“If the EU sticks to its fiscal rules, it won’t have enough money for its geopolitical ambitions,” warns Eurointelligence founder Wolfgang Münchau.
European Citizens are €3000 a Year Worse Off
As a prelude to Münchau’s take, please consider November 2022 article Austerity Policies Have Made European Citizens €3000 a Year Worse Off by the New Economics Foundation.
After the 2008 financial crisis, the EU introduced stricter fiscal rules that define limits to government borrowing and spending, in an attempt to reduce the levels of government debt. This included a reinforcement of the rules to bring government deficits under 3% of GDP and debt-to-GDP levels under 60%. EU member states attempted to follow these rules through cuts to public spending and cancelling planned public investment. The report finds that this has left Europe less resilient to economic shocks like the Covid-19 pandemic and the Russian invasion of Ukraine.
The research finds that austerity policies in the EU, brought in following the 2008 financial crisis, have led to a permanent scarring of incomes, and cuts to spending on infrastructure and vital public services.
Polling commissioned by NEF and Finance Watch and conducted by Censuswide earlier this year found that two out of three Europeans polled agree that rules around spending should be changed to allow governments to spend more on education, health, social care and jobs.
In his July 2023 article, Austerity is Back, Eurointelligence founder Wolfgang Münchau agrees with the above take.
Austerity is Back
I called it the worst policy mistake of my lifetime – the austerity after the onset of the eurozone crisis. It permanently damaged the eurozone’s economic resilience, contributed to the rise of the far-right, and drove a wedge between eurozone countries. They are about to do it again.
Austerity is not a trade-off between short-term pain and long-term gain. It makes people worse off in the long run too. The New Economics Foundation recently came up with an estimate of the total cost of austerity during the entire period: a shortfall of €533bn in investment in infrastructure, including renewable energy. You can see it everywhere – in the form of underfunded armed forces and police, deteriorating railways and closed motorways.
It is going to be worse than last time because of where we are starting from. Italy had a deficit of 8% of economic output last year. This is projected to go down to 3.7% next year. From then onwards, Italy will need additional fiscal tightening. Together, this constitutes an unbelievable fiscal squeeze. France, which has more than its fair share of civil unrest, also needs to make fiscal cuts of a similar magnitude.
Now consider the politics. The EU’s climate change agenda is now moving into a phase where it starts to cost real money. The German government is just about to pass the domestic heating bill to force homeowners to replace cheap gas heaters with expensive heating pumps. A lot more costly environmental legislation is on the way from Brussels. The phase-out of the motor car will impose burdens on car owners. Opposition to Green policies are one of the causes for the surge in far-right support in Germany.
Now add austerity to the mix. With the return of the fiscal rules comes the return of the hard budget constraint. The Green agenda is the costliest project in the EU’s entire history. It will affect people unevenly. House owners, commuters and farmers will be much worse off than urban dwellers who are renting apartments. Austerity makes it harder for governments to compensate the losers. Brexit-style country-vs-town divisions are opening up.
Austerity will also constrain other large financial commitments such as financial and military aid to Ukraine. Now that the fiscal rules are back, this will now compete with domestic spending. In March, just after the anniversary of Russia’s invasion, the cost of the reconstruction of Ukraine was put at around $400 billion. It could easily double as the war goes on. Full EU membership would have further costs as the EU would have to support Ukraine for a long time after accession.
If Ukraine were to join the EU, it would become the largest net recipient of EU funds, crowding out current recipients, mostly from eastern and southern Europe. Germany’s net contributions, already the largest, would rise by a lot. I struggle to see how any of this is possible once the fiscal constraints kick back in.
The EU could resort to financial wizardry. It is a master of the dark art of fiscal smoke and mirrors. But there are limits to that too. The EU could launch a Ukraine reconstruction facility on lines similar to the recovery fund they created at the start of the pandemic. But this mechanism was sold as a one-off, and is not supported by everyone. The EU could try to co-opt international institutions and the private sector. It could divert the frozen Russian assets – some €200 billion in central bank reserves. But this is legally problematic, and might lead international investors to shun the eurozone. There are no easy choices. The bulk of the funding for the reconstruction will have to be guaranteed by national governments, and everything will require unanimity. That’s the bottleneck.
