Economic Outlook: Starving a cold

By ANTHONY HALL, United Press International  |  April 30, 2012 at 9:36 AM
share with facebook
share with twitter

If a civil service worker in Spain losses his or her job -- and the odds are good it would be a forced retirement -- the chances of replacing that worker are nearly zero.

With the exception of police officers, the government is whittling down the share of workers who are public employees -- now 17 percent of the workforce. That figure is up from 15 percent in 2008, which is about average for members of the Organization of Economic Cooperation and Development, The Wall Street Journal reported.

But the trend tells the story of the strategy governments in Europe have chosen to get through the financial and economic crisis. For the first two years after the economic downturn set in, governments were tossing money at the problem with significant stimulus packages.

Suddenly, that turned around and Europe lately has Greece to thank for Plan B, which is to stop spending as much as possible, raise taxes to the brink of civil discord -- and sometimes well beyond that -- and hope for the best.

The problem with Greece is that it was so far in the hole and had such difficulty collecting its own taxes that it could not muster up a stimulus package on its own.

It is one thing, when push comes to shove, for other members of the eurozone to rush in and help Greece with emergency loans, but Europe was not going to throw stimulus money at a country with some of the most generous social programs in the world. Aid for Greece came at a price. Soon the entire region was on a fiscal diet. Europe went from feeding a cold to starving a fever. No exceptions.

Now, not long after Britain's statistical agency said its gross domestic product fell for two consecutive quarters, Spain has confirmed that it, too, had technically fallen back into a recession with an economy that contracted 0.3 percent January through March.

Two consecutive quarters of negative growth is the standard definition of a recession. The trouble is, while Spain has an unemployment rate of 24.4 percent, the plan is for Spain to continue its budgetary dieting.

What follows, more than likely, will be credit downgrades and rising borrowing costs for the government.

Here's lesson No. 1 for today: If a government tries to spend money to keep jobs going to allow for spending -- like blowing on embers -- to get the economy going, that is fine. If a government figures it will cut back on spending and balance its books to gain investor confidence, that's fine as well.

But it is quickly evident that changing direction -- no matter which path is chosen -- is exactly the worst possible choice to make. If cutting back on spending and raising taxes is the solution, isn't it evident that burning up billions of dollars just before doing that is completely counter-productive?

Similarly, if a government decides to cut back on spending to gain investor confidence and suddenly starts spending like a sailor on leave investors will be twice as cautious as before, given trust has been severely undermined.

Democracies are often ill-suited to the task of correcting economic problems for just this reason. Democracies have built-in checks and balances -- Democrats and Republicans, for example. They balance each other out. That means every four to eight years -- not nearly enough time for a solid economic strategy to work – the populace gets impatient, the party in power is blamed for the mess and the freshly elected reactionaries turn the recovery inside out.

In Europe Monday, stocks were down on Spain's dire GDP report. Stocks in Asia were mixed, but markets were closed in Japan and China.

The Hang Sent index in Hong Kong added 1.7 percent and the Sensex in India gained 0.76 percent. In Australia, the S&P/ASX 200 rose 0.79 percent.

In Britain, the FTSE 100 index fell 0.56 percent while the DAX 30 in Germany dropped 0.36 percent. The CAC 40 in France shed 1.17 percent and the Stoxx Europe 600 gave up 0.4 percent.

Related UPI Stories
Trending Stories