GDP is falling down...

Eurostat published its latest statistics on Q4 2012 in the Eurozone. Nothing that we did not expect actually: Portugal -1.8%, Cyprus -1.0%, Italy -0.9%, Spain -0.7%. No statistics were published regarding the state of the Greek economy.

These results indicate that during the last three quarters the Eurozone had a contraction in each and every one of them. (I would remind you that the definition of a recession is two consecutive quarters with negative GDP growth. And we are experiencing three...)

What many did not expect though was the following:
Germany: -0.6%
Finland: -0.5%
France: -0.3%
UK: -0.3%

We all thought that the German economy was impervious to such things as recessions right? Well, let me remind you that this was a not-so-unexpected phenomenon. I have explained that the recession would have a very important effect on the German exports (which are about 60-65% to countries within the EU, and specifically within the Eurozone) in this article published in mid-November. Wolfgang Schäuble was said to secretly prepare for this downfall in the last days of 2012 by "cutbacks to prepare for a weakening economy and possible fallout from the euro crisis" (for details read this).

It looks like this time is now here for Germany. I have no other explanation for persistence in plans which do not work than obstinance and illusory beliefs and views of the world. If Schäuble is allowed to do the same with Germany as he proposed (and unfortunately pulled through) with Greece, Spain, Portugal and Cyprus the Germans are in for a much worse fate than they expected. 

And this will only be the beginning...

Fiscal Plans for the EU Members?

Although it just recently came to my attention, Angela Merkel had proposed a "Fiscal Plan" for preventing excessive debt burdens since December 2011. An example of her proposals is that each country should limit its fiscal deficit to about 0.5% of its GDP. In the case of deviations from this rule, fines should be imposed to the nation. In response to this, Luxembourg Prime Minister Jean Asselborn gave an interview to Der Spiegel  stating that the plan was a "waste of time and energy."Agreed. However, what is more important here is not that strict rules are imposed. Is what happens when they are not obeyed.

Budget Surpluses or Deficits of PIIGGS. Source: Wikimedia Commons

As many of you may remember, there was (and still is to my knowledge) an agreement between the EU nations called the Stability and Growth Pact. This was implemented in 1998 and it became famous for stating that no fiscal deficit should be greater than 3% and no government debt should be more than 60%. This pact was a German initiative by the mid 1990's. You can guess who were the ones to first break the pact: Germany and France. Yet what happened? Any fines, any rebukes? Nothing whatsoever. 

Earlier this year, the European Commission threatened to suspend subsidies for Hungary. Shortly thereafter, the nationalist Hungarian prime minister, Viktor Orbán, gave in to Brussels' demands, obviously considering the fact that 97 percent of all public investment in his country are financed to a significant degree by the EU. The same situation could happen to Cyprus, Malta, Greece and other small countries. Nevertheless, such measures cannot be implemented in countries like Germany, France, Spain and maybe Italy. Specifically, Germany did nothing over the last month to promote suggestions by the EU for reforming the tax-splitting provision for married couples and Spain has remained obstinate to change its tax policy. Even small countries like Cyprus, Belgium and Luxemburg have opposed to suspending automatic inflation-linked wage increases and Malta has refused raising the retirement age.

The EU now tries to water down Merkel's pact, which, inter alia states that if the European Council, is of the opinion that a debt-ridden member state "has not taken effective action to correct its excessive deficit," it can impose a fine amounting to 0.2 percent of GDP. I would like to see the day when fines are imposed to countries like Germany and France. Yet somehow, given the current situation, I do not believe that it is possible.

Most of the EU leaders proclaim that we need more Europe and more integration rather than less Europe. I couldn't agree more. In an excellent article in The Expositor, Daniel Cohn-Bendit and Guy Verhofstadt have stated that "With a European State, we would have a European government, a European Parliament (2 chambers), a European passport, maybe even a European army (it would enable to cut Defence spending)." These are the issues that have to be addressed by the EU. It is impossible to have a common policy with just common stability pacts and common fiscal policies. European integration is not implemented through economic integration, although hopefully this may lead the way for a whole new spectrum of policies covering not just the economy but the whole of European activity. We have reached a point where we are either united or divided.

P.S. On the same article Daniel Cohn-Bendit has commented that “European enterprises participated in the corruption in Greece: other countries benefited from the high Greek defence spending, so they said nothing”. This brings a whole new perspective to the situation does it not?

Too much benefits?