The combination of fiscal austerity and competing funding needs makes me sceptical about any uncosted big proposals – like large-scale financial support for Ukraine or a European army. The big question is not whether these are good ideas. I believe they are. I just cannot see how you can organise a political majority in favour of it, and still do all the things necessary for the EU to function, and then some.
Austerity has many economic consequences, but the political side effects are utterly toxic. Our deficits are much higher now than they were back then; we have high inflation; the extreme right is much stronger; and the EU has pre-committed itself to an expensive Green agenda. All this constrains the EU’s foreign policy choices just at a time when the EU is starting to discover its geopolitical role.
The maths just does not add up. We are reaching the limits of what a decentralised, rules-based EU can do.
The Math Does Not Add Up
The math certainly does not add up, but why?
“The Green agenda is the costliest project in the EU’s entire history. It will affect people unevenly,” says Münchau.
Whose fault is that?
“The German government is just about to pass the domestic heating bill to force homeowners to replace cheap gas heaters with expensive heating pumps. A lot more costly environmental legislation is on the way from Brussels,” says Münchau.
How stupid is that?
“If Ukraine were to join the EU, it would become the largest net recipient of EU funds, crowding out current recipients, mostly from eastern and southern Europe,” says Münchau.
The EU is too unwieldly already. Adding more countries would make matters worse.
Reaching the Limits
With profound implications, I wholeheartedly agree with Münchau’s statement “We are reaching the limits of what a decentralised, rules-based EU can do.“
The Euro itself is fundamentally flawed. There is no single interest rate that makes any sense given the wide variance of productivity, work rules, pension obligations, and infrastructure differences between countries.
And rules are impossible to change because it takes 100% of the nations to do so.
France will never change its save the family farm mentality. Trade agreement negotiations between the EU and the rest of the world have fallen apart every year for 30 years because France will not allow any changes to agricultural policy.
Germany and Netherlands will not agree to remove fiscal brakes. One might suggest, like Münchau, that this is a terrible idea. Others think its great. Pragmatically, it depends on what the money is used for.
In practice, a lot of stupid stuff, including heat pump replacements and a lot of nonsensical climate agenda rules.
The EU is big, unwieldly, and totally inflexible. The UK did good to escape even though it blew the initial handling of Brexit.
2 Out of 3 Politicians Want More Money
Here’s a key point from above: “Polling commissioned by NEF and Finance Watch and conducted by Censuswide earlier this year found that two out of three Europeans polled agree that rules around spending should be changed to allow governments to spend more on education, health, social care and jobs.”
I’m shocked that it’s only 2 out of 3.
None of these polls ever ask “How the hell do you propose to pay for this?”
One good thing about fiscal brakes is it forces decisions about where to focus.
Münchau wants an army, support for Ukraine, heat pumps, artificial intelligence spending, and of course, climate change. The math does not add up.
Seriously now: why is internet so bad in Germany anyway?
Please consider Seriously now: why is internet so bad in Germany anyway?
Germany is 25th worldwide in average internet speed (2017), was 22nd in 2015 – just 15,3 Mbp/s. Half as fast as South Korea and below 13 other EU countries, as well as Switzerland. For the average highest internet speed, we’re only at 45th, behind 17 EU countries and Switzerland! We’re even further behind in fiber optics – only 4 countries rank lower than us. The mobile 4G network is also one of the worst in Europe, both in average speed and availability we’re at the bottom of the rankings, while we pay some of the highest prices in Europe for data.
A study from 2018 from the federal network agency established that only 1.6 percent of German smartphone users can reach the promised internet speeds on their devices.
That article is dated, but sadly it is still accurate.
Mish Suggestions
- Scrap the EU army idea, scrap heat pumps, and scrap all of the climate change agendas.
- Upgrade technology, internet service, and phones. Instead, Germany’s focus is on heat pumps!
- Spend more on AI and research.
