Meanwhile in the Euro Zone - where do we stand ?

While Brussels seems paralyzed by the post-election standstill in Germany during chancellor Merkel attempts to form a stable government, the problems in the euro zone continue (the following section is drawn from various sources, including but not limited to Nachdenkseiten.de, Frankfurter Allgemeine Zeitung, Macroeconomic Policy Institute (IMK Report #86, “Krise überwunden ?”), u.a.:

Greece 

Though the Samaras government is forecasting a primary budget surplus (i.e. without taking into account interest payments), this indicator used by the troika means nothing to investors who want to see sustainable growth and consumer demand before they decide to invest in Greece. Instead, due to the severe austerity measures implemented in Greece, unemployment has shot up to record levels (28%) and consumer demand collapsed, the country’s economy has shrunk nearly 20% since 2009, and the ratio of public debt to GDP increased from 121% in 2009 to 176.2% in 2012 and an estimated 156% in 2013 (Bloomberg; my own estimate of the public debt ratio in 2013 is more in the order of 186%). New financing gaps have opened up in the social insurance funds and elsewhere estimated at a total of €10 bln for 2013. The IMF and international investors view a second debt cut as unavoidable to allow the Greek economy breathing room to recover and attract investment funds. 

And yet, despite the obvious failure of austerity and 5 years of deep recession caused by pro-cyclical austerity policies, further expenditure cuts are planned to comply with the conditionality of Troika 'aid' payments. As a result, the political situation has become increasingly tense: in late September, teachers and other government employees went on strike to protest the planned mass firings of 40.000 public-sector employees, nine universities closed down in protest of the firing of 37% of the staff, and 200 schools are being occupied by their students.

Faced with 28% unemployment, resistance to the Troika’s conditionality comes not only from affected employee groups and the parliamentary opposition but also from the governing coalition, all the more so as the Samaras government is increasingly threatened by neo-fascists on the right and by the socialist Syriza on the left. According to polls taken in mid-September, Syriza would get the largest share of votes (30.5%) in a national election, and the neo-nazi Chrysi Avgi 15% !  Since it became public that a member of Chrysi Avgi is accused of the murder of anti-fascist musician Pavlos Fyssas there have been daily protests against fascist terror and the dismantling of the welfare state.

On top of all this, there is mounting evidence that powerful economic and political interest groups, including some officials from the Samaras government, actively support the violent suppression of worker protests by the police and special anti-terrorist forces. (see “Griechenland: Proteste gegen Sozialabbau und faschistischen Terror"). In response to these events, a military union demands that the Samaras government steps down to allow the formation of a ‘government of national unity’ in support of an immediate confiscation of German assets in the country.  

Portugal

Due to a government crisis in July, the Troika postponed its supervisory mission to mid-September, with mixed results so far:

- While the economy seems to be recovering (Q2 growth +1,1%), public debt has increased to 123.6% in 2013 (from about 65% in 2009, see Bloomberg and IMK report #86, page 23), raising doubts about the country’s debt sustainability. 

- The unemployment rate peaked at 16% in 2012 but is now on a declining path. 
- Trade performance is good, with exports up sharply and imports growing less; the trade balance is positive.

- Popular resistance to Troika-imposed public expenditure cuts is strong and supported by a recent constitutional court decision that confirms the undemocratic nature and unconstitutionality of policy measures imposed by unelected foreign officials. As a result of the court stoppage of public expenditure cuts, the Portuguese government will not be able to fulfill the troika’s deficit targets, risking the non-disbursement of financial aid.

Even if Portugal were able to meet its compliance targets, a second aid program may be needed after the current €78 billion rescue package's expiration in mid-2014, because capital market funding is getting very expensive again: with financing sustainability in question, spreads on Portuguese sovereign credit risks have started to rise to over 500 basis points (=5%), compared with less than 250bp on Spanish and Italian sovereign credit risk. A second aid programm will most likely be be without the participation of the IMF as the institution cannot lend to a country with debt levels judged unsustainable. A precautionary credit line from the ESM seems to be under consideration.

Spain

Even though Spain did not sign up to a conditionality-based EU aid program (Spain received a €30bln credit line from the EU for a capital infusion of its banks but without conditionality), the Rajoy government followed a similar fiscal consolidation strategy as other Southern European countries subject to aid conditionality. The first fiscal adjustment measures were adopted when risk spreads for Spanish sovereign debt suffered from Greek 'contagion' and started to explode. The measures included cuts in public wages and severe cuts in public expenditures, esp. for capital formation and public investments. The results of the self-imposed austerity: negative GDP growth, a higher public debt ratio (84,2% in 2012 compared to around 50% in 2009), record unemployment (26%), and growing popular resistance to public expenditure cuts.

Italy 

The country has huge refinancing needs in 2014 but strongly rejects the German austerity ‘Diktat’. Policymakers in the euro group fear a renewed increase in Italian credit spreads, but so far, thanks to the intelligent monetary policy of Italian ECB-Chief Mario Draghi, euro zone credit spreads remain moderate. Italian 10-year bond yields even fell 5 basis points as the nation auctioned off €6 bln of sovereign bonds due between 2016 and 2028 on October 11, after Draghi said that “a pledge to keep interest rates low explicitly allows for cuts in borrowing costs if market volatility resumes” (see Bloomberg: “Italian bonds advance with Spain’s on US debt ceiling optimism”). Other auctions of Italian debt also went very well, with yields on three-year notes declining 50 basis points and yields on 15-year bonds declining 30 basis points. 

***

While crisis conditions have receded on Europe's financial markets, thanks to ECB president Mario Draghi, much unnecessary, avoidable, and potentially long-lasting damage has been done to the real economies in Europe, especially in Greece. The Troika's rescue funds were used to bail out bank creditors and investors who made bad investment decisions, but the costs of the bail-outs are borne by the average citizens and taxpayers. Public debt levels are higher than before the 'rescue' and unemployment rates are at record levels, producing a lost generation of young people with no perspective to ever find a job and lead a normal life. Many citizens have lost their health insurance and cannot afford to buy medication because their pensions and wages have been severely cut. The severe austerity measures imposed on Southern Europe have caused an economic and humanitarian crisis of epic proportions. Hunger and poverty-related diseases have returned to Europe and neo-nazi parties are gaining popular support.

Nothing is better in Europe, on the contrary. Oxfam's excellent report on the true cost of austerity and inequality in Europe correctly argues that Europe is facing a lost decade with high unemployment, poverty and inequality; the deterioration of human and physical capital; and little to no economic growth. Based on the experience with similar austerity (structural adjustment) policies implemented in Latin America, South-East Asia, and sub-Saharan Africa during the 1980s and 1990s, Oxfam predicts that "an additional 15 to 25 million people across Europe could face the prospect of living in poverty if austerity measures continue."

Nobel laureate Joseph Stiglitz sums up Europe's plight:

"The wave of economic austerity that has swept Europe in the wake of the Great Recession is at risk of doing serious and permanent damage to the continent's long-cherished social model. As economists, including myself, have long predicted, austerity has only crippled Europe's growth....Worse, it is contributing to economic inequality that will make economic weakness longer-lived, and needlessly contributes to the suffering of the jobless and the poor for many years."

 (foreword to Oxfam report "A Cautionary Tale")

If the EU policy makers responsible for this mess had any decency and integrity, they would take their hats and resign. Unless, this is exactly what they and their sponsors wanted to achieve, namely a dismantling of the European welfare state. In this case, they can celebrate a roaring success.