Posted by on November 14, 2019 6:34 am
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By Erik Sass, TES Editor-in-Chief


Collectively and individually the countries of Europe face economic problems that they are either unwilling or unable to confront due to a lack of political courage, despite the availability of effective remedies. That was the bleak takeaway from a panel discussion of economic and political experts at the 8th Annual Austrian Conference on “The Austrian School of Economics in the 21st Century,” moderated by Barbara Kolm, founder and director of the Austrian Economics Center in Vienna.


Europe’s troubles aren’t necessarily confined to the continent, of course. Kicking off the panel with a global view, Lawrence Goodman of the Center for Financial Stability in the United States noted that, on both sides of the Atlantic, monetary policy and financial management has succumbed to excessive focus on immediate outcomes: “Today policy is overwhelmingly short-term focused, and quite frankly it’s threatening the health and stability of the long term.”


One of the most troubling trends, Goodman went on, has been the repeated resort to quantitative easing (central banks using reserves to buy government bonds) despite growing evidence that it is no longer producing the desired stimulus: “Extraordinary monetary policy is beyond its limits… When you look at the liquidity injections in the immediate aftermath of the [financial] crisis and quantitative easing I, [these] were helpful. Quantitative easing II and quantitative easing III were superfluous in our view.” Indeed, “What we learned from this data is that the efficacy of monetary policy has in fact diminished with each successive round of quantitative easing.”


The resulting problems are global in scale, Goodman noted: “This has created a series of spillovers… which creates a beggar-they-neighbor tension with currency policies… It’s no wonder that $17 trillion of sovereign debt is negative, the interest rates are negative. This is a mess.”


Against this troubling background, the other panelists quickly zeroed in on Europe’s particular challenges, beginning with its continuing reliance on QE, now on hold in the U.S. Franz Wenzel, investment strategist for institutional clients at AXA, noted the contrast: “At this juncture the U.S. Federal Reserve has presumably no intention to [add or] lower or decrease its balance sheet… What keeps us awake night and day, the ECB is in a very different situation.”


Harking back to former ECB president Mario Draghi’s famous promise in July 2012 to do “whatever it takes” to save the Euro, Wenzel reminded the audience that Draghi also laid out expectations for the national governments of EU member states to do their part with structural reforms – but they have largely failed to follow through: “Mr. Draghi mentioned that in each and every meeting of the ECB, the governments have to play the game as well… We need governments to play the role as well, i.e., to foster structural reforms. That’s what the Euro zone is suffering today.”


Daniel Kaddick, executive director of the European Liberal Forum, also took aim at the ECB’s chronic dependence on QE: “I’m not a big fan of what’s happening in the ECB. It’s not only a massive market distortion and socializing market problems, diminishing the basic logic of loans, the basic logic of markets… it’s also building up a massive bubble which we all are expecting to burst.” Echoing Wenzel, Kaddick also lambasted the “entanglement of politics and economics,” warning that national politicians must share responsibility for what is happening: “Politicians are also killing banks as a social institution, which I find extremely dangerous. Banks were social institutions that were responsible for the security of the money of the people. Is money secure now? I doubt it.”


Failure to implement structural reforms allows cosseted industries to drift dangerously, Wenzel added. Pointing to one key European economic engine, the vaunted German car industry, Wenzel lamented German carmakers’ failure to keep pace with global trends: “Of course they make the most beautiful cars in the world. Yet they missed a huge change to electric cars… There’s a huge mismatch.” Pounding the point home, Wenzel repeated that structural reform is “what is substantially and desperately unfortunately missing today.”


Even more ominous, the structural reforms that are being proposed are headed in the wrong direction, argued Michael Jäger, vice-president of the Taxpayers’ Association of Bavaria, a branch of a continent-wide organization. Here Jäger pointed to recent proposals to establish a European-wide minimum wage, a sweeping measure that would – among other things – eliminate the competitive advantages of lower-income countries in the east: “Why should one investor go to Romania or Bulgaria, when you have high costs, as well as corruption and weaker infrastructure?”


At home, Jäger went on, “No one is telling the truth in Germany that there is space for tax cuts.” This serves to stifle innovation, especially in the digital sector where European governments are ostensibly keen to foster growth: “In Germany, if you’re a startup it’s a really bad situation… If you have profits you’re overtaxed.” As a model he suggested Germany look to Estonia, where “as long as you keep the money in your corporate, you pay 0% taxation.”


Taking up the theme of tax competition, Kaddick decried another set of misguided structural reforms, aiming to make it impossible for national governments to woo investment with lower taxes and more efficient social payments: “We all need to put pressure on all politicians who want to harmonize taxes, to harmonize pensions, it’s the wrong thing to do.”