Why Europe Failed

Dr Oliver Hartwich of The New Zealand Initiative discusses his new book, Why Europe Failed.

Over the past years, we have become used to Europe’s debt crisis. However, the fiscal problems of countries such as Greece are only the tip of the iceberg. Europe’s crisis has much deeper roots. Here, Dr Hartwich explains the causes of Europe’s decline.

7 thoughts on “Why Europe Failed

  1. Robert Brown says:

    Thank you Colin, I agree with your points above and understand that “printing money” is in effect crediting commercial bank accounts with keystrokes. I also understand that in a country like Australia’s spending can be funded by the central bank buying the debt and issuing dollars in payment. If this spending is greater than the taxes the government collects It will of course increase public debt and a government deficit. It is however an option a country like Australia can take as an alternative to a private sector deficit which by necessity must occur if there is a government surplus and a current account deficit. I am coming from the position that government deficit is preferable to a private sector deficit, as a private sector deficit has a detrimental effect on private sector spending which in turn effects sales, employment and economic growth. Back to my original posting I was trying to make the point that Eurozone countries like Greece, Spain, Italy etc that do not have their own sovereign currency, do not have the same freedom to adopt a policy of running large governments deficits in an attempt to foster private sector growth, as do countries like Australia and the US.

    • ColinTwiggs says:

      Governments need to run deficits when there is a crisis of confidence as during the GFC. At any other time they should match revenues and expenditures or run a small surplus to repay debt.
      Private sector deficits (when the private sector is a net borrower) are fine provided that the deficit is used to finance increased investment and not consumption. In fact, they are preferable to government deficits because resource allocation is likely to be more efficient. It is just that they are difficult, if not impossible, to engineer when there is a crisis of confidence.

  2. Robert Brown says:

    Government spending is a problem in Eurozone countries because they don’t have their individual central banks with which to create their own money. They are reliant on and subject to the offerings of the European Central Bank. Countries like the US, Australia, Switzerland, UK, Japan etc which have their own central banks and can create their own currency do not have this problem and thus do not have to take out massive debt ridden loans that burden the Eurozone countries.

    • ColinTwiggs says:

      Most money is “created” by commercial banks and not the central bank. They create a loan to the borrower, who purchases an asset, and finance the loan with the deposit from the seller.

      Government spending is either funded by public debt or taxes.

      Central banks “create money” by purchasing government debt from private investors, creating more deposits with commercial banks.

      • Robert Brown says:

        Yes, most money is created by commercial banks in the form of loans, and government spending is usually dictated as a matter of policy by what it collects in taxes, but it is not bound by this if it does not want to be. It is only a policy decision. There is nothing restricting the federal government in Australia for example from buying any goods or services up for sale in Australian currency without having to fund such purchases through the collection of taxes. After the GFC for example the Australian government issued $1000 to each tax payer without first having to collect it in the form of taxes. QE2 in the US is another example of the government being able to issue money without having to collect taxes first. It will of course effect the government deficit, but whether that is a good or bad thing is another argument. Countries have for many years have had deficit budgets, they are the norm rather than the exception in countries with a negative current account balance The fact is that a central government in a country like Australia or the US is not bound by having to collect taxes or take out loans in order to buy whatever is up for sale in its own currency. The role of taxes work as such are a means of controlling inflation and maintaining price control by draining money supply.

      • ColinTwiggs says:

        “The fact is that a central government in a country like Australia or the US is not bound by having to collect taxes or take out loans in order to buy whatever is up for sale in its own currency.”

        You seem to have missed something here. Governments are bound by the same accounting rules as everyone else. Whatever they spend has to be collected by way of taxes or financed by debt. When we refer to them as “printing money” this is a euphimism for a more complicated transaction that achieves the same end:

        1. government issues debt to fund a surplus
        2. private investors buy the debt
        3. OR central bank buys the debt and issues dollars in payment (it doesn’t actually print dollars it simply credits its account with the commercial bank where the funds are deposited)
        4. when central bank buys debt, dollars in circulation have increased — referred to as “printing money”
        5. banks then have more money to lend, driving down interest rates
        6. UNLESS banks reluctant to lend and leave credit with central bank as excess reserves, earning 0.25% p.a. — which is what has happened a lot over the last few years — so QE had about as much effect as pushing on a string

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