Europe's Wrongheaded Austerity Policies
The irony is that the austerity policies of the past years have been imposed at the behest of the unelected, leftist authorities in Brussels on center-right governments in the EU member states. The electorates are punishing their center-right governments by voting in center-left politicians who promise to end the austerity policies and "tax the rich" – a course that will make matters even worse.
Austerity -- what governments are currently experiencing in Europe – can be a bad thing. It is a well-known basic economic theory that when politicians try to slash the government budget by taxing citizens rather than by cutting government expenditure, they only harm the economy, which results in less tax income and worsens the situation. In the early 1970s, economist Arthur Laffer visualized it by drawing a curve on a napkin, indicating that from a certain point on, higher taxes result in less government income. When taxes are raised even further, the economy begins to contract.
A typical example can currently be seen in the Netherlands. The country's economy has not grown in the last three quarters. Pressured by the European Union, austerity policies were introduced in 2010. Last April, the government fell when the Freedom Party of Geert Wilders refused to back a new austerity package of €11.5 billion, of which only €4 billion was to come from cutting expenditures and €7.5 billion was expected to come from raising taxes. The new austerity round was nevertheless imposed by the EU, which insisted that the Netherlands trim its budget deficit to 3% of BBP in 2013. Geert Wilders was right to have refused to go along with the latest plans. Not only will the amount of €7.5 billion in new taxes in all likelihood not be reached, but the Dutch economy will be hampered even more.
Last January, Standard & Poor's warned the Netherlands that its credit rating could be lowered if its growth kept declining. S&P warned that the Dutch austerity policies risked "becoming self-defeating, as domestic demands fall in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues."
Geert Wilders' party is expected to do well in next September's general elections. The electorate agrees with his rejection of the austerity package. Like Mr. Wilders, it blames the EU authorities in Brussels for imposing these policies on the Netherlands.
The same phenomenon can be seen all over Europe, with electorates in revolt against EU-imposed austerity everywhere. The rising unpopularity of governments that are trying to cut back their deficits has worried the IMF. Earlier this month, IMF Managing Director Christine Lagarde said that the IMF is aware that fiscal austerity holds back growth and that the effects are worse in an economic downturn. This is, however, only a half-truth. As no one, not even the state, can indefinitely continue to spend more money than he receives, cutting government expenditure – hence austerity – is badly needed. The problem is that the austerity policies are targeting not the institution which is living beyond its means -- namely the government -- but the taxpayers. As Europeans are already suffering tax levels that are almost twice as high as those in the U.S., it is only natural that the voters are in revolt.
The irony is that the austerity policies of the past years have been imposed at the behest of the unelected liberal, leftist authorities in Brussels on center-right governments in the EU member states. The electorates are punishing their center-right governments by voting in center-left politicians who promise to end the austerity policies and "tax the rich" -- a course that will make matters even worse.
The Dutch are lucky to have Geert Wilders; but the French, who lack an equivalent of Mr. Wilders, quite understandably voted President Nicolas Sarkozy out because they disagreed with his austerity policy. However, they voted the Socialist François Hollande in, who will undoubtedly only heighten the problem.
The same phenomenon can be witnessed in the United Kingdom. Two years ago, the Conservative David Cameron managed to oust Labour. Today, polls predict that if elections were to be held now, Labour would beat the Conservatives with a margin of 10%. David Cameron is fortunate that Labour leader Ed Miliband is unpopular or the margin might be even larger.
What did Cameron do wrong? He, too, made tax payers pay for austerity. One of the first things Mr. Cameron did was to raise Britain's top tax rate to 50%. The result was that the tax revenue from Britain's highest income group fell. Another thing Cameron did was to raise sales taxes. VAT – or Value Added Tax – rose from 17.5 to 20%, the highest level ever, as part of Cameron's effort to bring down the country's budget deficit.
The VAT rise, the government said, was a tough, but necessary step in getting Britain back on the road to economic recovery. The Dutch government has just announced it will raise the VAT from 19% to 21%, a measure which Mr. Wilders, who wants to lower it to 18%, vigorously opposes. Earlier, German Chancellor Angela Merkel, too, had raised the VAT in Germany from 16% to 19% as part of her efforts to fill holes in public spending; Mrs. Merkel is also expected to fare badly in next year's general elections.
