By Lucas Juan Manuel Alonso Alonso.
European economy remains stagnant and in my view, mainly in the euro zone, unemployment rates will continue to rise or, at best, with only cyclical and insignificant downward variations. The main reasons for this are very simple: Member States with highest unemployment rates have (and they will continue to have) economic growth rates that are insufficient to generate employment, as well as, and it is far more decisive fact, unproductive organizational structures.
And, I am afraid that the strongest economies in Europe are going to suffer a steeper economic downturn. In fact, in spite of measures such as precarious and poorly-paid work, labour flexibility, less costly hiring, cheaper dismissal, different modalities of hiring (…etc.), there will be not any significant effect on employment but, undoubtedly, these measures are going to reduce consumer spending (less purchasing power of the middle classes) without increasing investment spending (investors are more likely to save than invest).
“The reduction in consumption and lack of investment are highly alarming factors of a continuing economic stagnation”
In addition to the above, a badly understood policy of austerity and structural adjustments are reducing government spending in core functions. The simultaneous effect of these factors (reduction in consumer and government spending together with lack of investment), leads to a sharp drop in aggregate demand. Therefore, exports are, in some cases, the sole positive factor of the aggregate demand and main driver of economic growth in some European countries but, at the same time, we see a deep decrease in imports due to lack of domestic demand and this points once again the economic stagnation.
“As a result, if European Union (mainly the euro zone) continues to follow the same policy rhetoric, it is perfectly clear that we will be facing a future of economic stagnation, greater unemployment and inequality, increase in the fiscal deficit and public debt. In my view, this situation can lead Europe to an unending vicious circle”
The EU implemented painful austerity measures in order to reduce the high level of government debt in many country members. But it was, and still is, a wrongly-conceived austerity. In fact, in various European countries the debt to GDP ratio is going onto a firm upward trajectory creating a possible risk of default. Government debt is not a problem in itself but the amount of debt (debt to GDP) and the interest rate of the government debt (debt interest payments/GDP).
And, in some countries of the euro area, a large share of government debt is composed of non-development expenditures (for example tremendous public structures which are intended to place people related to political, economic groups…., wasteful of public funds brought about by governments on opaque contracts…and others unproductive public structures) while, at the same time, expenditure on development aid is cut back (for example education, research & development, healthcare…).
“Thus, as the result of policy implications, the budget cuts are not being carried out on the necessary items and there is a huge level of government debt that is useless for the productive economy”
The central feature is on how a government invests its resources (government revenues). The government revenues can be invested in development or non-development projects. Development projects are productive and, therefore, they are the ones who boost a country’s socio-economic progress.
On the contrary, non-development projects are a charge on a government budget. In my view, the current EU project is doomed to failure because it, among other things, benefits the few and not the many, and thus, unfortunately, many EU members are leading for the wrong reasons: high degree of social inequality, abject poverty (in very many cases, children abject poverty), very high unemployment rates (especially among the young people), low democracy quality… and so on.
The society revitalization (socio-economic progress) should come from, among other things, a combination of fiscal consolidation (for example, improving equity in tax policy, so that those that have more pay more…) and structural reforms (for example, strengthening or creation of productive sectors rather than austerity plans…). A wide range of different recipes (very different from the current ones) are needed to leave behind this deep stagnation and finding our socio-economic progress.
Tax burden in many European countries increased substantially. Paradoxically, greater tax burden is placed on households meanwhile multinational companies, quoted on the stock market, and great fortunes have less fiscal pressure. The transfer of greater tax burden on consumer prices in combination with measures of lower wages and high unemployment rates are eroding consumer spending.
It is essential to consider a harmonized and equitable tax reform:
“Reduction of unproductive government expenditures and public structures (for example, unnecessary governmental bodies and unproductive public expenditures…, in other words, it is necessary to prevent the creation of unproductive state structure and patronage networks) rather than cutting key government functions, for example education, public health, social security, or unemployment support…”
“Effective measures to fight against fraud and tax evasion, impose a progressive tax on multinational companies, great fortunes, investment companies with variable capital (…) rather than a greater tax burden on households, low-income families, severance pay, SMEs (…) because higher tax burden on them lead to a progressive reduction in consumption (for example, it is a serious mistake a higher VAT rate), higher unemployment and economic stagnation that contributes to exacerbating poverty”
Government revenue would have to be increased as a result of the combination of the above measures without indiscriminately raising taxes and cut drastically government spending in core functions. Thus, the aggregate demand would be reduced to a closer level to its real capacity, spurring real economic development while at the same time keeping inflation under control. Wouldn’t be these measures beneficial to European Member States?
“It is necessary to encourage the most competitive productive sectors (real economy) because these are the main driver of economic growth, rather than subsidize unprofitable areas”
Therefore, first of all, an appropriate action is to reduce excessive and unproductive government bodies (necessary austerity) rather than cutting key government functions, for example education, public health, social security, or unemployment support…(incorrect application of austerity)
There is a shortage of credit for SMEs that are the main driver for job creation in Europe. And, in many cases, the bailouts of hundreds of billions of euros were for banking entities which handled money in speculatively way generating huge losses and threw the financial markets into a state of total chaos before the real economy was seriously damaged. And still the unworthy and incompetent executives of these banking entities are retired with million-Euro compensation. Now, some of these banking entities are making profits but the money is not reaching the real economy.
“Bank loans to sectors more prone to economic bubbles was, and still is, responsible for this vicious circle of global crises from which there is no escape using the same recipes that generated them”
For example, when governments take steps to encourage home ownership through policies of low-interest mortgage loans and thus once the real estate bubble burst, the market value of homes began to drop and many borrowers (houses owners) aren’t able to pay off their mortgages. No problem for banking entities because they will be bailed out with public money but, as a result of huge bailouts to banks, the national debt continuous its upward trend and the country’s vast majority of people are going to suffer years of cuts and austerity, which means a decline in social-economic progress.
Does it make sense to continue with austerity plans? My point of view is that austerity plans will continue to reduce consumption and economic growth leading to economic stagnation that contributes to exacerbating poverty (increasing at an alarming pace) which in turn worsening the already deteriorated situation of many European countries…isn’t it a logical conclusion?
