Trouble Ahead As France And Greece Vote For Economic Chaos

Elections overnight (AEST) in France and Greece raise the prospect of the collapse of the Eurozone and a consequent world recession; voters in those countries might be pleased with themselves, but the rest of us should worry. This could get very, very ugly.

I would begin my remarks today with an observation: nobody really likes or enjoys economic austerity; only a masochist believes that slashing government spending to the point it begins to kill off economic activity is the prizewinning formula on a permanent, ongoing basis by which to govern.

But that observation is tempered by a reality: around the world, in liberal democratic systems of governance, electorates that are politically aware but mostly economically ignorant vote time and again for predominantly left-of-centre governments who engage in profligate spending, accompanied by exorbitant taxation and/or foreign debt.

Eventually the consequences of such governments must be addressed and the damage repaired, but in 100% of cases the same electorates will vote for a return to the spending-based model at the earliest opportunity — irrespective of whether such activity is sustainable or not.

And so it has come to pass in two constituent countries of what is increasingly the basket case that is Europe; in France, a new Socialist president — whose economic pledges essentially boil down to a promise to “let it rip” — has been elected in Francoise Hollande; in Greece, elections have resulted (at this stage) in the election of nobody in particular in a popular revolt against financial measures designed to stop that country from defaulting and going bankrupt underneath a mountain of self-inflicted government debt to other nations.

Back in August last year, in an article entitled “Gathering Storm Clouds,” I examined the very real prospect of world recession in the foreseeable future, and with specific reference to Europe, said this:

“One of the greatest acts of economic lunacy in the late 20th century was the Euro: a currency founded on the noble but idiotic belief that it is possible to federate a couple of dozen disparate countries into an economic and political union and — among other things — give them the same single currency to spend….many of these countries, whose currencies were rapidly appreciated to qualify for entry into the ERM and then the Euro, were left with nowhere else to go except the path of high sovereign debt to compensate for the fact there was less money in real terms to run their economies as a consequence.”

Clearly, those words are more applicable now than they were then, given Greek voters appear determined to throw off the shackles of forced financial restraint, and given the new President of France has essentially promised to spend up with reckless abandon.

In an early (and typically knee jerk) response, share markets across the world — including here in Australia — have recorded sharp losses today, as markets are swept with panic by the prospect of the collapse of Greece and, conceivably, of the Eurozone with it.

It is true that such movements on share markets are sudden, reactive, and often quickly reversed; but on this occasion, some consideration of the wider ramifications of the French and Greek votes should be given.

The immediate problem is Greece, a country known for decades as a byword for slovenly governance, mismanagement, corruption and official incompetence; indeed, at the time the first bailout packages were being devised for Greece last year, this critique extended as far as talk of the “lazy” Greek workforce, its abominable culture, and virtually non-existent work ethic.

It is one of those countries that should never have been part of the Euro project; not because there is anything wrong with Greek people of course, but because its economy was one that was so comparably weak, and its drachmas worth so little in comparison to other European countries, that Greece was hit extremely hard by qualification to join the Euro — and the consequences of that are now being seen all too clearly.

For Greece to collapse — as seems distinctly possible — becomes very tricky on a wider basis, as monies from across Europe (and including from the UK, which isn’t a part of the Eurozone at all) have been poured into Greece in the billions to attempt to stabilise that country.

Remembering that other countries such as Portugal, Italy and Spain also find themselves in debt problems of their own, economic collapse in Greece — not least as a direct consequence of an election result — will rightly make the likes of Germany, France and the UK think twice before throwing good money after bad in additional potentially ill-fated rescue attempts.

And should that occur, the Eurozone as a whole will likely collapse; the tiny handful of economically secure countries in Europe will leave the remainder to fend for themselves under their restored former currencies, but with the final result that Europe as a whole will sink into deep and sustained recession.

Interesting to watch in the context of all of this is the UK. Whilst not part of the Eurozone, it nonetheless counts itself (misguidedly, in my view, where the Euro or the EU generally are concerned) as a financial partner of Europe.