- Dismantle preposterous rules and regulations.
- Stop trying to protect diesel.
- Let the free market pick the energy and climate winners.
Germany does not need the same things as Sweden so why have the EU dictate everything?
In general, get the hell out of the way.
Let’s return to Münchau’s opening gambit. “If the EU sticks to its fiscal rules, it won’t have enough money for its geopolitical ambitions.”
Is that a bad thing?
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Austerity is not a problem. It is a solution to fiscal irresponsibility. It’s proof that borrowing for consumption requires future spending to decrease since a large part of annual budgets will have higher debt repayment allocations. It forces individuals and governments to think rationally about the use of debt.
I wouldn’t call the EU decentralized. It’s just a bunch of highly centralized economies fighting for control. And telling the US to take a hike ain’t easy. Why do you think we really have our bases in their countries? How do you think we would react in the US if we had foreign armies here? Oh wait, that’s not a talking point given by your B.S. party.
The best idea is… printing money at high speed. Japan debt is 200% of their gdp and people still buy that papers.
The president of the BCE gave the biggest loan in the history of the FMI to Argentina. She thinks debt and printing money is the best (or the unique) economic recipe in the world.
War is Peace
Freedom is Slavery
Ignorance is Strength
3.7% of GDP Budget Deficit is Austerity
1) After Monica Lewinsky Clinton bombed Serbia for 78 days to save himself and Germany from the Muslims invasion. 20 million Ukrainian refugees invaded Europe to balance the Arab and the Afriq invasions.
2) Nerd #1 and #2 were dissected. Odesa grain export was halted. Oil, ammunition depots and silos were bombed. After 35 years of tranquility and inactivity Europe veins are clogged. They lost their ability to think, or fight a war.
3) In Winter 2024 US northeast and Europe might freeze in the dark.
4) Ukraine war stalemate will cont at least until Nov 2024.
5) The Dow downturn might start in Aug/Sept 2023, first slowly then faster.
Comrade! Which Trotskyite cell are you in? When the masses wake up and the leaders who know the true path take control of the unformed masses then the Revolution begins and we must be ready to seize the moment. Are you friends with Melonchon here in France? You and he are on the same wavelength and are part of the same glorious Movement that will change the world.
There is exactly one problem which is that we are living in a Global Debt Ponzi (GDP) which was enabled by the fact that we accepted fake money, AKA fiat currency, as if it were real. 95% of the imbalances and distortions and other crazy azz $hit that goes down would simply not happen if the people woke up and realized that money is gold (or a good, convertible on demand representation thereof) and nothing else it.
They come up with crazy things to spend on because the energy source of the Global Debt Ponzi is debt. When the energy source of a Ponzi dries up, the Ponzi collapses nearly overnight in spectacular fashion. In the case of the Global Debt Ponzi, its fed each time new currency is created because that currency is NOT money. It’s just more debt. It’s an “IOU I don’t know what”.
Unfortunately it is worse than that. Ponzi scheme do not plateau nor are they linear. You cannot, for example, just keep the debt the same and have the Ponzi survive. And you cannot have the debt increase in a linear fashion and have it survive. It MUST increase at an exponential rate or it will collapse. This is why the curves of money supply and sovereign debt are exponential curves. Debt must increase at an exponential rate or else the system, which is at its very core a scam, a con game that cannot by its very nature go on forever.
We are now well past the hockey stick curve in the sovereign debt and it is now showing up in the balance sheet of the central bank which is the lender of last resort. We are in the portion of the debt curve for the USA which is nearly straight up. When a curve is going straight up it means that “stuff” is happening very quickly per unit time. That is why so many things are happening each week anymore. It used to be that it could take 2-5 years for some of the things to happen which now take place in a month. The rate of events will only increase, exponentially, until the system collapses.
Nobody seems to have figured this out yet and so when the collapse arrives, expect everyone to say nobody saw this coming. That will of course be complete BS because I have been writing about this for more than a decade.
