In this post I will return to my favourite topic: The Eurozone and its descent into chaos. You may not have heard much about the Eurozone lately – partly because of the election coverage, and partly because things have been quite stable – but trust me when I tell you the problem has not gone away.
You may have heard optimistic reports claiming that the Eurozone leaders are now working together. If you were stupid enough to believe that the problem in the first place was lack of co-operation, then I’m sure this sounds assuring to you. Obviously, if the only problem was that some countries weren’t willing to take one for the team until now, then the whole problem ought to go away now that countries like Greece look like they have been subdued.
The only problem is this: It really doesn’t matter if you’re working together, if you what you’re working together for won’t provide a solution. What have the Eurozone leaders decided to work together for? An even more relaxed monetary policy, that’s what. It’s kind of like a group of passengers in a sinking ship, deciding to work together to make the hole in the boat even wider. They may be united, but they’re going in the wrong direction. Unity alone accomplishes nothing.
Now I’m going to try and explain the headline. I am not by any means saying that the Eurozone is or will ever be as poor as Africa, nor do I think lions will be roaming the streets of Berlin anytime soon.
No, what I mean is that European leaders have fallen for what I’d like to call the “Africa fallacy”. Let me give you a brief history of foreign aid and you’ll understand what I mean:
In the 1950’s, some not-so-smart economists (there are a few bad apples among us) came up with this idea that the reason why Africa was so poor relative to the rest of the world was because Africa as a continent was very capital-poor – lots of labour, but no capital (capital in this sense refers not only to money but to machinery etc as well). Now this kind of made sense: Basic economic theory, the type we are taught in EC101 modules, teaches us that output is a function of capital and labour (Output = the amount of capital raised to the power of alpha times the amount of labour raised to the power of 1 – alpha, where alpha indicates how capital-dependent the economy is – usually estimated to be at least 1/3). You need both – it’s useless to have a bunch of machines but no workers to operate them, and it’s equally useless to have a bunch of workers but no tools for them that they can work with and produce things.
Now note in defense of these economists and the politicians who listened to them (how come politicans only listen to us when we’re wrong?!) that this idea came after the relatively successfull Marshall plan that helped Europe recover after WWII. Foreign aid basically had a much better track record back then than it has today.
Anyway, what they suggested was this: Since Africa has a lot of labour (workers, most of them unemployed), but not so much capital, and since you need both to create wealth, we’ll just send them a bunch of free money for them to buy machines and build factories and stuff with. Then, they’ll be wealthy, the world will be a better place – oh, and maybe they’ll even forgive us for the whole colonialization thing (white guilt has always been a motivation behind foreign aid).
There were two basic flaws with this argument:
1) First, if you need foreign aid to industrialize (as these economists argued), then how could the first countries industrialize? The UK was the first country to enter the industrial revolution era back in the 18th century, and to my knowledge no-one sent them any foreign aid. They had almost no capital – probably less than African countries today – yet somehow they made it and became the one of the richest countries on earth. How was this possible? The only possible explanation is that once you have the conditions necessary for growth, what little capital you have will grow as well. You may for example start of with only 100 factories in your whole country, but under the right conditions, these factories and their owners can turn a profit and soon you’ll have a 1000 of them. Which takes us to my second point,
2) The right conditions were not there in Africa, and they are even more non-existant today. Mainly what I’m talking about here is the lack of stable government. It may be tough for some conservatives and libertarians to swallow, but government is quite vital for growth. Not that a bigger government automatically means more growth (it’s usually the other way around), but having a government is certainly vital. Things such as having a police force you can report crimes to, a court system who will bring criminals to justice, a government that respects your property rights – all these things are fundamental building blocks for an economy. Without them, you won’t have growth – no matter how much labour and capital you pour into an economy. Pouring capital on countries without these vital things is like pouring water on a duck’s back – except water is a lot cheaper. Africa’s problems have always been structural in their nature; the original lack of capital and private investment had a cause after all. The African countries have lacked stable governments as well as non-corrupt legal systems and police forces. Many African countries were and still are quite tribal in nature. There is a reason why the European countries had to leave tribalism behind before they could industrialize: Tribalism simply doesn’t make for a good economy.
OK, so foreign aid was a flawed concept, but what does this have to do with the Eurozone? At first glance nothing. At second glance everything.