The UK is itself lumbering under £1,400 billion of debt — the legacy of 13 years of borrow, tax and spend Labour governance under Tony Blair and Gordon Brown; whilst the harsh austerity measures put in place by the present Conservative government will eventually fix the British economy, the pain is such that every opinion poll in Britain indicates that the British public would, at a hypothetical election held this week, opt for a return to Labour in a landslide and to its discredited and destructive economic management regime.

The UK is already teetering on the brink of falling back into recession as a result of the current government’s austerity measures; monetary collapse and economic malaise on the continent would suck Britain right into the vortex with it.

Yet this must now be viewed as more likely than not. The new French president is set to repeal those austerity measures in France set in place by his unpopular but competent predecessor, Nicolas Sarkozy; indeed, Hollande promises “growth and prosperity” — both of which can only be delivered in the immediate term by sloshing borrowed money anew through his country’s economy.

Further, he has pledged to renegotiate European deals to bail Greece out from its woes, and to withdraw from agreements (especially with Germany) on binding austerity measures across the Eurozone.

Greece, for its part, has effectively delivered the rest of Europe a one-fingered salute at the ballot boxes over the weekend.

So where will this lead, and what are the consequences here in Australia?

Any collapse in Europe and resultant recession will automatically take the UK, the USA and many other countries with it; the prospect of economic depression across the world emanating from malaise in Europe is one that must be taken seriously.

The so-called GFC may have had its roots in the US, and the contagion from that is an obvious factor — but not the underlying cause — of Europe’s woes; but having precariously navigated that event, developed economies are far more fragile, and far more susceptible to another severe financial event afflicting the global system.

Here in Australia, it is highly likely that we, too, would succumb.

Elements within the Australian public — and, it must be said, among its circles of governance — labour under a pretence that our trading relationships with Asia, and with China especially, will shield us from any sustained world economic slump.

This is a myth, and one which conveniently ignores the fact that whilst China is an important trading partner, so too are the US, Europe, and other markets that would be hit hard by adverse events in Europe.

Australia’s present debt ratios may be low by current world standards, but they are rocketing: by $A100 million per day over the past four years.

It bears remembering that even with the mining sector running on high, the overall Australian economy is patchy, sluggish, and hardly growing at speed.

Yet despite my complete aversion to unnecessary deficit financing and budget deficits born from the sort of mismanagement the ALP in Australia typically engage in and has done in its present manifestation in government, plans by Treasurer Wayne Swan to rip $40 billion out of the economy in one fell swoop in tomorrow’s budget — to meet an arbitrary promise of a budget surplus in time for an election year — are dubious at best, and downright dangerous at worst.

Clearly, there is much at stake, and much for ordinary folk — not just in Australia, but in western democracies around the world — to worry about, and quite literally.

France and Greece have elected new regimes with the promise of inflicting great damage on themselves, and on hundreds of millions of people across the globe who did not have a vote at yesterday’s elections.

It is to be hoped that politicians in those countries are adept at breaking promises; for if they don’t, the consequences will be far-reaching, and nothing short of disastrous.

Euro-Zonk: Why David Cameron And The UK Must Stand Firm

There’s a lot of chatter presently that Europe is headed into a “double-dip” recession that will take Britain with it. The Conservative-led government of David Cameron must stand firm; the alternative is a disaster of — well, frankly, of European proportions.

It’s been a little while since we’ve had a video clip here at The Red And The Blue to lead into an article; we have one tonight, however.

Watch this, especially from 1:30 in (it’s pivotal to the basis of my argument, the pivot of which will become clearer as we go), and then let’s talk about it.

http://www.youtube.com/watch?v=7TOgB3Smvro

If you’re British (as many people close to me are) — or if you’re a devotee of British politics (as I am) — then two worlds are about to collide; indeed, this “collision” has been brewing for decades.

And there’s no romanticism, in either the classic or contemporary sense, about it.

We all know Europe is in a complete mess right now; Greece and Italy and Ireland are all on the brink of collapse, and there are whiffs of decay about a number of the other so-called “Eurozone” countries as well — and not least that France and Germany might be starting to stagger, too.

If France and Germany are beginning to stagger, it isn’t much of a surprise; after all, those with money can only bail out those with none for so long.

But all of them — all of them — are up to their eyeballs in sovereign debt.