“Nobody seems to have figured this out yet”
They know. They aren’t ignorant of history or math. Year of Jubilee, Kondratieff cycle, Armstrong Economic Cycle, The Fourth Turning, refer to the same cycle that repeats over and over again. The termination of Glass Steagall was just symptom of a phase in the long term debt life cycle.
Wolfy Münchau is true to form finding everything in the EU bad and nothing good.
1) The EU’s purpose since the beginning was to keep the peace in Europe and in that it has excelled beyond everyone’s expectations. That in itself is of an inestimable value as all Europeans know.
2) The Euro is flawed as if other currencies were not. Yes it does need more work especially in the fiscal area. I have been hearing of the demise of the Euro since 1999 and strangely enough the Euro.is still used in much of the worlds trade and is a true reserve currency. I wonder if the Fed’s interest rate is good for West Virginia, Maine or North Dakota for that matter.
3) “Scrap the European army idea”.
It’s already been scraped for a long time and Wolf should be aware of that.
4 “Scrap heat pumps”.
That’s a German thing. Other countries don’t give F.
5) “Scrap.all climate agendas”.
Looks that that is already happening with high use of oil, coal and nuclear. Militant ecologists are not very popular anymore.
6) ” Spend more on RnD, AI and the internet”.
I am sure no one has thought of that before.
7) The EU’s farm policy could’ve better but it’s original purpose was to guarantee Europe to grow enough food to feed its populaton and it does it so well that there has been food surpluses ever since it was put into place back in the 1950’s. Lots of good food available at reasonable prices is a plus in my book.
8) The problem of any country having a veto is much discussed now and although work arounds were necessary to get money and arms to Ukraine (over Hungry’s objections) the problem is being addressed.
“4 “Scrap heat pumps”.
That’s a German thing. Other countries don’t give F.
Brussels exists mainly, even if possibly not entirely, in order to force other Europeans to also buy possibly wonderful, but too expensive, products of the German industrial machine.
Heck, it can’t even ever hope to be different. The difference in brainpower, knowledge and insight between the dilettante gravy-trainers in Brussels, and the legions of Herr Doktors making their case on behalf of Robert Bosch, is so ridiculously lopsided that the latter WILL get everything they ask for Every. Single.Time.
The poor lightweights in Brussels, don’t even possess the vocabulary necessary to formulate a coherent no. So, they’ll simply go along, for no other reason than not wishing to appear like complete idiots (which they of course are. But even idiots, perhaps unfortunately, aren’t keen on appearing to be.)
“The EU’s purpose since the beginning was to keep the peace in Europe and in that it has excelled beyond everyone’s expectations. That in itself is of an inestimable value as all Europeans know.”
Until 18 months ago (the foundation has been cracking for decades, but now it’s gone tits up full tilt). It’s now full gas to military parades, militarisation of cops, border patrols, industry and all else. As well as back to wars that must be won in the name of peace… Since things are always diiiiiiiferent thiiiiiis tiiiiiime, in the feeble minds of the not so bright.
Agree with much of that Mish. But “Scrap the EU army idea”?
That presumably requires sticking with NATO? No thank you. The US is partly the cause of many of the EU’s problems. Telling the US to fuck off would be extremely painful, but a raprochement with Russia and China would likely be in its best long term interests. The EU has many, many faults, not least the rule by committee (mainly of idiots), but one of its biggest challenges is its growing isolation and the cost of that, largely from being in an abusive relationship with the US.
The problem with an army: If you have one, you tend get involved in all kinds of stupid projects.
Macron even mentioned Africa at one point.
But yeah, I don’t much care for NATO either.
True, but I suspect the Europeans would spend less on their own army than they do on NATO and more of the money spent would line European pockets rather than US ones? What you would likely end up would be much less than NATO (especially ex US & Turkiye), so far more limited in its abilities to cause mischief. I also suspect there would be less motivation to deploy that army if the US were not involved, and the ability to actually do so would be further impaired by typical EU infighting! The EU might also have fewer options to pick fights with other countries if it were concerned about what China & Russia thought. It’d be a paper tiger really, mainly to make the apparatchiks feel important. Seems like a big win all round really (unless you’re the US).