2011 December 25 Sunday
Patrick Buchanan: Sustained European Austerity Implausible

Pat Buchanan makes an argument about Angela Merkel's attempt to commit all European countries to a treaty that prevents them from profligacy: Nationalism in Europe is on the rise and the Mediterraneans won't want to live poorly for a decade to pay off accumulated debts.

Nationalism is on the boil across Europe, and it is impossible to believe the leaders of those 26 EU countries, by cutting some deal with Angela Merkel and Nicolas Sarkozy, can bind their countrymen forever to cede veto power over their future budgets to Brussels.

Will Greeks and Italians really accept a decade of austerity to pay off debts larger than the national economy, to banks and bondholders, for hundreds of billion of euros already spent?

Pat sounds right to me. The southern Europeans aren't going to accept austerity based on some economic theory about how it will be better for them in the long run. It is rather inconsiderate of Europe's elites to keep countries in the euro zone that, for very fundamental reasons, don't belong there. Those reasons have caused southern European labor to become too high priced for southern European exports to compete. This is one of a few reasons the southern Euros can't grow their way out of debt.

Increases in employment costs of all euro nations outpaced Germany’s in the decade through 2010. German hourly labor costs rose an average 1.7 percent per year, while they jumped 2.9 percent in Portugal, 3.2 percent in Italy, 3.4 percent in Greece and 4.1 percent in Spain, the labor union-affiliated IMK institute said Dec. 12.

The causes of those high rates of hourly cost rises aren't easy to fix (see my "fundamental reasons" link above). This was true a when the euro zone was created (making the inclusion of southern Euros in the euro zone an act of lunacy). It was true a few years ago when the financial crises almost turned into a world Great Depression. It is still true today. It will be true next year.

As Tim Duy at Fed Watch points out all of the options for Europe are pretty bad. Some of the theoretical options aren't anywhere near the realm of political plausibility. The resentments between European nations are getting more intense and ruling out more options.

The already low odds of continued full service of all that sovereign debt will go even lower when world oil production goes into permanent decline at some point in this decade. Near flat oil production is already restraining economic recovery. Gail Tverberg gets it right when she argues we can't decouple GDP growth from energy growth (more details here). Since oil as a transportation fuel is hard to replace with other energy sources (at least for the next 10-15 years) I expect declining oil production to pull down the world economy with it. Then heavily indebted European governments will get hit by rising costs and dropping tax revenues.

You hear a lot about renewable energy sources. But as International Energy Agency chief economist Fatih Birol points out, the world's dependence on coal has actually grown over the last 10 years.

"We rarely talk about coal," says Birol. "But over the last 10 years, 50% of the growth in global energy consumption has come from coal."

That 50% of growth from coal is rather like a canary in the coal mine. That the world needs to boost coal consumption in order to boost energy consumption is telling in a "Limits To Growth" sort of way. Other energy sources cost more. Oil has about quadrupled in price. Solar and wind still cost too much. While natural gas prices have come down in the US at a global scale dirty coal is still the go to energy source.

Another reason for the heavy weighting toward coal: China consumes most of its energy as electricity and most of its electricity is generated using coal. Plus, China uses a lot of coal for steel making. But as China's demand for cars goes continues to grow China's oil demand will drive up oil prices and squeeze Western economies even harder. Competition for oil and other natural resources is going to become an even greater impediment to economic growth (and therefore tax revenue growth) in the West. So Europe's economies can not return to Business As Usual. Therefore economic growth can not provide Europe with the cash flow needed to pay off its debts. The politicians who are trying to avoid sovereign defaults are making the defaults bigger when they come.

Too many discussions about economics and financial crises ignore the physical world. We face stronger head winds against economic growth in the Western countries and limits in natural resources.

Share |      By Randall Parker at 2011 December 25 05:14 PM  Economics Sovereign Crises

eggwhite said at December 25, 2011 5:46 PM:

Interesting post and enjoy the blog a lot. But why is the growing use of coal the sign of a future problem? We have centuries worth of coal. And now we have shale oil coming online in a big way. It looks like we have at least 200-400 years worth of fossil fuels available, assuming no huge deep undiscovered pool of oil, which would make it ever bigger. What am I missing? I know coal and oil require something like a market price of $50 to be sustainable. That's no problem - cheaper than oil now. So what's the issue?

Randall Parker said at December 25, 2011 8:31 PM:


No, we do not have centuries worth of coal.

Shale oil: You mean the North Dakota and Montana oil production surge? Still quite small potatoes. For context see UCSD economist James Hamilton on the history of US oil production and peak production. From the PDF of the full paper:

Production from Alaska peaked in 1988. North Dakota is the only state that continues to set all-time records for production, thanks in part to use of new drilling techniques for recovering oil from shale formations. To put the new Williston Basin production in perspective, the 138 million barrels produced in North Dakota and Montana in 2010 is about half of what the state of Oklahoma produced in 1927 and a fifth of what the state of Alaska produced in 1988. However, the potential for these fields looks very promising and further significant increases from 2010 levels seems assured.

What Alaska produced in 1988 was not enough to prevent the US from staying well below its 1970-1971 peak of production. So Williston production could go up by a factor of 5 and we'd still be below the US peak. Meantime, a number of other states will continue their declines.

The marginal cost of oil production is now above $50 per barrel. I hear figures in the range of $70 and higher.

