Streetwise Professor

May 7, 2012

Between the Scylla of the Markets and the Charybdis of the Streets

Filed under: Economics,Financial Crisis II,Politics — The Professor @ 12:01 pm

Election-related news in Europe and Russia is dominating the headlines, and I’ll devote a post to each.

First, with respect to Europe, the Socialist Hollande won the presidency, and the ruling coalition in Greece did not win enough seats to continue the current arrangement.

There was much rejoicing in Paris.  That will not last long, when reality rears its ugly head.  The hangover from that celebration will be horrific indeed.

For Hollande faces a very ugly choice. If he governs as he campaigns with increases in taxes that Obama can only dream about and more generous benefits for civil servants, he will face a bond crisis before too long.   If he concedes to the fiscal realities facing his country, and Europe generally, he will face a political backlash for his betrayal.  France has a long tradition of politically disruptive civil unrest, mainly emanating from segments of the population that are the base of Hollande’s support.  If he crosses them by capitulating to “the markets” and “finance” and even (per NPR “Wall Street”-what, no financiers in Europe?), these erstwhile supporters will be in the streets.

Hollande and others in Europe talk about replacing austerity with growth, growth, growth.  How, exactly?  What is the magic growth formula?  If it is so obvious, why hasn’t anybody found it before? Has Hollande captured a unicorn whose horn will create a spurt of growth that will catapult France (and Europe) out of its current recession and fraught fiscal situation?  If debt and more government spending are the secrets to growth, why aren’t France and Europe booming already, given they’re neck deep in both?

“Growth” is a code word, a euphemism, a lie, for debt funded “stimulus”.  It describes a glittering goal in order to convince people to agree to dubious means.  But even if you believed that stimulus could produce growth, how is this at all possible if the markets are almost certain not to fund this additional spending?

Yes, everybody wants growth.  No disagreement there.  How to get it is the problem.

In countries like France, increasing growth has to come from the supply side-cutting onerous restrictions, particularly in the labor market, combined with a credible plan to ensure that future spending growth is fiscally feasible.  If these things can be done, it is possible-just-to get decent growth while avoiding short term austerity.  Germany implemented labor market reforms in the 2000s, and has reaped the benefits. This is what Italy is trying now, with uncertain prospects for success.

But these things are highly unlikely to happen in France, or in Europe more broadly.

Unions and even some corporate interests will defend the existing labor market institutions and other regulatory restrictions to the last ditch.  Indeed, Hollande’s base will not meekly accede to such changes. Maybe, just maybe, he could play Nixon in China, but that seems wildly implausible.

And credibility about future fiscal prudence is almost impossible to achieve.  The promises can be made today, but when time comes to deliver those in charge of implementation face acute risk of being thrown out of office.  Indeed, the Greek elections illustrate this dynamic graphically, and in record time.  The parties that agreed to the bailout terms suffered badly in the election, and now those already dubiously sufficient terms are at risk of being repudiated, mere weeks after they were agreed to.

All of these realities will be impossible to ignore in very short order.  I do not see how Hollande, or the Greeks, or the Euros collectively, can navigate between the Scylla of the bond markets and the Charybdis of mass protest in the streets.  Indeed, by raising expectations that have induced near euphoria in some quarters in France, Hollande has made the already narrow space between these mortal hazards narrower still.

So where does it go from here? Back to the old standbys.  Importuning the European Central Bank to loosen, and begging, pestering, cajoling, and guilting Germany into putting its taxpayers to work for everyone else in Europe.

Neither alternative is at all palatable to Germany.  Merkel will be caught between her own government-wrecking monsters: the frantic demands of the rest of Europe and the steadfast refusal of Germans to sacrifice their own high incomes and generous benefits for ungrateful (and often hateful and slanderous) citizens of Euroland.

Meaning that it is difficult to see how the standbys will work either.  They depend on German surrender, and it is hard to see that happening either.

To me, it seems almost certain that the core of the European game is empty.  The demands of the various constituencies and nations in Europe cannot be satisfied given the political and economic constraints.

Wen cores are empty, things fall apart. And when something as big as the EU falls apart, the consequences are historic and devastating.

Print Friendly, PDF & Email


  1. I don’t know whether I should be sad or amused by this. One of the first things I heard him promise is that he’ll reverse the decision to raise the retirement age from 60 to 62. How does that create growth? Second, he plans on raising taxes. Uh, how does THAT create growth?

    I still don’t understand why people don’t understand what growth really means; wealth creation. To create wealth, you must grow the overall economic pie bigger. Raising taxes doesn’t do that. It only takes money that’s already in the current pie. Growing jobs in the public sector doesn’t do that either. It only takes money from the current pie and gives it to somebody else, i.e. salaries paid to government workers do not create wealth. Yes, it can increase consumption, but growing consumption does not necessarily create wealth. In France’s case, government workers spending money only pays back what was already taken from a corporation. Lastly, need I even say it, certainly LOWERING the retirement age doesn’t create wealth at all, but actually shrinks the current pie.

    Only in Socialist/Progressive thinking does Germany come out looking like the bad guy.

    Comment by Howard Roark — May 7, 2012 @ 2:14 pm

  2. Indeed! Cutting taxes and regulation causes growth! Our assiduous servant George W. Bush cut taxes and regulation in 2001, and the number of US private sector jobs grew past its January 2001 level by June 2005!

    Comment by a — May 7, 2012 @ 3:20 pm

  3. Judging by your sarcasm, can you please explain to me how raising taxes and increasing regulations causes growth, i.e. wealth creation? It would be a fascinating read.

    Comment by Howard Roark — May 7, 2012 @ 3:26 pm

  4. We are pointing to the success of timeless Republican policies. No matter what the circumstances are the proper policy is to cut taxes and reduce regulation. And if you do you might see private sector job recovery from a brief, mild recession in four and a half years!

