Eurozone crisis deepens as German 'sado-monetarists' refuse to back QE

The countries of the eurozone are running into austerity fatigue and no wonder, with unemployment at catastrophic levels, except in Germany. What scope is there to take action to boost the economy?

There is a view that implementing the public sector austerity drive will increase private spending by more than the public sector cutbacks, thereby itself boosting the economy. Some advocates suggest that this happens automatically as lower public borrowing reduces interest rates. But this is plain nonsense. Short-term interest rates are set by the authorities at whatever level they choose. Long term rates are determined by the market's willingness to hold the stock of debt. Yet this is far from being a rigid or mechanistic thing. Over recent years, the lowest bond yields in the world have been registered in the G7 country with the highest debt, namely Japan.

ryck: "So this doctrine of expansionary contraction could hold. And it is convenient for austerians everywhere to believe that it does. But it suffers from what you might reasonably consider to be a fatal flaw. It doesn't seem to work." Nobody ever said it would 'work.' !! This essay seems to be a valiant attempt to chip away at some nonexistent doctrine that stated, flatly: austerity will help grow an economy. I am unaware of any serious attempt to make that point. The other end of this mess relates to the undying fever and euphoria from those who stand as stark witnesses against austerity and offer, as usual, Keynesianism as the obvious solution.  Keynesian tactics  have never worked, anywhere, and no convincing case of such a preposterous effort on government spending has been identified as defraying the massive debts that socialist governments willingly dive into.  Countries routinely spend themselves into oblivion. Watch Argentina for the 4th or 5th time.  Keynes and his pseudo-intellectual  lackeys have made special efforts to stimulate government spending in all the current SICPIGS who are trundling down the slanted ditch into a terminal fiscal latrine. That should be evidence enough without citing TARP and spending on phony electric cars and solar follies but it is not. True Believers will only believe that every euro or dollar that falls into private hands is a unit of salvation itself denied to the benevolent government. It is hence woefully wasted.  The Western World will pay big time for this folly. Hopefully austerity at its current level will soften the demise of several economies without experiencing a total collapse of the currencies. I am not optimistic about this as I think QE will be the very last thing the left-wing loonies will let go of as it is the only thing they have left to stay in power. 

tom197482: Yes, exactly. It is obvious that if we borrow more the GDP figures are likely to rise - but where does that leave us if we bankrupt the country in the process?

KlingonOffTheStarboardBow: "managing an economy amounts to the same thing as managing a household budget. (It doesn't.)"  YES IT DOES insofar as in neither can you spend more than you earn and not expect to suffer serious consequences. Sorry Roger, but your article is nonsense. Why the Germans are supposed to accept higher inflation thanks to money-printing and the inevitable fall of the euro - as the world sees that Germany, too, has succumbed to lunacy - I cannot see. This crisis has been caused not by money-markets, by capitalists, by Anglo-Saxons or any other of the usual suspects but by idiotic and cowardly governments over-borrowing for decades. Only a fool thinks that decades of doing the wrong thing can be put right without patience and a lot of pain. Clearly. however, there are a lot of fools about, including those responsible in the first place. The greatest insanity is visible in France where millions are calling for an "end to austerity". Mass hysteria is a frightening thing. What do these people MEAN? Borrowing more? But THAT is what got us INTO this mess. "Mrs Brown. You are suffering from arsenic poisoning as your husband is trying to kill you. But don't worry, I am putting you on an arsenic diet at once."

GeorgyPorgy: Spot on! The silly notion that states can borrow and spend to the point of infinity and somehow get away with it really needs to be nailed. For example, how has the UK got away with running seemingly permanent current account deficits. Answer, by going deeper into debt through bond sales, and the sell-off of UK assets which has gone on unabated during the last 30 years. This was always an unsustainable path and we are now reaching the limits. And by the way you can only grow your way out of debt, if the monetary debt stimulus, grows more slowly than the economy. Actually the reverse is happening in the US where debt is growing faster than national income.   Of course the money printers will never admit this and will obfuscate their nonsense by references to the surplus on capital or financial account and so forth. If I live beyond my means, I can borrow, up to a limit, and/or sell my assets. The only difference at state level is that the state has more collateral and can borrow for a longer period at lower rates. But it cannot sustain this position forever. No, states no more than individuals, families, or businesses cannot live outside one the fundamental laws of economics.  

barncactus: I agree. The Left, especially, tends to promote the idea that there is no natural limit to state spending. I disagree. In the long term, a state cannot spend more than it can extract from its people by one means or another. We are now at that stage and from now on it gets very interesting. 

Jason Aris:  Agree 100% but if you speak to your average Frenchman then it is  all the fault of the UK/US either via their banks or, in the case of the UK, not  contributing enough to Europe (despite historically being a major net contributor over the years). They simply cannot understand that their whole way of life is dependant on subsidies from other countries and that their banks are some of the worst culprits with regard to irresponsible lending.