Early this month, the British Conservatives suffered widespread losses in local elections as voters punished the party for austerity measures and a stalled economy. A poll among members of Cameron's own party revealed that they see the tax rises on ordinary families as one of the biggest barriers to Cameron's reelection. Ever so often, Mr. Cameron expresses his approval of taxing people even more. "Taxes must rise to reform elderly care," he said. "Green taxes must increase in order to protect the environment."
Austerity policies, which consist mainly of extra taxes, not only keep the European governments from finding long-term solutions to their overspending, while worsening the economic situation; they also make these government increasingly unpopular. Almost 40 years after Arthur Laffer drew his famous curve on a napkin, one wonders why European politicians, keep closing their eyes to an evident truth, and put in place incentives for growth. But then even their American colleagues often do not want to see this truth.
President Obama's efforts at the G8 meeting last Saturday to help Merkel and Hollande reach a consensus on how to proceed will not help. Merkel and Hollande do not need to reach a consensus on how to proceed; they need to reverse course.
Reader comments on this item
|Collapse is the solution, not the problem [144 words]||Matt||May 22, 2012 14:28|
Comment on this item
by Soeren Kern
"My son and I love life with the beheaders." — British jihadist Sally Jones.
Mujahidah Bint Usama published pictures of herself on Twitter holding a severed head while wearing a white doctor's jacket; alongside it, the message: "Dream job, a terrorist doc."
British female jihadists are now in charge of guarding as many as 3,000 non-Muslim Iraqi women and girls held captive as sex slaves.
"The British women are some of the most zealous in imposing the IS laws in the region. I believe that's why at least four of them have been chosen to join the women police force." — British terrorism analyst Melanie Smith.
by Khaled Abu Toameh
"Armed robbery in broad daylight." — Palestinians, after Hamas "seized" $750,000 from Gaza bank.
Fatah accused Hamas of "squandering" $700 million of financial aid earmarked for the Palestinian victims of war. Fatah wants to ensure that the millions of dollars intended for the Gaza Strip will pass through its hands and not end up in Hamas's bank accounts. Relying on Fatah in this regard is like asking a cat to guard the milk.
The head of the Palestinian Authority's Anti-Corruption Commission revealed that his group has retrieved $70 million of public funds fund embezzled by Palestinian officials. Arab and Western donors need to make sure that their money does not end up (once again) in the wrong hands. Without a proper mechanism of accountability and transparency, hundreds of millions of dollars are likely to find their way into the bank accounts of both Hamas and Fatah leaders.
by Mudar Zahran
"If Hamas does not like you for any reason all they have to do now is say you are a Mossad agent and kill you." — A., a Fatah member in Gaza.
"Hamas wanted us butchered so it could win the media war against Israel showing our dead children on TV and then get money from Qatar." — T., former Hamas Ministry officer.
"They would fire rockets and then run away quickly, leaving us to face Israeli bombs for what they did." — D., Gazan journalist.
"Hamas imposed a curfew: anyone walking out in the street was shot. That way people had to stay in their homes, even if they were about to get bombed. Hamas held the whole Gazan population as a human shield." — K., graduate student
"The Israeli army allows supplies to come in and Hamas steals them. It seems even the Israelis care for us more than Hamas." — E., first-aid volunteer.
"We are under Hamas occupation, and if you ask most of us, we would rather be under Israeli occupation… We miss the days when we were able to work inside Israel and make good money. We miss the security and calm Israel provided when it was here." — S., graduate of an American university, former Hamas sympathizer.
by Ben Cohen
Now, with the Islamic State's self-proclaimed caliphate having captured key oil wells in the Middle East this year, foreign oil has become an even more lethal financial weapon-of-choice for those seeking to destroy democracy and further escalate the War on Terror.
That President Barack Obama failed even to mention oil as a critical factor in the war against IS during his speech to the nation on September 10, is an omission both revealing and dangerous in terms of how his administration wants to depict the stakes involved in this latest confrontation with the jihadis.
by Lawrence A. Franklin
One Pakistani recruiter of child suicide bombers describes these children as "tools provided by God."
Another Muslim cleric in a madrassa [Islamic boys' school] describes child suicide bombers as "a gift from Allah that we have an unlimited number willing to be sacrificed to teach Americans a lesson."
Using children as suicide bombers will stop when... they stop "condoning the killing of innocents."