Try this experiment: Substitute Africa for “PIIGS” (Portugal, Ireland, Italy, Greece, Spain) and “foreign aid” for “stimulus”. The whole idea behind stimulus is essentially the same: These countries just need a little bit of money so they can get going. The problem is the same as with Africa: The reason why the recession rages on in southern Europe is because of structural issues. Not lack of demand, not lack of supply, but issues that concerns the very core of these countries governing. Greece for example has a completely inefficient police force – that’s a big reason why people are turning to racist wannabee-vigilantes like Golden Dawn for basic crime protection services. Greece and many of the other countries are absolutely dysfunctional, corrupt at every level. Increasing capital, or labour, or anything else won’t improve the situation. These countries need (for starters) constitutional reforms (for example a balanced budget amendment, term limits etc), not stimulus money. Unless you meet the basic conditions necessary for an economy to be able to grow, it doesn’t matter what else you do. It was true for Africa, and it’s true for the Eurozone.
And because of the Eurozone, the problems doesn’t end at these countries’ respective borders: A problem for Greece is a problem for Germany, and a problem for Germany is a problem for Finland, and so on. This means that something that drags down growth in Greece will also drag down growth in Germany. The insecurity and volatility of the situation causes investors to abandon the region altogether, and employers don’t want to hire even in the Eurozone countries that aren’t among the PIIGS, because they know that the other countries are hitched to the PIIGS countries and could be dragged down at any time (we’re seeing this happening with France and Belgium in particular).
Is constitutional reform possible? Hypothetically speaking the answer would have to be yes. It’s always possible if a strong enough majority of the population wants it. But let’s have a look at the people of Spain, Greece, and the rest of them: Are they currently doing any useful soulsearching? Are they self-critical? Are they willing to take their fair share of the blame? Because, the way it looks to me, a majority is still not really interested in finding a long-term solution and even less interested in investigating the cause of the crisis. Most of them just care about keeping their own government benefits.
And what about the politicians? Well for them, advocating constitutional reform of any type would be an admission of failure and indirectly blame for the current situation. Plus; they are the winners in the current corrupt system. Why would they want to change anything? Things are going great for them. Their benefits and salaries are not going anywhere. I’d say they are quite comfortable hanging out with lobbyists, having fancy dinners with leaders of special interest groups etc.
And, while constitutional reform may be able to sort out some issues in countries like Spain and Greece, the Eurozone still won’t work simply on account of the economies being too different to have one and the same interest rate. The very existance of the Eurozone is the biggest structural issue that the European economies face today. And because of that, the Eurozone has to go.
A final word about the election
Before I end this post, I’d like to talk about a completely different topic, namely the election. In 24 hours, we will most likely know whether or not Americans have chosen to change direction with Mitt Romney, or keep on the current path with Barack Obama. If there are any uncertain voters out there reading this post, I would like them to consider this:
The real difference between the left and the right lies in the different view of the citizen, and the citizen’s relationship with the state. You can compare it to the difference between a dog and a wolf. A dog has an on the surface very easy life: Fed by the owner, it doesn’t have to hunt. A dog doesn’t have to worry about finding company and friends – the owner is it’s main company, and the owner will decide which friends the dog is allowed to see. But there is a downside to all this security: At any time, a dog’s owner might decide to have the dog put down, for any reason whatsoever.
Now compare this to the life of the wolf: A wolf has to hunt every day to find food, and it can never be certain about where its next meal is going to come from. A wolf lives a life almost completely devoid of security; but it also doesn’t have to please any owner nor worry about being put down on a whim. It can associate with other wolves, or it can live as a lone wolf – it’s up to the wolf himself.
Would you rather be a wolf or a dog? What relationship do you want with your government? Do you want a government that owns you, provides for you and has the power to have you put down? Then vote Barack Obama, because that is the direction he is taking the US. If you’d rather live a free life in the woods (metaphorically speaking of course), then vote Mitt Romney. No, he won’t be taking you for walks or feeding you at regular times every day – but he will leave you alone to fulfill your dreams and ambitions.
A note of caution: If you choose to vote for a politician who promises you the convenient life of a dog, then don’t be surprised when you end up on a short leash.
Thank you for reading.
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