The Germans and the French because they’ve funded the bailout programs; and the rest of “Europe” because they were stupid enough to join the single currency project in the first place, which was cooked up by…yes, the Germans and the French.

I have opined previously that the Euro was the single greatest act of economic lunacy of the 20th century, and it was; after the rapid appreciation of member-state currencies to qualify for Euro membership, and the subsequent ceding of various fiscal policy levers to a central bureaucracy in Brussels, borrowing money has been the only way poorer European countries have been able to keep their economies afloat.

Now, that equation has reached critical mass.

The “borrowers” have bankrupted their countries; and the countries publicly listed in the “borrower and broke” column is set to be augmented in coming months with at least two and perhaps as many as six others who are faced with sovereign default.

And the “creditors” — namely, France and Germany — are staggering under the weight of a series of monetary bailouts to their “European partners” which, inevitably, has seen both countries borrow heavily abroad to fund their lavish commitments to their “European partners.”

Even so, the rights and wrongs of the goings-on in financial circles in Europe are of limited concern to me; yes, I would like to see all countries involved sort the quagmire out, and no, I don’t actually want to see Europe — collectively or on a country-by-country basis — slip back into recession.

But my primary concern, I have to say, is for Britain.

If anyone failed to click at the beginning of the article, now’s the time to watch this: especially from the 1:30 mark…

http://www.youtube.com/watch?v=7TOgB3Smvro

When the Labour Party finally got its fangs into the UK — after 18 deserved years in the political wilderness — Britain was booming, thanks to the economic legacies of Margaret Thatcher’s policies, executed by Chancellors of the Exchequer Sir Geoffrey Howe and Nigel Lawson, and later, through the revolutionary economic stewardship of John Major’s last Chancellor, Ken Clarke.

The bit in the middle was Britain joining the ERM in 1992 under Chancellor Norman Lamont, then leaving in late 1992 as the alleged exchange-rate mechanism failed to protect Sterling from the effects of a falling US dollar.

This led to the Bank of England raising interest rates by five percentage points in one day, and in turn led to the UK’s involuntary departure from the ERM; Lamont’s second and last budget in 1993 featured massive hikes in taxation to fix the damage and to right the government’s finances.

Lamont was sacked seven weeks after delivering the 1993 budget; his successor, Ken Clarke, presided over the healthiest manifestation of the British economy in decades.

But there had been a warning: Europe, and in particular anything to do with monetary collaboration, was a disaster looking for a place to strike, which is likely the reason both Margaret Thatcher and her first Chancellor, the unabashedly Europhile Howe, steered so far clear if it.

In the early years of Tony Blair’s government, which was elected in a landslide in 1997, Britain continued to boom.

It is noteworthy that Blair was not elected on the back of any perception of Tory party incompetence on the economy.

Rather, he won as a result of the “It’s Time” factor, a general perception that Britons were comfortable, an anti-sleaze campaign by the Major government that blew up in its face when the peccadilloes of some of its less professional ministers came to light, and the ubiquitous sloganeering and rhetoric typical of Labour parties the world over.

For the first few years, it worked; but even then, public sector borrowing in Britain was rocketing; so-called “New Labour” was delivering spending on social programs it claimed delivered a social dividend whilst maintaining economic rigour.

Blair’s Chancellor, and eventual successor, Gordon Brown, threw buckets — no, shitloads — of money at anything that moved and that was deemed to be in need of spending.

And it was all borrowed money.

Together, Blair, Brown and the Labour cabinet actively flirted with dumping Sterling and joining the Euro; public outcry, and noisy opposition from the Conservative Party, tempered these activities, but they still went so far as to set up “Euro trading zones” in selected parts of Britain.

Cutting a long story short, having taken government in 1997 with a robust bull economy and negligible public debt, the Blair/Brown government was thrown from office in 2010 having amassed £1,300 billion in government borrowings — a complete indictment on any elected government anywhere in the world.

And what of that hubris-laden, headily rhetorical speech from Neil Kinnock? Britain dodged a bullet in 1992; and although it eventually took one five years later, Kinnock would have been worse than Blair.

