been to both Greece and Cyprus...I can offer some observations here.
First, currently, the Greeks are already offering some of the best deals possible of the past twenty years. You can go over for one week (hotel, air, and buffet meals included) for 459 Euro ($600 roughly). Toss on another $200 for a second week. That’s a two hour flight from central Germany to Greece....all part of a package deal. I don’t think you really need to toss more free cash into the deal....the Greeks are already making it a pretty good deal for a two-week trip.
Second, the relationship right now in Greece with Germans....isn’t exactly great. Most Germans are very hesitant over making a trip to Greece...in fear of a confrontation. So money isn’t going to comfort them.
Third, and final....let’s say this works....but for other reasons possibly. Then would you come up next spring and offer another enticement deal to get folks to go off to Spain? Then in 2014....maybe Portugal? Then in 2015....maybe Italy? The German method of fixing something just turns into free vacation deals? A German hearing this deal....would start laughing, and then demand the political figure be fired.
Oops, of course in post 2 I meant ECB, not “EBC”.
The (European) Union shall establish an internal market. It shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment. It shall promote scientific and technological advance.Sound like the USSR much? Lots of parallel goals mentioned in the USSRs constitution . . .
They are not bailouts. They are loans.
When Germany gives up the social market economy and their politicians stop talking trash about the “Anglo-Saxon economic model” (which our politicians have abandoned, frankly), I will start taking them seriously. While they hold on to it and the EU as their proxy imposes that economic model on all of the EU members, their government will look like manipulators to me.
On the off chance you are serious, look at Spanish sovereign bonds, which are clearly loans to the Spanish government. If the bank bailout for Spain goes through, the new loans will be given seniority over the old government bonds--which stretches the definition of loan priority. If you get pushed far enough down the priority chain, the old loans become worthless bailout gifts.
They may have shifted their *rhetoric* from austerity to growth — but, that's not the same as introducing measures that actually lead to growth.
The ersatz “Keynesianism”, which mainly involves more government spending, was never meant to be a prescription for growth. It was supposed to be a way to stabilize an economy — to lop the peak off bubbles, and fill in the troughs of recessions.
The only *growth* policy that the EU has implemented is the lowering of trade barriers. The EU started out as a free(er) trade zone — and free trade is a proven growth strategy.
Lower taxes are also a proven growth strategy; and Roubini is right to recommend them. However, does anyone believe that lower taxes are what the socialist governments of Europe have in mind, when their rhetoric turns to “growth”?
Another proven growth strategy is liberalization (in the original meaning of the word) of labour markets. Meanwhile, France and others are increasing the regulation of labour markets.
In the EU, growth policies are more honoured in the breach, than in the observance.
If “free trade” is a “proven growth strategy”, then how come the trade deficits for the USA are so colossal?
True, many in Brussels are pushing for that. I doubt it will ever happen. Can you see the German tax collectors marching into Italy, France, or Spain to collect moneys due? Or, for the populations of the Mediterranean counries sitting still forever for declining wages and living standards? I can't.
kudos! right on!
because imported stuff is not only very good but very cheap.
We shed the manufacturing that could be done elsewhere cheaper and perhaps better.
Americans love goods that are inexpensive compared with similar or less than equal stuff made in the USA.
We have a strong manufacturing base and our exports are strong
A loan is something that has a reasonable chance of being paid back at some point. Therefore these are not loans.
I don’t care what the EU calls them. These “loans” will never be paid back. There isn’t enough money. Period
I'm glad to see you admit that.
All of the bad ideas being bandied about in the EU now originate from the UK and the United States. The Europeans may complain about Anglo-Saxon economies but, it appears, they are preparing to implement Anglo-Saxon monetary "solutions" to their problem.
No they are not. They wouldn’t be insisting on giving up sovereignty to the central government as a solution, nor giving up financial control to the central government.
And we now spend a cool trillion per year for government benefits to mostly working age Americans who have never, or seldom worked, or formerly employed Americans who've become part of the long term unemployed. And there are no jobs for most of those receiving the benefits.
Yeah, it's real cheap having all that manufacturing done elsewhere.
Of course it's a proven growth strategy, at least for nations who have so-called free trade with the USA: Japan, China, Mexico, just to name three of the more successful ones.
Lure the manufacture of US products to your nation, gain maximum possible access to the US market, and allow the minimum possible access to your market. It's worked time and again.
A travel voucher to smother Europe? How about Greece going back to the drachma. Germans will have plenty of dough to spend on resorts in Santorini or even to buy a villa on the Aegean.
A travel voucher to southern Europe? How about Greece going back to the drachma. Germans will have plenty of dough to spend on resorts in Santorini or even to buy a villa on the Aegean.
NAFTA allows for equal access to each member’s market. Canadian leftists, and unionists in particular, opposed NAFTA & still do. To hear them tell it, there’s no way that Canada can compete against the mighty U.S.A.
