With the ‘Greek tragedy’ still unfolding, following two years of austerity programmes that have sent the economy to its deepest-ever recession and almost completely dissolved political and social cohesion, the final outcome is that the end of 2011 found the government accounts in a worse position than at the end of 2010.
Preliminary data for last year's government accounts reveal that the fiscal deficit seems to be heading to the double digit region, above the 10% of GNP benchmark, despite huge increases in taxation, savage cuts to pensions and public-sector wages and sharp reductions in social budget spending, all of which led the economy to previously unseen GNP losses to the tune of 7.5%.
Obviously, there is something (everything?) wrong with the policies imposed on Greece by its creditors, the EU-ECB-IMF troika, with these now in charge of the country's rehabilitation programme drafted by the International Monetary Fund (IMF) and the European Commission.
Unfortunately for the Eurozone, it is now not only Greece that is facing more dead ends than a year ago. The Italian treasury is borrowing money at the ridiculously high rate of more than 7%. In view of the fact that Rome has to refinance at least €300 billion in maturing debts during 2012, out of total sovereign liabilities of more than €1,800bn, the economic prospects of the country as a whole can only be described as non-sustainable.
And that is not all. The new Spanish government, under Prime Minister Mariano Rajoy, has just revealed that the 2011 fiscal deficit must have far exceeded the 6% of GNP target, and has in fact climbed nearer to 8%. Instructions from Brussels led the new prime minister to introduce a new package of austerity measures for 2012, planned to reduce the government budget deficit by €45bn over the coming years, and all that in a country with an overall unemployment rate greater than 20% of the working age population, and in the region of 50% for young people – a clear recipe for social unrest and riots.
It is not 'economic science' however, that powers EU Commission's dictums but rather ideological convictions, which dictate that unemployment is not a bad thing for every economy, leading as it does to a reduction in real wages and improved competitiveness.
However, they forget that every society has an embedded lowest ‘real’ wage, below which nobody would choose to work – people will sooner take to the streets and live on bread and water than take humiliation. In any case, Spain will also soon be another player in the Greek tragedy – as for Portugal and Ireland, it is only the latter country that seems to be heading towards a growth path, albeit very slowly.
This is because Irish people are accustomed to hardships and the unemployed have chosen to go overseas in search of jobs, supported by Irish communities all over the world. That is why the Irish society can endure such Draconian measures, which might well destroy the southern Eurozone.
The fact is, however, that the south comprises the third- and fourth-largest economies of Eurozone, along with the two tiny economies of Greece and Portugal. And that’s to say nothing of Belgium where after 500 days without a real government, the new Prime Minister Elio Di Rupo finds himself in the very unfavourable position of having to introduce more austerity measures than was contained in the Walloon-Flemish political compromise, in order to comply with Berlaymont 'orders'. Such action is almost certain to bring the Belgian economy to a standstill, or even plunge it into recession.
How to avoid recession
Unfortunately, the common denominator seems to be that Brussels-inspired economic policies lead to recession, social unrest and very high unemployment.
The political elites in Berlin and Paris know much better how societies work than Brussels’ Commission bureaucrats. Even Berlin seems, bit by bit, to be coming closer to a more 'Keynesian' economic policy mix than Brussels.
A solid proof of this is that Chancellor Merkel's government is running fiscal deficits of more than 5% of GNP, much higher than the permitted limit of 3%, and this in addition to the huge 'hidden' deficits in the three 'laanders' of the ex-German Democratic Republic.
More public spending
All in all, there is nothing 'scientific' about the kind of policies that the Eurozone should adopt.It is all politics, and this will be made clear in the 9 January meeting between French President Nicolas Sarkozy and Chancellor Angela Merkel. Well-informed sources say that Merkel and Sarkozy will come up with new ideas, introducing more tangible elements and public spending directives over the vague decisions of the 8 December EU Council of 26 leaders (with the exemption of UK Prime Minister David Cameron), about the creation of a 'strong fiscal Union within the Union'.
Already, EU Council President Herman Van Rompuy has got the message and has called an extraordinary meeting of the 27 EU leaders on 30 January, with 'employment' being the only item on the agenda.
This is already starting to smell of 'Keynesianism' and more public spending, in contrast with the liberal ideas of Commissioner Ollie Rehn. But how will further public spending and larger deficits be financed? Germany has set limits on the new money that Berlin can put in, so who but the European Central Bank (ECB) can provide the new money?
Towards the end of 2011, the ECB proved that it could come up with around with half a trillion euro in newly printed notes handed over as a loan/gift to 500 Eurozone banks at the near negligible interest rate of 1%.
If the ECB had €500bn for the banks, doesn't it have anything for the Eurozone’s citizens? The answer is that there is also money for the people, but it will be delivered via the banks. It is now a very poorly kept secret that a large portion of the €500bn found its way into government coffers through bond purchases, which of course resulted in a very hefty profit for banks and, if required, such a tactic can be repeated.
Merkel will not say it openly, but she cannot resist the pressure from all over the world for Berlin to support employment outside Germany. So, on 9 January, the two leaders will pave the way for the next EU Summit by making positive remarks concerning employment.
Such remarks cannot have any other meaning apart from that the ECB will continue financing governments indirectly, as it has already done by purchasing Greek, Italian, Spanish and Portuguese bonds in the secondary market, and to a much larger extent to reach Rome, Madrid, Athens and elsewhere in the Eurozone. There is no other way for Europe to continue being coherent and prosperous.