Obsessed with socialism and the European project as Labour was in 1992, and beholden to such pledges as a 50p in the pound tax rate on anyone earning more than £50,000 per year, what eventually happened under Blair and Brown would have been far worse under Kinnock.

But Kinnock showed, if nothing else, what was to come; alas, very few people recognised the truth behind his words in the longer run.

The smug, glib, prematurely triumphant little display Kinnock put on a week out from the 1992 election masked something far more sinister, and far more menacing.

Today, the Conservative Party is again at the helm of government in Britain, hobbled as it is by the useless presence of the Liberal Democrats, who choose to abstain from  or to oppose anything painful that might actually help fix Britain, but who are always present for anything that might advance the political cause of their own contemptible specimen of a political organisation.

It is in this context that I make my point.

Prime Minister David Cameron’s Chancellor of the Exchequer, George Osborne, has implemented budget cuts of £81 billion over five years (AUD $125 billion) as part of an overall program to haul in the deficit in the British budget and to begin to repay the UK’s historically colossal owings to its international partners.

This public sector debt — incurred in peacetime — is unprecedented.

On one level, these cuts (and the attendant tax rises accompanying them, such as increasing VAT from 17.5% to 20%) are measures simply aimed at slowly undoing the unquestionable damage that 13 years of Labour mismanagement inflicted on those splendid islands.

On another level, however, it is also unquestionable that world economic circumstances are grim to say the least, and especially so where Europe and, by extension, the UK is concerned.

It’s come to pass in the last few weeks that Europe wants Britain to pay €31 billion (AUD $40 billion, or £26 billion) to bail out the Euro.

I’d say that it’s perfectly reasonable for Britain to take the view that having avoided the Euro and the ERM almost entirely, it should not be at all obliged to pay a penny to prop up and prolong what was always a colossal mistake.

More to the point, as things stand with the EU generally (and despite the deal Margaret Thatcher famously struck in 1980, generating much odium toward the UK for its daring to fight Brussels), Britain still pays the single largest annual contribution towards Europe of the lot of them.

And most of all, there isn’t much point in Cameron, Osborne and the Conservative Party stripping £15-£20 billion per year of profligate waste out of the UK economy, just to piss those savings back up against a post in bailing out countries too stupid to realise the Euro is and was a bad deal, and too stupid to know when to call the whole thing off.

My sense is the British public will reluctantly put up with Cameron and Osborne cutting out expenditures that ought never have been incurred, but that there would be a near-bloody insurrection at the prospect of the monies saved being sent across the Channel to fill the coffers of those too inept to see what Britain (with the exception of its last, loathsome Labour government) saw — that the Euro is just a ruse, and that France and Germany might have money, but they can’t rule the world with it.

Drachmas, Francs, Deutsche Marks, Lira…much more sensible; and with the wisdom of hindsight, better soil to grow a community from, as opposed to simply insisting everyone be the same.

Will Britain sink back into recession? I don’t know.

I don’t think so, but at the minimum, I certainly hope not.

But whether it does or not, Cameron and Osborne are fixing the British economy in the same way Thatcher and Howe were forced to do 30 years ago, having taken office in 1979 from another Labour government that had all but bankrupted Britain.

The Euro is a red herring that has been a distraction in Britain for too long.

The Liberal Democrats are likely to pay, literally, with their electoral life for trying to frustrate Cameron’s attempts to fix Britain.

And following Cameron’s recent veto of a treaty to bind European nations closer economically, the Tory Party’s vote in all reputable opinion polls has been rising in the past fortnight: not yet far enough to win an election outright, without the accursed Lib-Dems, but it’s getting close.

Call on a fresh election, and voters will zero in on Labour: it might be the place to park protest votes in the polls, but with its ineffectual leader, ineffective front bench, confused messages and shrinking membership, I’d wager a Conservative landslide if such an election were to be pulled on any time soon.

Cameron and his Conservatives must stay the course on economic reform. Double-dip or no, the benefits will materialise in the mid-term. Yes, the Tory Party will rightly reap an electoral dividend for them. But they were elected to fix Britain, and thus ought not be distracted by the pox of the Liberal Democrats and Labour to their left, or by the odious entity that is Europe and the Euro on its flank.