Free trade is a growth strategy, not a zero-sum game, because it enables each nation to concentrate on what it does best. That's the principle of comparative advantage. America has comparative advantages in innovation, design and high technology (among other things). If other nations undertake the low-skill, low tech, and low-paying work — that frees up Americans to do the things they're best at.
Labour-intensive manufacturing has been declining in the west for decades; to be replaced by more capital intensive, or innovative work. New manufacturing technologies (e.g. 3d printers, robotics, etc.) are bringing manufacturing back to the west, because low-wages aren't enough to compete anymore.
“The major reasons why manufacturing is more expensive in the USA are excessive regulations, union pressure (both private and public sectors) and a welfare system that rots the country from the inside out. Business startups in this country nowadays get crushed under these absurd regulations.”
If you had autarky, rather than free-trade, you'd have no choice but to buy these expensive products — and thus remove any incentive to reform regulations, rein in unions, reform the welfare system, etc.
For instance, the UAW used to cut a deal with one of the “Big Three” manufactures, which the other manufactures would then copy. These were sweet-heart deals, which bought labour peace. The auto companies could afford the deals, because they were protected behind high tariff walls. Only the consumer lost out, having less choices for over-priced vehicles. As tariff walls came down, these union sweet-heart deals became unsustainable. We know the rest.
* Not only the wealth, but the independence and security of a country appear to be materially connected with the prosperity of manufactures. Every nation, with a view to those great objects, ought to endeavor to possess within itself all the essentials of national supply. These comprise the means of subsistence, habitation, clothing, and defense.
I was just reading somewhere that if you'd followed his advice over the last few years you'd be like -30% return on cash or something. Roubini is a stopped clock.
Because there’s low value in consumables. You don’t see the great notion of trading a piece of paper, our dollar, for actual labor and capital turned into a product?
Just like farming the population of manufacturers is dropping while the dollar value of their production is increasing.
They’ve stuffed their “free trade zone” with bureaucrats from Brussels. It’s clogged and in more ways than one.
How is a trade deficit bad? It is a term invented by liberals to bash free trade. There is not and cannot be any “trade deficit” in a free exchange.
The year before NAFTA passed, the US had an almost 1 billion dollar trade surplus with Mexico. Now the US has a 60 billion plus trade deficit with Mexico. That is the only result that could have been realized because with poorer nations these aren't trade agreements, but agreements to transfer production facilities and technology for cheap labor. Mexico had little to sell the US until massive numbers of US plants and jobs were moved there.
It's the same with China, and it wasn't so different with Japan and South Korea when these nations were rebuilding after WWII. Both were initially cheap labor nations, and both followed the proven model for growth by gaining maximum access to US markets and allowing minimum access to their markets. Just as China has also been doing for a few decades now.
The real 'trade' with poor nations is US plants, jobs and technology for cheap labor and lax regulation. Other than some natural resources and unique agricultural products, that's about all poorer nations have to 'trade'.
If there is “low value in consumables”, then how do countries like Germany and China get so rich from them and be able to go so far as to dictate US policy?
Of course, they are. Printing money as sound economic policy is an invention of the British (Keynes) and roundly-approved in the U.S.. That is what the Euros are desperately trying to emulate -- if only they can figure out how to pretend it's legal.
Keynes was for pushing countries into taking loans in exchange for national sovereignty being subsumed to an empire based on the USSR? That is a new one, by me.
Why wouldn't it indicate that the nation receiving actual goods and services in exchange for paper is sitting in the catbird seat?
You know damned well what I meant. Keynes was for printing money. That's the entire debate at the moment. Everyone but Germany wants the ECB to print their way out of this mess. It's an Anglo-Saxon idea that they adopt at their peril.
I really don't understand why you're arguing with me as if I were some EU-phile. I most certainly am not.
OK, so you just don’t really understand what’s going on in the EU. Germany is not unwilling to “save the euro” as it were, but the rest of the continent has to pay the high price as mentioned by the pro-EU leaders (including Merkel)that being the surrender of sovereignty, fiscal and political, to the central government. The term “United States of Europe” is being bandied about, but EUSSR is more accurate, since no member state (except for one) will be able to formulate its own budget anymore, never mind many laws that will become essentially void in the face of the EU constitution being officially supreme. It’s centralization on a scale never seen before . . .
Not only the wealth, but the independence and security of a country appear to be materially connected with the prosperity of manufactures. Every nation, with a view to those great objects, ought to endeavor to possess within itself all the essentials of national supply. These comprise the means of subsistence, habitation, clothing, and defense.That hasnt changed in the 221 years since that report came out.
Alexander Hamilton, Report on Manufactures
There’s a difference between government debt, a trade “deficit”, and debasement of the currency. Two out of three are bad. The other is an invention and represents nothing. A trade “deficit” is a nonsense concept.