KlingonOffTheStarboardBow:  The mindset of the elite is incapable of grasping basic facts, including that the state must shrink, that hiring and firing and many other areas of business life made simpler and so on. Being "in denial" hardly seems adequate to express the extent of their self-delusion about economic reality.

barncactus: They understand it perfectly well. Being a founder member of the EU with influence on its architecture has conferred large benefits on France which it naturally is reluctant to give them up. Why didn't the UK form an EU equivalent after WWII? We were in a better political position than the defeated countries, but of course we were still dreaming of silly things like empires. And I suspect we considered ourselves superior in many ways. I think that concept went away quite a while ago.

globalise: Not for me it didn't

Gillian23: I agree. This absurd keynsian nonsense about big numbers being different in some mystical way from small numbers is exactly that…pure rubbish. Overspend and you put yourself and those dependent upon you (be it your family or your nation) in hock to the will of your creditors. Period.  Those creditors, fearing the day when either you default or devalue your currency to the point at which it loses any trading value, will in the meantime (while you are happily borrowing and spending away) work to put themselves in a position where they can comfortably turn off the tap. Anyone in power who does not understand that needs to be retired from power immediately. For all our sakes. Not elected in.

gogreengowhite: 60 years of keynesian deficit spending to "stimulate" the economy put the western world were it is today. Roger Bootle's solution: more keynesian deficit spending.

gogreengowhite: Over the last 60 years the European country that has done most Keynesian deficit spending to "stimulate" the economy is Greece and the country that has done least Keynesian deficit spending is Germany. Just look at the outcomes.

dandaniels: What do you expect from gays? They couldn't give a shit about future generations. As warned by a prominent Harvard Lecturer.

LordCurrywurst: "What do you expect from gays?" Homophobia is strong in this one…

weimar:  I would like to call it the "everything you spend is an investment" fallacy. In fact, the word "investment" is the most abused word in the vocabulary of politicians and economists. The trouble is everybody forgets that investment implies a return, which is in most cases entirely missing. In any case, nobody is measuring it.

ryck: "Roger Bootle's solution: more keynesian deficit spending" The True Believers in Keynes are like those with a terminal case of rabies: they howl at the moon, snort, run around in circles and foam at the mouth until death. Nothing can alter their behaviour. 

London Eye: QE The main reason our economy has stop growing! How does an economy grow when: Savings have been destroyed Real wages have been relegated to below inflation rises or worse. Pensions have been decimated. High import costs driving stubbornly high inflation. Domestic economy is stifled and weak. Basket case pound. All caused by Kings delusional obsession with QE. Will take decades to work out of the system,, if ever!

ryck: I think QE helped government grow and certainly help them remain in power. So there!!  ;)

morgan: QE basically stopped a reset occurring. Lenders and borrowers are still standing albeit zombified.

RogerSavage: Lenders and borrowers haven't just been propped up, they're the only ones winning - yet lenders and (some) borrowers caused the whole mess in the first place.  Never mind, hammer the prudent/savers.  What a disgusting, topsy turvy, broken state the financial system is in.

blueprint: So the big bad Germans don't want to print money willy-nilly like we're doing? Sounds good to me, they're going to come out of this stronger than ever, while we're marooned up the proverbial shit creek sans paddle.

ryck: …sans paddle, sans credit, sans a stable currency. 

lacoste: blue: Yes - about time for Germany to exit the EMU - before she picks up the tab for Club Med profligacy. Germany's exit would enable 'les autre' to trade with a viable Euro - until such time that individual nations choose to revert to their traditional currencies. This would be a blissful ending to an ill-conceived European tragedy aka 'The European Project'.

londoncynic: Who can blame the Germans for not bowing to demands from France and the south to print them out of trouble, when all it will lead to is another massive splurge on Germany's credit card by already heavily indebted governments. It is a monetary solution to a political problem, and that is why the fissure between Club Med and Berlin is growing wider by the day.  A massive euro QE (and don't forget, we have already had two LTROs and the promise of OMT), might bring very short-term relief, but it would soon lead to the same spiral of unsustainable government debt and zombie banks overloaded with junk sovereign paper that has created the current problem.  You can only cover your junk with a paper fig leaf for so long. Meanwhile economic divergence on the eurozone would continue to grow, and the lack of real reform would drive the north and the rest even further apart. The Germans are pushing for a political solution, and keep calling for 'structural reforms' - employment/tax/social provisions to create a flexible economic model that is anathema to European socialists like Francois Hollande. They are discussing a banking union, but it is making very little headway, since the Germans expect countries to honour their pledges to reform their economic models, while Club Med sees banking union as a prelude to a debt union, eurobonds and permanent handouts from the northern eurozone. The first plank in the solution to the eurozone crisis was the much-trumpeted Fiscal Pact and look where that is now, only a year on.  Countries being let off the hook and given extra years by the Commission to meet deficit targets, while backpedalling (in France's case, particularly) on structural reform.  If Germany cannot even win the argument over the Fiscal Pact, why on earth would it be prepared to give way and allow the ECB to turn on the liquidity tap with no evidence of serious structural reform? This will not end well.

sein_schatten: On the spot!