Eurozone’s Farce Fiscal Austerity Programs

I have been saying that the so-called fiscal austerity in the Eurozone has been a farce.

The European Central Bank has continually been bailing out the region’s banking system through inflationism or via the massive expansion of the ECB’s balance sheet.

Meanwhile European governments have been raising taxes matched by partial budget cuts and politically label this as “austerity” programs. [The left, using deliberate semantical distortions, misleadingly blames such failures on the markets].

What has been really happening has been a transfer or a redistribution of resources from both the private and the public sectors into the politically privileged banking system. Taxes have been increased or are in the process of being raised to pay for the bailouts of the banks.

In genuine austerity programs, resources would be made available for the productive use of the private sector. This means growth in the private sector relative to a reduction of government expenditures.

In the current Eurozone programs, this has not been happening.

Professor Steve Hanke in an interview with Streit Talk explains further, (bold emphasis mine)

Member states haven’t delivered on much in terms of fiscal austerity and certainly not structural reform. Fiscal austerity should be about reducing the size of government…governments are bloated and spending way too much in Europe. Austerity should be almost entirely focused on reducing government expenditures and obviously not on increasing taxes. But there’s a lot of tax increase noise within the so-called austerity programs in Europe, so they just have it all wrong. And, in any case, they haven’t delivered much.

As far as structural reforms go, there have been almost none that have actually been implemented, even in Greece. They’ve talked a lot, and spent most of their time blaming markets or the outside world – the Germans, the Dutch, the Finns, and so on – for the problems that they’ve gotten into. So there’s a lot of finger pointing going on and talk about structural reforms, but they’re half-baked.

And when I say structural reforms, what do I mean? What they have to do is put in place growth-friendly policies and get government out of the way. And that means they have to have something like Presidents Reagan and Clinton did in the United States; they have to reduce government expenditures and reduce regulation and red tape. But they’re not in that business in Europe. Their assessment is: we have a crisis because markets failed and we have to regulate markets more now so that they don’t fail in the future. This is just upside down because the crisis was caused by government failure – mainly the European Central Bank and the Federal Reserve Bank of the United States. These were the great enablers and engines that allowed for the blow-up of the bubble that ultimately burst in the fall of 2008, although there were problems in Europe even in the summer of 2007.

So essentially in both the fiscal austerity and structural reform realms, the packages that they’ve been talking about are really almost fatally flawed. And they haven’t even delivered on what they said they would deliver on in the first place. They’ve been wasting their time moving from one meeting to the next and jumping from one fire to the next. They lack the “vision thing.” The long and the short of it is: will these steps toward fiscal austerity and structural reform stabilize the periphery’s sovereign debt markets? The answer is: of course not.

Politicians of developed nations will increasingly resort to more interventionism channeled through central banks, whom the public understands little about, as a way to shield their skullduggery.

And this is why markets will be sensitive to sharp volatilities, and or susceptible to “pump and dumps”, as market actions will be shaped by the feedback loop mechanism between market actions and political responses and vice versa.