After viewing Eurostat's "Government Finance Statistics" publication for 1/2012 in which all data concerning income, expenditure, debt, deficit, and much more were visible, what amazed me was the size of social benefits paid by each country in the EU. Take a look at the following:

What is obvious from the above statistics is that all crisis-ridden nations have seen their social benefits rise over the past 15 years. Greece, Portugal and Cyprus are the top three in increases with 8.4%, 9.5% and 7% respectively. On the other hand, Germany and Finland have reduced the social benefits they pay by 1.5% and 2.6% respectively. It is noteworthy that the nations whose social benefits rose substantially over the last 15 years were the ones which in 1996 had the lowest percentages (Cyprus: 8.3%, Ireland: 12.5%, Portugal: 12.6%, Greece: 13.5%) This phenomenon is rather strange as citizens of most of the aforementioned countries will indicate that they were better off in 1996 than 2012. As politicians and policymakers increases social benefits

Hollande's Fallacy

Yesterday, as I was watching the news, the story of Francois Hollande's budget cuts of around €10 billion and his proposed 75% tax for the "well-off" citizens of France came up. Since I do not know any details on the cuts I will refrain from commenting, however, a 75% tax seems like too much.

Personal tax in France has so far had a maximum of 41% and now people who earn more than €1 million per year will have to give 75% of their income to the state. Although this is a temporary tax, expected to last until 2017 and then removed, I do not think that it is sustainable under economic logic. People who actually earn 1 million euros per year aren't those who sit around all day and do nothing. They are those whose responsibility is great, like operating pension funds or multinational organizations. They hold the wealth and jobs of many individuals in their hands and they have most likely worked exceedingly more than everyone else to get where they are now.

The problem here is incentives: Who would be motivated to work hard

Obsolete Illusions

Today, I read an article which made a huge impression on me. In it the author explores his ideas about France being a narcissistic, nostalgic country with an obsession about its past. For these reasons, the country is more than charming, states the author. Although it acts like a North EU country, its heart and soul are still rooted in the South. Nevertheless, what the author failed to see is the similarities the French have with the rest of the Southerners.

For example, Greece is a nation which firmly believes that it's past more than makes up for what it is now: a near-bankrupt country with more enemies than allies within the EU. However, in a period which spanned about 2000 years the Greeks had formed one of the greatest nations in Europe if not the world: if it wasn't for them we would have never known about Ulysses, Achilles, Alexander the Great, Socrates, Plato, Aristotle, Pericles and many others. The Greeks believe that their history of implementing one of the best forms of democracy that ever existed, or the knowledge their ancestors have brought in the world is more than enough for the rest of the world to be understanding and supportive with their problems. 

The Spanish like to think about an era where they dominated the seas, had the most impressive naval force in the world and almost all new land discoveries were made by them. Wasn't it Columbus, whose Spanish ships were gathered by the financial aid of Queen Isabel who discovered America? Wasn't it Hernán Cortés who conquered the Aztecs and led most of Central America under Spain's reign or wasn't Francisco Pizarro who demolished the Inca kingdom and conquered a large part of South America?

The Italians remember a time where Rome was the world center (after all, "All road lead to Rome") and they were lords of one of the greatest empires that ever existed in the world. Bright scholars from Venice, Florence and elsewhere enlightened with their ideas a period which came to be called as Renaissance and lasted for about 3 centuries. Without them we wouldn't have the masterpieces of Leonardo da Vinci, Michelangelo, Petrarch or Dante. 

The same holds for the Portugal who remembers the glorious and prosperous times of the Portuguese Empire which lasted almost 500 years (until the independence of East Timor in 2002). During that time the Portuguese had colonies in most of Africa, South America, India, Indonesia and many other Southeast Asian nations which still have residues of the Portuguese in their mother tongue. 

Almost all Southern countries have something in their history to brag about. The only possible exception seems to be Cyprus, where they may only brag about their ability to withstand many conquerors throughout their history and still being able to survive as an independent nation. Nevertheless, the future may be brighter for them due to the natural gas deposits which have been discovered lately.

As the reader may realize, it is not just the Southern countries which have these memories of grandeur. Germany, England, Netherlands, Austria, Scandinavians and all others have certain periods of time, be it short or long, within their native history where they more or less ruled Europe. And all of them, both North and South still have the hope and expectation that they will come to rule it again.

"Greed is good" said Gordon Gekko in the 1987 film Wall Street. As long as nations are governed by people, and people always have ambitions for more (be it power, money or anything else) disputes between nations will never cease. The only way to fortify the Union is make nations understand that they are one. The Prussians controlled most of Northern Europe until the late 19th century. Now it long gone and its vast area is now divided to include Poland, Germany, Denmark and many more nations. Now there are no Prussians. Only Polish, Germans and Danes.

The same should happen with the EU. We have to understand that we are now united under a common scheme, the Union, which should protect and embrace all of its members, be it weak or strong. From now on we should convince ourselves that Europe, and not Germany or Greece or France, has one history one future and one path which is common for all nations under the Union. The time for rulers, emperors, dynasties and monarchs in both the North and the South is long gone. Accept it.

The Political Consequences of EU crisis

"Man is characterized as the only animal who can learn from his mistakes and his unwillingness to do so." Thus said Mark Twain in the late 19th century.

