After the last EU finance ministers meeting it became clear that austerity measures will be loosened. Led by France much problematic governments declared that they will not fill the targets for spending cuts and deficit size. This happens although serious reforms in EU are not still implemented and as a result the economy continues on its way down, under high redistribution, high taxes, excessive regulation and generous and expensive welfare system. More and more consumers, less and less producers
At the same time politicians are blaming exactly the non-existing austerity for continuing problems and decide to cancel the spending cuts plans
It is absolutely expected people to protest on streets against lowering wages, pensions and benefits. But is absolutely stupid these protests to stop the reforms that are inevitable. The democracy is a choice between possible scenarios and not a choice between possible scenarios and dreams. Up to now both the protesters and the governments prefer choosing the dreams. So the fairy tale of borrowing and spending is continuing, and any attempt for awakening is declared heresy and damned ruthlessly.
Obviously it will be better for the economy to continue the excessive government spending. It would be good for me too to spend more and have more TVs, property, cars, luxury travels, etc. There is just one problem what to spend.
It is good to acquire more goods, it is a small problem only the money for it.
The prevailing logic of EU finance leaders is that is not good to stop spending and weaken the demand. In fact the demand does not automatically create GDP. It must be connected with the production. I.e. spent salaries must be earned in real production and not in bureaucratic services that are a type of redistribution. Additionally in an open economy every stimulus measure stimulates also the importers and erodes the domestic result. But the most important question is where the money for stimulus comes from.
Borrowing and creating debt is a pleasant job. Repaying back the loans is an unpleasant job. It doesnt matter if the repay will be through taxes and austerity, or through inflation. The price is being paid. There is no free lunch. So it is wiser to make the cuts earlier when the debt is still lower. Postponing is a choice of a magic dream that will be soon converted to a nightmare. No exit
March 5th 2013