Friday, June 22, 2012

Conservative Senator Doug Finley is Full of It

Conservative Senator Doug Finley "It was a big-government approach that spent European welfare states into massive debt in the first place,"

Doug Finley has blue eyes, but they appear brown because he is so full of shit.

The notion that the European "debt crisis", which began as a banking and currency crisis and is now becoming all three, is proof that the welfare state is unaffordable is absurd.

Sweden, Denmark, Finland and Norway: The right never seems to want to address just how well Sweden, Finland, Norway and Denmark are doing when it comes to debt. In terms of per capita spending and or in terms of government spending per GDP all 4 can be considered welfare states on steroids. Yet, Denmark has a net debt as a percentage of GDP of 1, Sweden -15 (Yes its assets are greater than its liabilities), Finland -57, and Norway -156. Canada has net debt to GDP ratio of 32.

Greece: Greece has never had an extensive welfare state. Government spending as percentage of GDP was slightly higher than Canada's was in 2006 and their 2006 rate is lower than what ours is now. Furthermore, as Greece is and always has been an economic minnow, in terms of per capita government spending Greece does not even register. Claims that Greeks are southern European Swedes is as false as Kevin O'leary Don Cherry quality rants about Greece being a bunch of lazy lay abouts that are being bailed out by hard working Germans. Prior to crisis your average Greek worker worked nearly 700 hours more per year than the average German worker. They also worked far more hours than Canadian workers.

Ireland: If Doug Finely had an ounce of intellectual honesty he would have tried to explain away the Irish situation. After all, prior to the down turn Ireland was a darling of the right. It had low corporate tax rates and was rated high on the Heritage foundation's "economic freedom" index. However, Ireland had a huge real estate bubble and when it burst, the Irish government transferred mountains of private bank debt onto public accounts. As a result, Ireland's gross debt GDP ratio went from 25% in 2007 to 108% last year. It should be noted that earlier on in the crisis, the right also lauded Ireland for its austerity program, but has since moved on various Baltic states due to no sign of a recovery in Ireland.

Spain: The Spanish were running surpluses prior to the down turn. Indeed, Zapatero's government ran a surplus in his first 3 years in office and in 2007 a surplus of 23.2 billion Euro was the biggest in the Euro zone. Spain's debt to GDP ratio was not a problem either. Spain's gross debt to GDP ratio was almost half of what it was in Canada in 2007. Spending did increase under Zapatero, but at a rate no more than under the previous regime. Government spending as percentage of GDP remained unchanged between 1999 and 2008. As for government spending as percentage of GDP, it was far less than any other major European nation and, I might add, less than it was in Canada.

Spain's deficit problem was not the cause of the crisis there. It was consequence of it. Like Ireland, Spain had a massive real estate bubble and in 2008 it also burst. This created the perfect storm. Hundreds of thousands quickly lost their jobs and began collecting unemployment insurance (800,000 Spanish lost their jobs in first three months of 2009), government revenues collapsed and most important of all Spain's banks began to fail. Mountains of private debt was transferred onto the public balance sheet and this trend shows no signs of abating. Spain's recent decision to ask the Troika for an additional 125 billion euros was not so it could shore up public accounts but rather so it could put yet more public money into shoring up its banks. To add insult to injury much of Spain's growth in the boom years was fueled by huge influx of foreign capital from the center of Europe. Spain, like all of the so called PIIGS, ran a massive capital accounts deficit. When things began to go south and Spanish credit markets began to seize, that capital was repatriated.

Of course, what separates Spain and Ireland and other Euro Zone countries crippled by collapse of the real estate market from the US and UK is that the latter still have monetary sovereignty and the former do not. Spain and Ireland can not reduce interest rates, devalue their currency and revert to quantitative easing. They surrendered their monetary sovereignty to the ECB and the ECB has done a terrible job managing the crisis. The ECB was slow to lower interest rates and they have only allowed one round of quantitative easing. In addition, the ECB's unwillingness to let inflation in the Euro Zone and Germany in particular to rise above 2%, mean that the only option open to Spain and the other PIIGS in lieu of a currency devaluation is to try to deflate their way to competitiveness. Not only is such a strategy unlikely to work for a whole host of reasons, deflation makes the debt crisis worse much worse. Spain's lack of options coupled with ECB's abysmal record, have investors fearing that Spain will eventually throw up its hands and do what Greeks are bound to do, viz., leave the Euro. As a resurrected Peseta is likely to quickly plummet in value, a decision to leave the Euro Zone would surely mean a sovereign default. What all this means is that while both the US and UK have deficit to GDP numbers that are as equally high or higher than in Spain and both have debt to GDP ratios that are far higher, both the US and UK can borrow at record low rates and well below the rate of inflation and Spain is forced to borrow at just below 7%.

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