European GDP Takes a NoseDive

EU GDP drops huge.  In 2012, they didn’t have a single quarter of growth.   One of their remedies is to place a transaction tax on trading.  Massive mistake.  Massive.  A tax on trading will only make markets less transparent, less liquid, and drive transactions into the private unregulated marketplace.  The tax will also cause capital to flee to other places at a time when the EU needs capital to come to it.

European Union

European Union (Photo credit: ana branca)

That Tobin economist out of Yale wasn’t a brilliant guy when it came to the real world.

There is no magic bullet that can magically transform the EU economy.  The French made a mistake electing a socialist in France that decided to expand government programs and increase taxes.  But no one ever confused the French for being capitalists.  The multiplier effect of government spending is 0.  You cannot tax and spend your way to economic prosperity.

Europeans never learned that.  They are full on Keynesians.  Central planners.  Bureaucrats.

The debts they have accrued are eating them alive.  Their economies cannot grow fast enough to keep up.  They have entered what is known as the death spiral.  Because of the heavy government interference in markets, and the artificial low interest rates the EU Central bank is imposing, capital is locked.  It doesn’t turn over and won’t cannot be allocated through the marketplace to more productive resources.

The bureaucrats will meet.  They will talk.  Hold more emergency meetings.  They’ll spend more taxpayer money on fancy hotels with fancy offices and great food.  They will exchange ideas.  But nothing will get done.

There are some in the EU that are trying to encourage entrepreneurship and startups as a way out.  It’s a great idea to encourage entrepreneurs. But, that takes a lot of time to have any real effect on economic development.  Not to mention the fact that the EU doesn’t have an entrepreneurial culture based in citizen DNA like we have in the US.

Because entrepreneurs fail so much, it takes time to build a community.  Parts of the EU are trying.  But even if they are successful, the economic engine they are trying to create won’t bear sustainable fruit until 2033.  They don’t have the luxury of  that kind of time.

The way out of the mess is a difficult path no politician, and especially no bureaucrat in a cushy job wants.  Take a meat cleaver to government regulation.  End subsidies.  Slash taxes.  End government jobs and put them to work in the risky private sector.  Privatize, privatize, privatize.  End centrally planned panels and market manipulators and let the free market reign over capital allocation and who wins, and who loses.

The EU is on the road to persistent economic contraction.  Since they are not in a vacuum, there deficiency affects everyone else a little.  If you remember my “Microeconomics Monday” series, you would consider the EU deadweight loss on the American economy.  The US can grow GDP even with a faltering EU-but it would be a lot better if the EU did things right.

Because of all the economic imbalances the EU has, if they did embrace a free market system it would be like an earthquake, tsunami and volcanic eruption hitting at the same time.  Things would get a lot worse before they got better.

No one has the political will, nor the stomach for that.  Sounds a lot like many governments in the US that are beginning to be faced with the same challenges.

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Thanks for the link Instapundit.

Thanks for the link smalldeadanimals

tip of the hat to the morons at Ace of Spades.  Have a shot of Val-U-Rite for me.

Thanks for the link Doug Ross.

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