A.Prole said at December 26, 2011 12:18 PM:

What will probably occur is a paradigm shift in the public's attitude to the EU.
Since its inception, the EU has (wrongly# been associated in the public mind with modernity, growth and higher living standards.It was seen #wrongly# as throwing out an out-dated model #nationalism# with a better more efficient new model #federalist superstate with economy of scale).
Now it will crtainly be associated in the public mind with stagnation, poverty, political oppression, hunger, riots and police baton charges on striking workers.Politicians eager to play the blame game - people are angry due to declining living standards - will turn the EU, an entity that previously was held as sacred and idealistic.
Britain might very well pull out.If Britain goes expect other nations to follow.Watch The Netherlands.

Ross Noble said at December 29, 2011 11:39 PM:

Will Greeks and Italians really accept a decade of austerity to pay off debts larger than the national economy, to banks and bondholders, for hundreds of billion of euros already spent?

The statement above is very similar to the Inter-ally debts owed to the U.S. after WW1. U.S. government issuing of Credit to Allies during the first War, were asked to be remitted in the interwar period. At the same time, the U.S. put up trade barriers, so the "allies" could NOT export goods to acquire dollars to pay the debts. These interwar government debts created a triangular flow, where the Allies (France and England) squeezed Germany via the Versaille treaty. Germany would pay the Allies, who would then pay the U.S. government treasury. But, Germany had trick up their sleeve. They issued bonds to commercial banks in the U.S. private sector. So, private credit money would be issued by U.S. banks, and ultimately vector to the U.S. government treasury.

But, the private bonds to the american commercial banks had an interest dimension to them. At 5% the principle will double in about 8 years. The intergovernmental debts that the allies needed to pay the U.S. treasury also had a debt hook, requiring increasing payments over time. In this way, the Allies and Germany were busted out economically, as their debt loads grew exponentially. These countries became autocracies, leading to fascism in Italy and Germany. England gave up assets to the U.S.

Today, the Greeks and Italians are in debt to Commercial banks. The Piigs issued bonds, and Commercial banks, mostly those of Germany and Holland and France bought them. Those same banks now require the Governments in Greece, Italy, Spain, etc. to pay increasing usury over time. As a reminder, commercial banks create money on the books by hypothecation. The bond serves as the "asset" to allow new credit money to be created.

In historical terms, government spending and debt on government loans to outsiders can create a real problem. In the PIIGS, their debt points to commercial private banks outside of each respective country. In the Inter Ally period between WW1 and WW2, debt pointed outside of Europe and to U.S. government creditors. Whenever debt points outside, it cannot be easily cancelled unless there is war.

Today, the U.S. does not fall in that position, because we hold the money power. We issue our debt to the world and then tell the world not to buy up our real assets. For example, if China's Sinoc tries to buy an oil company, they are prohibited. Instead, our defict money recycles back to the U.S. to buy more debt, usually in the form of T Bills. The U.S. can do this because dollar is reserve, and we have veto power in the IMF and World Bank. Also, contracts and trade are insured by American military power. We dare the world to call us on our debt, so the world continues to recycle it back to the U.S. to buy T bills.

The U.S. is exporting debt to the world, which now exceeds 1 Trillion. Since it grows unnaturally due to the exponential interest curve, it cannot be paid. But, nobody is demanding austerity of the U.S., even though U.S. government spends governmental deficit dollars externally to the world. The defict dollars mostly demand resources to help fund overseas U.S. military, and also to pay the trade deficit. Every dollar of imbalance in trade, means an extra dollar leaves the U.S.

But, Europe must go into austerity, because they had the temerity to borrow from private banks? Of course private bankers will demand austerity, because this is how they can be paid, and they can also acquire real assets.

Austerity forces wages down, because money vectors to pay usury to the bankers. If you cannot pay, the bankers will want real assets. In this way, a population is yoked into paying tolls on their output. It also sharpens plutocracy, where debt vectors to the monied classes. These monied elits will demand monopoly rights and will tilt the law in their favor.

Democracies should resist oligarchial forces, and the only way to do that is take the money power into the public domain and control it with the law. Government itself, if not restrained, creates intergovernmental debt, as in the case of the U.S. as both creditor during the Interwar period and as a debtor today. So, it is a difficult problem, how to restrain the money power from both private and government predators.

We need advanced concepts on money and the law. Otherwise, we are headed toward oligarchial statism. Today's particular statism is driven by the private sector and is called neo feudalism. While the U.S. government has issued deficit money overseas our private banking is the bigger problem, creating bubbles and putting the population into debt bondage. Private banks have also captured their governments by threatening collapse unless they are bailed out. This is similar to the U.S. governments postion to the world. Recycle those debts back to the U.S. or risk systemic collapse.

In the case of Europe, they have gotten themselves in trouble, by letting their government debt point outside of their country to private commercial banks. In ancient times, the temples and money authorities could simply cancel debts because it was a central authority who held all the money power. It is not so easy to cancel debts today, with the tangle of debt passing across borders.

But, there are ways to do it, and our politicians are completely silent on this issue. Austerity is a bad idea, and there are ways to avoid that unhappy condition as well. But, private bankers will demand austerity so their bonds get paid, or at least get paid to the extent possible. If democracy fails to enforce payment of the bonds, then a statist type police state (feudalism) is in the offing. This is already occuring with caretaker governments in Europe.

Sycamore said at December 30, 2011 11:59 AM:

^ Great post for sure

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