Another Twain quote states that history does not repeat itself, but it does rhyme. The fact is that we may observe many similarities between today and every other financial crisis in the European continent. For example, let's remember the period after WWI in Germany, specifically June 1921 until January 1924. For those of you too young to remember, this was the era when the German hyperinflation occurred. The German Mark was fixed to about 60marks per dollar in 1921 and rose to 8000 per dollar by the end of 1922. Over the next year: On 1st November 1923 1 pound of bread cost 3 billion, 1 pound of meat: 36 billion, 1 glass of beer: 4 billion. How did this occur? The insistence of French and British officials that Germany should pay war reparations and the inability of German economists to handle the situation well. (remember what I said about Economists and Real Life?)

Why the history lesson you may ask? Well, in the end of this crisis and while unemployment was still very high in Germany, a young ambitious politician took advantage of the situation, blaming the politicians in power, the Jewish community and the Allies for insisting in paying the reparations, gained large popularity, which resulted in him becoming Vice-Chancellor at first and Chancellor next. His name: Adolf Hitler. I think you all remember what happened next!

During a crisis many nationalistic, far-right movements gain popularity. Examples are plenty: the Golden Dawn in Greece, Viktor Orbán, the Hungarian prime minister, Timo Soini, leader of the True Finns party in Finland and Marine Le Pen in France. (I think I am forgetting someone, though...) Since the beginning of the EU crisis the above have seen the popularity of their political parties rise to unprecedented levels. In times of desperation, anxiety and turbulence, people always look for a scapegoat. It's always the others: the foreigners, the democratic-minded, the immigrants, other nations except their own, because in their minds they, as a country, cannot be wrong.

It would take many years before people begin to realize that a Union is a great idea. In fact, not until all old people are replaced with young minds should this change occur. In Europe we have 27 independent countries. The EU is just a notion now. It isn't something tangible for most people. We may see the meetings, the debates, the arguments, the politicians but we live in a single country, with most news stories coming from that country and many of us are ignorant of what happens at the EU level. What should be done is promote the idea that we are all in a big EU family.

Make people believe that the EU cares about their country. For example, Greece, Spain or Italy should not feel that they are the outcasts of the EU; they must believe that support will be given to them by the European Commission and they should not be afraid of the future as the EU will help all its children. Statements of the "we are not afraid of a Greek exit"-type should be avoided. They do not assist at all. 

I have said this before: We are modeled like the United States of America. We just call ourselves the EU. Think about it: if any state of the USA would be in trouble, would the US politicians remove it from the country? Their were cases like this in recent history if you think the example is far-fetched: New York State and California. They are not out of the US now are they?

Then why should we even consider to exit a country from the EU? To satisfy the whims of some politicians? Exit one country and the end of the Union will follow rapidly. A new age of nationalism will emerge, one which will not be a glorious one...

Welcome Recession

Yesterday, Eurostat published a news release concerning the GDP data of the Eurozone countries, compared to last year's. Not surprisingly, the results were that Greece's output shrunk by 6.2%, Spain's by 1%, Cyprus's by 2.4%, Italy's by 2.5% and Portugal's by 3.3%. Even in the UK, output was reduced by 0.8% compared to 2011. The only surprise was France, which avoided recession (which is measured as two consecutive quarters of negative growth) by reporting a 0.0% change compared to the previous quarter.

Germany's GDP on the other hand, rose by 1.0% a change attributed mainly to an increase in exports and domestic consumption, as investment levels have fallen. In general, GDP dropped by 0.2% both in the EA17 and EU27, while in the previous quarter it had remained stable at 0.0% change. What does this mean? Well essentially, if the next quarter is one of negative growth, the EU will officially be in recession. And I am almost certain that there will be negative growth in the next one.

That is, unless Mario Draghi (or any other EU official) decides to do something about this. By something, I mean effectively use his power as the ECB governor and buy bonds directly, which would boost investment and restore confidence in the region, something that he directly stated that the ECB could do in the future. I hope that Mario Monti's statement that "we have to reach the night before the euro collapses in order for the ECB to do what it has to do" proves to be wrong. I really hope that the officials will come to their senses before it is too late and large-scale measures to save the Eurozone have to be devised. 

Nevertheless, I do think that another quarter of negative growth, moving the EU in the recession zone, will be their wake-up call. We are humans, and like human beings most of us have do not care as much about the future as we do about the present (talking about German policies here; to be accurate it's just Merkel policies as many in Germany oppose her actions). In order to change ideas and mentalities we have to be convinced that things are going bad. Entering a recession will do that kind of convincing.

It seems that "smart" people need to wait until the very last minute to be convinced that their policies have created more chaos rather than reconstructing the Union. That is why an EU-wide recession is needed and, unfortunately, we are going to get one. Just wait until the next quarter.

P.S. The only person acknowledging what the bailed-out countries have done is Olli Rehn in one of the best articles I have read about the Eurozone. One cannot wait until September Olli, in order to see whether the ESM will be able to recapitalize banks directly.