Wall Street Journal Europe
October 17, 2011
by Irwin Stelzer
Greece will not meet its deficit-reduction target.
The reasons given are various. It cannot collect the taxes it levied in the hope of increasing the flow of revenues to its treasury, a shortfall contributed to by tax-collectors' refusal to work hard to rake in the money. And it is proving harder to pare public-sector payrolls than had been anticipated, while the privatization program is stalled.
Spain will not meet its deficit-reduction target, which is more likely to come in at 9% of GDP than the promised 6%.
It has abandoned plans to sell its lottery and postponed plans to sell or lease its Madrid and Barcelona airports. The government says the market is putting too low a value on the lottery, and potential investors in the airports need time to get their financing in order. And it seems that the central government can't rein in the spending of regional governments, making it impossible to keep overall spending under control.
Portugal will not meet its deficit-reduction target.
Tax receipts are lower than had been forecast only a short while ago, and the firmly entrenched governor of the island of Madeira has pledged to continue his spendthrift ways, preventing Portugal from meeting its spending-reduction goals.
Italy will not meet its deficit-reduction targets, assuming it can agree on any—not just vote for them under pain of losing its prime minister to a no-confidence vote, but actually implement the cuts in the bloated bureaucracy and jobs-for-the-boys system that passes for government in Italy.
Certainly the markets are not optimistic: Italy is paying more to borrow money than is Spain. Prime Minister Silvio Berlusconi did squeak through a no-confidence motion and get his budget adopted, but no one believes he retains enough clout to see his proposed reforms through, or that a more left-leaning successor government will even try very hard.
Meanwhile, the troika—the International Monetary Fund, the European Central Bank and the European Commission—trots from country to country, marveling at the accounting ingenuity of the countries that have been bailed out, tut-tutting at the failure of each to meet its targets, and recommending a heavier dose of the medicine that is enfeebling the patient. It sees trees and dots where there is a forest and a picture. These trees are part of a forest under threat from a single source, and these dots can be connected.
Efforts to cut the deficits in these countries are not failing because of different reasons in each nation, although there are some such. They are failing because of misguided austerity plans.
Spending cuts and tax increases drive GDP down faster than the deficit, causing the deficit: GDP ratio to rise rather than fall. These measures are being imposed on economies with rigid labor markets, no history of entrepreneurial innovation, high taxes, and regulations that strangle their private sectors. That is not to say that the roles played by governments should not be reduced: They should. But without growth-inducing reforms, all the cutting will continue to be for naught.
Doubt that and consider Ireland, one of the first countries to throw itself on the mercy of the euro-zone bailers. The unholy alliance of politicians and bankers that financed the inflation of a property-development bubble was followed by a massive policy error. Instead of following the advice of the great Walter Bagehot, and letting the banks fail while the central bank pumped massive amounts of liquidity into the system, the government decided to load the burden of failed banks onto the national balance sheet, which simply could not bear the load.
But when Ireland went cap in hand to the euro zone for help, it held to one principle: Its low, 12.5% corporate tax rate was not to be bargained away, no matter the pressure exerted by high-tax France, and a German chancellor eager to eliminate competition for inbound investment. That's not the only reason Ireland is now in a position to claim that it has met the terms of the bailout, and is entitled to have its interest rate reduced. It is important both in itself and as a symbol of Ireland's determination to grow out of its problem.
Ireland has sold off assets worth €2 billion ($2.7 billion), almost halfway to its agreed target of €5 billion of sales. But it is pressing the troika to allow it to invest some of the proceeds to grow its economy, most notably by rolling back the personal-tax increases it had to impose to get access to bailout funds.
Exports are up 40%, much of the increase due to sales by multinational firms that invest in the country because of its pro-investment climate and an educated, English-speaking work force that prefers jobs to riots.
Yields on Irish bonds have trended down—from 14% this past summer for 10-year bonds, to 7.6%—while those in other heavily indebted countries have risen.
"Ireland may be slowly 'decoupling' from the rest of the European periphery," conclude economists at Wells Fargo.
With the unemployment rate at more than 14%, Ireland has a long way to go. But if its drive for growth works, the Celtic tiger might roar again before joyful laughter is heard on the streets of Club Med.
There's a lesson here for the euro-zone powers that be: Even if they agree on a "shock and awe" rescue, the hard work of supply-side reform remains.
Corrections & Amplifications
Portugal held national elections in June and the government was elected to a four-year term. Alberto João Jardim is governor of the island of Madeira. An earlier version of this article incorrectly said the Portuguese government was about to be rejected by the electorate. It also described Madeira's governor as the mayor.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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