    Comment by a — May 8, 2012 @ 2:15 am

  5. I think a lot of the problems people experience in understanding where Hollande is coming from arises from the different way in which he, and folks on the left generally, use certain words. We think we all understand them the same way but in fact we don’t.

    One example is “wealth”. To the left, if you bought your house for $200,000 10 years ago and now it’s worth $350,000, that’s “wealth”. To me, that’s not wealth. It’s inflation, and the “benefit” is in fact a cost.

    Another example is “prosperous”. To me, you’re prosperous if you earn a lot. To others, you’re prosperous if you spend a lot. To the left, you’re prosperous if you have any savings.

    A further example is “affordable”. To me, something’s affordable if I can afford to buy it. To the left, something’s affordable if its price can be borrowed and the debt left for someone else to repay.

    I suspect something similar is going on here with Hollande’s use of the word “growth”. To me, growth means an organic self-generating increase in the size of the pie. I very much doubt that Hollande means this; or to be more precise I doubt that he’d insist on a single definition. Growth to him probably means a growth in the size of the state, a growth in the incomes of his client voters at the expense of the kulaks, or something like that.

    I doubt it’s possible to have a sensible conversation with Holland without first clearing up what the meaning of “is” is, so to speak. Even then it’s probably hard, since we do seem to have reached the long-predicted moment when the majority realises it’s possible to votes itself all of everyone else’s money.

    Comment by Green as Grass — May 8, 2012 @ 2:43 am

  6. I think the underlying idea of Hollande’s policies is to do growth via a mix of looser monetary policy and federal redistribution, both of which have only been used to a limited extent so far due to institutional limitations.

    It’s also not obvious that some of it couldn’t be funded by markets if one so wished: there’s a world shortage of central bank backed paper available to the private sector, the supply in the eurozone is zero (german bunds being an inadequate approximation), and the competing issuers (us, uk, japan) are unwisely turning eager customers away.

    The domestic proposals may not be fully enacted, but are not fiscally that wild anyway: taxing excess savings a bit more and giving the modest proceeds to teachers is not earth shattering.

    Comment by cig — May 8, 2012 @ 3:44 am

  7. The underlying idea of Hollande’s policies is austerity denial, surely.

    Comment by Green as Grass — May 8, 2012 @ 6:28 am

  8. I’m not convinced raising the minimum wage is going to help the unemployed youth who elected him, either.

    Comment by Tim Newman — May 8, 2012 @ 9:11 am

  9. And putting price controls on gasoline. That’s sure to do wonders.

    The ProfessorComment by The Professor — May 8, 2012 @ 10:04 am

  10. In my view you are making a number of mistakes when evaluating Russia/Putin etc “performance”, the same mistakes my “really progressive” friends are making. It’s funny that each time I want to comment in your blog is when I’m abroad and have only iPhone with me, so I’ll be short.

    Basically you overestimate the “environment” which leads to significant underestimation of Putin/Russia achievements.

    1. Very low level of trust between individuals, companies and state.

    2. Very low level of discussion. By Russian standards Naked Capitalism will be extremely unbiased, professional and thoughtful resource. In Russia it’s more about trolling, throwing shit on opponents with very shallow discussion about substance.

    3. Inefficiency on all levels, employee, business, government. White Sun of The Desert had a number of posts. Employee cheating is “ok”. I remember article in Vefomosti (#1 business newspaper) re: corporate theft. In most cases thieves even kept their position. Last months I’ve spent an HOUR renewing car insurance at commercial company. No queues, 1 man hour for clerk! How can you expect an efficient government here unless they are recruiting from another country?

    4. Over trusting opposition sources. To me it’s just the other side of bias spectrum. Prime tv channel biased/lies pro-Putin, opposition lies anti-. Few discussions/analysis in the middle.

    5. Corruption is not that widespread. I know people believe you can’t drive without bribing. My wife does, however she’s not driving 100km/h in a city and she’s not parking on sidewalks. Guys in a town of Vladimir (200km from Moscow) were telling me that their road police doesn’t take bribes. I was shocked.

    6. Corruption considered bad when benefits are reaped by other parties. Paying bribe to get kid in a good school/university is considered “ok”. Also tons of people _want_ to get into position where one can take bribes/kickbacks or steal from employer, be it government or private.

    5. Russians really don’t respect individual freedom On one hand they consider government/employer as evils, but they are 100% ok with limiting other’s rights (conscript army, gays, abortion etc). I think we are not citizens yet, we are still servants subject to a monarch. Moreover I would say they don’t respect another person dignity. It’s ok to live without considering others/society. This is especially visible for low/middle middle class.

    6. On deeper level Russians consider US an enemy. I remember returning to my suburb on a train on 9/11. Wanna know the common mood? ” At last!”. That’s where anti-US/West rhetoric really comes from.

    7. We are never responsible for our actions. If I’m fired or didn’t get raise, it’s evil employer. If we have bad roads: Putin. USSR collapsed: that was Americans. The fact that we achieved so little: it was WW2.


    Bottom line (quite sad actually): I do think that we’ve got what we deserve. Definitely not less 🙁

    It would be great if there were someone who can say: forget about US, Soviet times, WW2 victory, whatever. Let’s fix OUR country and make it a great place to live! For I genuinely doubt that there is a big demand for this idea.

    Comment by kosmik — May 8, 2012 @ 11:37 am

  11. Hmm, I actually meant to comment on another post, but lost wi-fi in a bar and reloaded on a wrong page.

    Comment by kosmik — May 8, 2012 @ 11:44 am

RSS feed for comments on this post. TrackBack URI

Leave a comment

Powered by WordPress