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Why Europe is Collapsing

10 Nov

People call this the “European Debt Crisis”. That’s like calling Chicken Pox a “Spotty Skin Sickness”. The spots on the skin are a symptom, not a cause.

Euros in Pots

Photo by Flickr user Images_of_Money

The trouble Europe is facing is that the economy there is not running so hot. If the economies of Italy, Spain – even Greece – were zooming ahead, nobody would doubt the governments could pay their debts. Likewise, in the UK and the USA, the main problem is that the economy is not running so hot. The solution that is being tried is “Austerity” – cut government spending to “restore confidence”. That’s like saying “let’s cure chicken pox by popping the blisters” – it attacks the symptom, not the root cause.

Yes, businesses are not confident. They lack confidence because c spending is down. The best way to restore confidence is to get spending up. However, governments are cutting spending. No wonder this “solution” isn’t working. The solution that would work would be to increase spending.

For a government, that may mean borrowing money. For the UK and the USA, that’s not a problem. Real interest rates on government debt is close to zero – even negative. That’s right, people areĀ  so willing to lend money to the US government that, taking inflation into account, they’ll even pay to do it.

European nations under the Euro are in more serious trouble. Interest rates are low in the USA and the UK because people are sure that the money they lend the government is safe – their governments would rather print money than default. Interest rates are high in Italy because Italy can’t print money. They don’t own the Euro printing presses. If they can’t pay their debts, and the European Central Bank won’t print Euros, Italy would have to default. And as interest rates go up and up, it becomes harder and harder for Italy to pay.

The European Central Bank could instantly solve the “debt” crisis by promising to buy any and all European government bonds they need to, printing extra Euros if necessary. Interest rates would immediately drop, as Euro-denominated government bonds became attractive investments again. Then, the individual governments could borrow at ridiculously low interest rates and spend on infrastructure projects or whatever took their fancy. This extra spending would boost “confidence”, and the economic woes we’ve been facing since 2008 would be over by mid-2012.

It seems very unlikely that these things will happen. The ECB and the leaders of European nations scoff at the idea of spending their way out of a crisis. Therefore, Europe is very likely to collapse. There will be bankrupt European governments, bankrupt European banks and pension funds, and knock-on effects worldwide.

So far, Australia’s economy is rolling along very nicely. As Europe falls, our economy will slow. Our own interest rates will drop from their current 4.5%, perhaps approaching 0%. Then, we’ll be in the same situation as the USA and the UK – the Reserve Bank can’t stimulate the economy by lowering interest rates, the only options left to keep us going strong would be stimulatory government spending, or to have the Reserve Bank print lots of extra cash. May God forbid that our leaders choose Austerity instead.

 

 
 

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