In Europe Austerity Is A Myth, Higher Taxes Are Not

Discussion in 'Politics' started by pspr, Nov 17, 2012.

  1. pspr


    The eurozone has officially slipped back into recession, and America could soon follow if it takes President Obama's route of cutting deficits mainly through tax hikes.

    The news this past week from across the Atlantic poses a lead-or-follow choice for the U.S. The nation can either pull the rest of the world back into prosperity, or it can sink with it.

    And it will be making that choice soon, in how it decides to deal with the tax hikes (huge) and spending cuts (not so huge) due to hit at the start of 2013.

    One option is President Obama's plan to raise taxes by about $1.6 trillion over the next 10 years.

    The other is the Republican idea of holding the line on tax hikes while rolling back future spending with entitlement reforms. To see which plan would work better, it's instructive to take a look at Europe.

    Eurostat, the European Union's statistical service, has made it official: The common-currency zone of the Continent has slipped back into recession after three years of weak recovery. The core economies, France and Germany, continue to grow but not by much.

    Germany's quarter-to-quarter growth slowed to 0.2% in the third quarter from 0.3% in the second; France had growth of 0.2% after a contraction of 0.1%.

    This modest expansion was not enough to offset the slumping sick men of the South — Spain, Italy and Portugal. Eurozone unemployment has also hit a record high of 11.6%.

    This dismal record shows the failure of government policies lumped under the label "austerity." That's a tricky term. It suggests that Europeans are suffering under massive cuts in public pensions, jobs and services. But actual Eurostat figures make us wonder what all the riots are about.

    Most European governments are spending more in 2012 than they were in the pre-recession year 2007. For the EU overall, public spending is up 10% in that time; in the eurozone, it's up 13%.

    But there's also "revenue-side austerity," as Britain's New Statesman calls it. That is, raising taxes. Europe has done plenty of this. In the U.K., the "austerity" program of Prime Minister David Cameron's government included a hike in the value-added tax — a national sales tax paid by virtually everyone — from 17.5% to 20%, along with increases in taxes on income, payrolls and capital gains. Meanwhile, public spending is budgeted to rise by about 5% over the next three years.

    Britain got a burst of growth in the third quarter — up 1.0% — thanks in part to the Summer Olympics in London. But it contracted in the three quarters before that. On the whole, its revenue-side austerity looks like a drag on growth.

    Likewise, France's feeble growth goes hand-in-hand with tax-happy policies. Its Socialist Premier Francois Hollande sent a chill through the economy when, while still a candidate in February, he proposed a 75% tax on high-income earners. That tax and others have helped raise France's jobless rate to 10.8% as of this September (a year earlier it stood at 9.6% and had been falling).

    Perhaps with such stories in mind, European Central Bank President Mario Draghi on Thursday urged governments to focus on "spending cuts and not tax hikes" in dealing with their deficits. He says spending cuts are a sign to the bond markets that governments really mean it — that, in his words, fiscal reforms are "credible, irreversible and structural."

    Credibility can make a big difference in the interest that governments must pay to stay afloat. A nation with $16 trillion in debt would do well to remember that.