If This Be Austerity
Sometimes we laugh at things that aren’t funny. For instance, I get a kick out of the notion that Portugal and other European nations in potential debt trouble are creating “austerity” measures – mostly by raising taxes with a dusting of actual spending cuts. But it’s really nothing to laugh at – fiscal reform is serious business for the euro’s future. To meet spending cuts agreements made during the creation of the bailout, Portugal has announced the following measures:
- Increasing their value added tax (VAT) by 1% to 21%
- Increase income taxes up to 1.5%
- Increase corporate taxes 2.5%
- And, lastly, almost like an afterthought, cut public sector salaries cut by an average of 5%
The Keynesian notion of increasing taxation in order to get fiscal budgets in order is ludicrous. The answer is and always has been growing the tax base. That is, growing the economy to pay down deficits. More taxes won’t do it in the long run. At least Spain seems to take this seriously, announcing the biggest budget cuts in 30 years.
The question of the euro’s long-term viability hinges on whether troubled member countries get serious about fiscal reform. Or, as Paul Volcker said earlier this week, “You have the great problem of a potential disintegration of the euro. The essential element of discipline in economic policy and in fiscal policy that was hoped for… has so far not been rewarded in some countries.”
Volcker’s words are probably a bit overwrought, but it is semi-concerning in the sense that the euro’s demise is being seriously contemplated. Hence, the resumption of very high volatility in markets. Right now, uncertainty seems to be winning the day – the European government is in many ways being as erratic as the US government was two years ago. But in this case, the EMU was quicker, and already brought out the big bazooka of a near trillion-dollar backstop if solvency becomes an issue. With that in place, it’s likely sooner than later that overwhelmingly positive global economic data regains primacy, and stocks resume their climb.