Fixing Europe’s problems

The bow is under the waves and what will happen next will be somewhat slow motion but it is hard to see a good outcome any time soon. I’ve come across this article a couple of times but its first para really is incredible:

EU GDP drops huge. In 2012, they didn’t have a single quarter of growth.

Then this a bit deeper into the article:

The debts they have accrued are eating them alive. Their economies cannot grow fast enough to keep up. They have entered what is known as the death spiral. Because of the heavy government interference in markets, and the artificial low interest rates the EU Central bank is imposing, capital is locked. It doesn’t turn over and won’t cannot be allocated through the marketplace to more productive resources.

The answer to these problems is right there in the para but who can do it? They need to encourage private sector to grow which means public sector spending has to be cut back with a chainsaw. Regulation has to be pared to the bone and then a little more after that. Interest rates need to rise (yes, rise!). Business taxes have to fall. Governments have to show they love their entrepreneurial class.

There, fixed it. Now you just need to get someone voted in to do it and things will be back to normal by around 2016.

But let’s not be too pessimistic. A fall in GDP is not necessarily a sign of doom and devastation. Cuts to useless, wasteful public spending show up in the national accounts as exactly that, as a fall in GDP. The process of getting the structure of production right is to redirect resources into value adding activities. I don’t live there and pay not that much attention to the detail but recovery must start with less public spending while business is enticed out of the bunker after five years of an incredible battering. Recessions don’t go on forever. Recoveries do come, and often when least expected. For the moment government spending does not appear to be going up and may even have begun to fall as a proportion of total output. It will be interesting to see where things are a year from now.

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