FEBRUARY 2014 / NO. 2
TAGS: POLITICIANS, LACK OF COURAGE, ROGER BOOTLE, EUROPE, EU, IMF, ECB, GDP, PIIGS, EURO

Politicians and the lack of courage

“Politicians keep throwing money to support weaker nations’ debt problems, they never talk about restoring growth”
The above statement comes from Roger Bootle in Fortune Magazine, dated 8th October, 2012. Why should we listen to him, you may ask, as we read so much from so many economists, daily, about the problems across Europe? For two main reasons: Roger Bootle predicted the downturn of the 2002 dotcom bubble back in 1999, and the worldwide financial crash in 2007 back in 2003! He sees only one way to solve the European disaster: a breakup of the euro. And why? Because in his view Europe can only survive by regaining its competitiveness with a split in the euro.
Politicians and regulators such as the EU, IMF and ECB talk only about the huge overhang of sovereign debt, approaching and exceeding 100% of GPD in nations such as Greece and Italy. In this respect, the future competitiveness of countries is similar to that of companies. The PIIGS countries, namely Portugal, Ireland, Italy, Greece, and Spain, all suffer from a dramatic loss of competitiveness because of their excessive cost of production. In the PIIGS countries, the cost of labor has increased by an average 3-4%/year since 1999. This competitiveness gap was a decade in the making, the equivalent of 40%, compared to countries in Northern Europe! For example, Italy’s share of global exports dropped from 5% to 2% since the end of the 1990s.
The PIIGS countries must revert to their former currencies immediately with devaluation rates ranging from -55% in Greece and Portugal, -40% in Italy, and Spain and -25% in Ireland. According to Roger Bootle, politicians have it totally wrong by continuing to throw lots of money from the public sector to buy time, however, the markets will win in the end. Abandoning the single currency is no longer an unthinkable choice, but the right one.
I am afraid, however, that our politicians in Europe do not have the courage to face this opportunity of future competitiveness. On the contrary, our politicians are very pleased to have been awarded the Nobel Peace Prize, which fills them with complacency!
“The euro is a depression-making machine”
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