Every transaction is paid in full at the time of the transaction. Oil, machinery, toys, etc. that are purchased by Americans are paid for in US Dollars. That completes the transaction. They have the US Dollars and we have the product, item, good or service. There is no deficit or debt. The transaction is complete.
Imagine the “deficit” you have with your grocer. You’ve paid him over and over again in US Dollars and received food. He’s never purchased anything from you. You have a “trade deficit”. Can you see how absurd the concept is?
Wow; I see that Im working with a real rocket scientist here. Where did the money you used to purchase the goods from the grocer come from, eh? Didnt come from thin air if you worked for it (because you created real money by doing so), unless of course you subscribe to liberal economics that very well do produce dollars out of thin air. Let us say that you worked at a plant that produced farm machinery or fertilizer for the farmer that produced food for the grocer to sell, yes? or fuel for such machinery; or steel to build the machinery in question; or at a mine where the ore to produce the steel to build the machinery comes from, ad libitum. How can that be an eternal trade deficit? It is not. In the case of our relationship to China, it iswe produce far, far less than China produces in relation, so our dollars are worth less and less and soon our economic worth to China will peter out. Which is why they have found a new trade partner in Europethemselves a manufacturing powerhouse, and an equal insofar as that.
Imagine the deficit you have with your grocer. Youve paid him over and over again in US Dollars and received food. Hes never purchased anything from you. You have a trade deficit. Can you see how absurd the concept is?
It is an internal trade deficit as measured within a political boundary - city, state, nation - but an external trade deficit between you (your family or nominal economic unit) and the butcher. The fundamental definition of a trade deficit is a lack of reciprocal trade. The formula would be that you sell bread to the butcher and he sells you meat in equal “value” and hence the trade is in “balance”. If you’re familiar with basic economics barter is a move backwards economically.
Imagine a case where you only want $8.35 in beef and you sell a loaf of bread for $1. The butcher can either:
1. Accept 8 loaves ($8) (a loss of 35 cents in value to the butcher & a gain to you);
2. You can give 9 loaves (the reverse loss above and a 65 cent gain to the butcher; or
3. Or you can cut the bread to best approximate 35% of a loaf (there will be imperfection here and loss of value to one side or the other)
Imagine an alternative case in which an even more primitive society where you are trading a live goat for some bananas. You don’t want that many bananas, but the banana seller does want some oysters. So now you have to design a three way trade to balance out the three different wants. Money is important and one of the great inventions of capitalism and civilization.
You’d likely enjoy the Ascent of Money. http://www.pbs.org/wnet/ascentofmoney/ Take a watch it is excellent and will shore up your understanding of the importance of money and credit to human welfare.
As you can see above the idea that money is bad or that a trade deficit is bad are absurd. All the live long day you’re creating trade deficits as you earn “money” and buy goods. The money is just a financial marker that relates to a basket of goods/services (including savings and investments) that are available to you. You are correct to say that fiat money can be corrupted and devalued and this happens all the time and throughout history. That is a political problem and not one with money per se.
You’re also correct that government deficits, over and above that necessary for commerce to flow freely, is a drag on the economic welfare of society. Recall that economics as a root means household management. We tend to see individuals as the fundamental economic unit, but it is really families that are. Large deficits and large debts can crowd out the productive sector of the economy, lead to malinvestments and harm the economies of individuals and families.
But, a trade deficit is not a debt that must ever be paid. The Chinese, to use your example, are giving us actual goods and services in exchange for US Dollars. What can they do with this money? They can only buy things denominated in US Dollars. That is property, goods, services and treasuries of Americans because we’re the largest source of US Dollar denominated goods. China is trapped. We are exporting our inflation to China and they cannot get off the merry-go-round without inflicting real harm on themselves.
The wasteful spending of American politicians and the people who elect them is a separate issue. It must be addressed, but our trade deficit doesn’t affect it in the way you propose.
Yes. I really do understand what's going on over there and I agree with the above statement completely. But not everyone in Germany is ready to save the Euro-zone at any cost. The Bundesbank, in particular, is resisting. They understand that the resultant inflation will cause Germany to lose much of its global competitiveness and stifle their exports.
Now, that is not to say that the Bundesbank wants to destroy the Euro -- not at all. They are quite comfortable with it as it was designed with an ECB largely powerless to print.
I'm commenting primarily on the economics of the ongoing and proposed "bailouts." That is not meant to imply that I think the politics are unimportant. And it remains, to our shame in my opinion, that the bad economic strategies being proposed are of Anglo-Saxon origin and currently entrenched in both the U.K. and the U.S..
This entire series of comments started with a joke [Germans forget they're the Saxon part of Anglo-Saxon.] I'm not too sure why it's escalated.