While the eurozone's central bankers fight about the technicalities of ECB emergency measures to save the euro, people in the Southern periphery continue to suffer and the economic downturn is reaching Europe's core: the latest PMI data show that manufacturing slumped in France and Germany and that the slump worsened in Italy, Spain and Greece. Markit's eurozone PMI for the manufacturing sector fell to 44.0, below the 50.0 level that divides growth from contraction and the lowest reading since June 2009. The eurozone's output index fell to 43.4, the lowest since May 2009, with Spain showing the 15th month of contraction, Italy the 12th, and Greece over 30 months of declining output ! (Reuters Business News, Aug. 1, 2012)
More evidence for Larry Summer's argument that "the idea of expansionary austerity is oxymoronic"... "you can drop the prefix" Already in September 2011 Summers admonished European policy makers for their incrementalism and their "oxymoronic doctrine of expansionary fiscal contraction" which claims that fiscal contraction is necessary to raise investor confidence and will lead to new investments and economic expansion (the famous story of the confidence fairy).
There is absolutely nothing expansionary about austerity as we can all witness in Europe: in Spain, where the new conservative government (elected in December 2011) followed the expansionary austerity doctrine to the letter, the economy slipped even deeper into recession, unemployment, bond yields and CDS-spreads sky-rocketed, and private capital took flight to the tune of €100 bln (so much for the confidence fairy). Shortly thereafter, European taxpayers had to rescue Spanish banks by injectiong roughly €100 bln into the system to prevent a collapse.
Bravo ! Quite successful, this expansionary austerity strategy modeled on the finances of Schwabian housewives !
Similar developments can be observed in other Southern European countries undergoing expansionary austerity programs: Italy saw €160 bln in flight capital exiting the country (probably to Germany) and Greece's private capital has been fleeing for months as the country moves closer to an economic collapse with each new expansionary austerity program imposed by the Troika. It's obvious to anybody but the Very Serious People in power that investors are not concerned with too little austerity but too much of it ! Seems logical, as most rational investors would want to invest in an economy where demand is growing, not shrinking !
Hellooooo! Anybody home among the economic policy makers in Berlin ? Nope - all on vacation.
Hopefully, when they return from their undeserved leave, they will understand that there is no confidence fairy and that sometimes, there is a role for government to step in and provide the start-up funds for investments in Europe that will generate attractive returns and growth for both the public and the private sector. I can already hear the dogmatists now: 'this is just the old Keynesian recipe and will only lead to higher debt.' Well, yes and no. Yes, it is a Keynesian recipe because Europe finds itself in a typical liquidity trap situation so aptly analyzed by Keynes and hence, the solution might just be the one proposed by Keynes.
And no, it does not have to lead to higher public debt levels. Not if you finally make those pay who caused the crisis and who profited from it, by implementing a financial transactions tax, a wealth tax, a higher property tax, whatever it takes. Just do it and save Europe !
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