The idea that the crisis is caused by excessive public spending
is false and misleading, for it conceals the malignancies
of Europe’s banks and the flaws of the Euro architecture.
Image Source: Banksy
Yesterday, it was reported in the EuropeanVoice.com that Dutch Prime Minister, Mark Rutte, called for a budgetary discipline commissioner. This proposal is not the only one heard on the matter as many politicians in surplus countries are making suggestions along the same lines. Such ideas are founded upon the theory which advocates that the cause of the current crisis in Europe is excessive public spending. This is utterly false and misleading. It conceals the malignancies of the European banking system and the structural flaws of the euro, denies that the EFSF policies are catastrophic and fuels the populist and racist rhetoric of the “lazy PIIGS”.
Greece can be fully blamed for being the first domino to fall, due to all the malignancies of its economy/society/state. Yet it is preposterous to blame Greece (and others like Greece) for the domino effect. Let us not forget that the crisis was caused by the over-leverage of Europe’s banks who “invested” like there was no tomorrow on the toxic financial derivatives and let us remind ourselves that the crisis is deeply rooted in the structural flaws of the euro and that it is three crises in one that we are facing: (a) debt crisis, (b) quasi-bankrupt banking sector crisis, (c) under-investment crisis. Above all, let us not forget that the euro architecture lacks a surplus recycling mechanism that would recycle the accumulated surpluses with profit across the Euro area to achieve balanced growth and convergence and thus put an end to the need to borrow in order to be competitive.
It is easy to put the blame on the frailty of – and the defects in – the Greek character (or in the character of the “PIIGS”) – it brings votes after all – yet someone should have the honesty to accept that the primary reason these countries needed to borrow was to cover the increasing divergence in competitiveness caused exactly by the structural flaws of the euro. Does any honest person really believe that with “budget discipline” alone, Europe’s periphery will suddenly converge with Europe’s core? The euro, as it is currently structured, leads to a spiral of divergence and the need to borrow is deeply embedded in its lack of this surplus recycling mechanism. For as long as such a mechanism is not put in place, no budget discipline, no matter how effectively it is implemented, will ever bring the constituent economies of the euro closer.
The rhetoric of certain European politicians could be reversed and applied to a national level to see if it would make any sense. It is as if asking for East Germany to be as productive as the West or for certain Landers to be as productive as Bavaria, only by means of budget discipline. Like asking for Newcastle to be as robust as London and so on. The euro area needs to act like all states do, where they take the surpluses and productively redistribute them so that balanced growth is achieved and the state does not fall apart.
The austerity obsession that plagues Europe, which is found upon the completely false idea that the crisis is caused by excessive public spending, is self-defeating since it fails to see the real problems. Without any means of producing growth and of achieving a balance among the constituent economies of the euro, all that austerity and “budget discipline” will achieve is to cement the exponentially increasing divergence among the economies of the euro. This is simply not viable and for as long as Europe’s leaders cling to their much-vaunted policies, things will only get worse for the euro as a whole and for certain countries individually.