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Spending Cuts Could Strangle European Recovery

Davos, Switzerland

There are some stories which, though very serious, lead to uncontrollable bouts of the giggles. This is such a story…..

When the recession hit Europe, the effects were devastating. Too many countries were operating on combinations of high government spending and low taxation. Germany was the exception. Though incomes had stagnated, Chancellor Merkel was aggressive in her attitude about taxation. She has been trying for years to organize all the Western industrialized countries into reining in tax shelters and collecting from tax cheats. Germany’s economy, while not explosive, is solid. It is built on small, high-grade manufacturing to provide a middle class which supports the service industry. But Germany is part of the European Union, and too many in the EU are looking to Germany to bail out the rest of the Union. It is Germany that is pushing hardest for deep budget cuts in other European countries. A leaked document has suggested that Germany is pushing for Greece to be put in a sort of receivership — surrendering control of its finances to the EU.

At his first economic summit, President Obama tried to make the case for the Keynesian model of recovery, the one that had pulled the United States out of the Great Depression faster than Europe. But, in response to the recession, Europeans had elected conservative governments that wanted to follow the same economic policies being advocated by our Republican Party. In a few European nations – Greece, Italy and Spain specifically – it is part of a six decade pendulum between socialist and fascist governments, with none of them going all the way to communism or corporatism. So, President Obama’s recommendations were met with the same kind of dismissive attitude that his policies have met in America.

Right now, in the Republican candidate battle, the President is constantly being accused of trying to turn America into Europe….translation: he wants us to become a socialist nation with cradle to grave welfare. Here’s where the giggles set in. Europe has dug itself in deeper into the economic morass because they turned their backs on Keynesian economics and embraces the trickle-down model.

IMF head Christine Lagarde with partner Xavier Giocante, Paris, June 22

The head of the International Monetary Fund, Christine Lagarde, warned at the Davos summit this week that spending cuts could “strangle” economic growth, and any cuts must be made on a nation-by-nation, program-by-program basis instead of being made “across the board.”

This is a perfect time to take a look at what Margaret Thatcher really did. She allowed the British manufacturing base to disappear. She also “privatized” everything she could sell off, from British Petroleum to the railway system. The privatization was supposed to create jobs and super-charge the economy. It certainly pumped a lot of money into the British treasury – once. She traded the yearly income for a one-shot payment. BP moved itself out of the country. The owners of Britrail closed smaller lines, forcing people to buy cars, all of which were built overseas, forcing major upgrades to roads. Get the picture? Thousands of Brits lost their middle-class incomes when the factories shut down and there was nothing to replace them. The lower wages of service industry jobs, if one could get a job, weren’t enough to sustain a family, so government support systems were expanded. Older people who had lost their jobs and pensions were particularly susceptible to not being able to find work and were not easily retrained to new jobs. The result – life-long dependence on “the dole.” If you watch Brit-coms and British movies, you’ve seen parts of this, in The Full Monty and the character of Onslow in Keeping Up Appearances.

Lagarde is not advocating any one-size solution to Europe. In fact, combining their problems across the EU is the last thing Lagarde wants. “Some countries have to go full-speed ahead to do this fiscal consolidation, but other countries have space and room. They should explore what to do…in order to help themselves. It has to be tailor-made.”

And into this debate comes U.S. Treasury Secretary Tim Geithner. He warned that there is a risk of a recessionary cycle if the austerity measures aren’t done properly. “There is a risk that every disappointment in growth will be met with an austerity that will feed the decline, and that is a cycle you have to arrest to solve financial crises. For parts of Europe for a long time, there will be no alternative to very substantial adjustment in budget deficits.”

Billionaire financier George Soros, who was very involved in the transition of the former communist countries of Eastern Europe to capitalist economies, warned that the extreme austerity advocated by the conservative governments of Europe could lead to a “lost decade” of economic stagnation. “This German insistence on austerity could destroy the European Union. This is reality, this is the harsh reality that we need to face. It is not written in stone, the future is not predetermined. We determine the future, so it would be well within the possibility of the authorities to change it.”

There is a second story at Davos that is less headline-making but equally important. Davos is a ski area in Switzerland that has been used for these economic summits for years. The story involves Swiss banking, that guardian of money that people want to keep hidden from government authorities for various reasons.

Swiss Finance Minister Eveline Widmer-Schlumpf

Switzerland’s oldest bank, Wegelin, announced on Friday that it is breaking up into separate divisions in response to a disagreement with the United States over men like Mitt Romney who have some or most of their money in Swiss banks to avoid paying American taxes. Just the way the city of Burlington, Vermont, is chasing people who didn’t pay their parking fines (to the tune of tens of thousands of dollars), the Obama administration is chasing down the tax avoiders who have stashed their cash in Switzerland. The administration agrees with German Chancellor Merkel that countries are deeply damaged by the ability of international corporations and individuals to hid their money in Swiss bank accounts and tax shelter countries like the Cayman Islands (another Romney bank site) and avoid paying taxes. But it would take an international effort to shut down these countries and the consequences to their economies would be horrific. A nation like the Cayman Islands has no other revenue source than the fees paid by corporations to register their “corporate headquarters” in post office boxes or virtually empty office buildings, like the little two story one a reporter tracked down last year that houses 20,000 corporations.

Wegelin was facing the possibility of multiple indictments on charges of helping Americans evade taxes. Swiss finance minister Eveline Widmer-Schlumpf called Wegelin’s decision “very regrettable,” and went on to say that “This development show how important it is that we come to solutions in the discussions, negotiations with the United States which hopefully prevent other banks getting into similar situations.”

The Justice Department has targeted 11 Swiss banks, including Credit Suisse, Julius Baer and Basler Kantonalbank. Widmer-Schlumpf told the press, “I don’t know whether other banks are in a similar or same situation…but what I know is that various banks are being threatened by the United States with prosecution and we will try to do everything…to come to a solution.” Switzerland wants the investigations halted in exchange for paying a large fine and handing over the names of thousands of American bank clients suspected of dodging taxes. UBS (which is not the initials of anything) paid $780 million in fines and handed over the names of 4,500 clients in 2009 to avoid prosecution.

Widmer-Schlumpf has been holding talks with Secretary Geithner this week in Davos. Switzerland struck deals with Britain and Germany last year that allowed clients to retain their secrecy while collecting taxes for their governments. But the EU Commission wants to force Switzerland into an automatic revelation of client information. Widmer-Schlumpf is part of the seven-member council that acts as a joint head of state for Switzerland and one of the rotating presidents.

The Great Depression ended in the Second World War, in part because of the way the Depression and the First World War were handled. This Great Recession does not need to end in a global war, but it may lead to some enormous changes in the world’s economic relationships, if it is handled properly. This country does not need to become Europe, as the Republicans want us to be. We also do not need to be isolationist, as some would have us be. It is essential that we work with the world, all of the world, to find global solutions to a global economy.

 

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