Why Austerity Programmes across Europe will Bring Disaster...

The fashion for budget cutting has now run all over Europe - including the French. And the English have gotten into the act too. So far, the biggest cutters are still the Germans, with a proposed €80 billion austerity programme over the next four years. The European Central Banker, Jean-Claude Trichet, raves about it and so does Ms. Merkel, the German Chancellor.

I wonder why. These are presumably savvy, educated people with a head on their shoulders, or are they? Haven't they read Keynes? Haven't they heard about the Great Depression and how Roosevelt didn't manage to get out of it? In 1937, he reversed his Keynesian-inspired expansion policies because they cost too much to the budget. To get out of the Great Depression, America had to wait for World War II and the extraordinary level of government war expenses.

Before the Great Recession came along - I mean before 2008 - I can understand that Keynes might have been considered passé. Those were the days of the real estate bubble and financial hubris. Those were the days of the so-called "Washington Consensus" which had put centre stage the free market ideology and pushed under the carpet - seemingly forever - any role the State might have in the economy. The Soviet Union had collapsed and with it the Communist, centrally planned vision of the world. All that was left were wildly liberal monetarists à la Milton Friedman - no other kind of economist allowed. The Market had become a New Idol, one that was never wrong. Just let it act in total freedom, and any recession would automatically correct itself. And, of course, a depression was impossible.

But now? We've seen to what excesses the Market Idol can take us. Governments have had to move in, they've devised stimulus packages and saved the banking system from collapse. That has cost money, of course. And when the stimulus stops, it is often too soon, as we've recently seen with the American real estate market that has taken another plunge. And much work still remains to be done to force banks back into banking, i.e. as keepers of our savings and lenders to business. That is their role in the economy. But of course they much prefer to play around with derivatives and other new-fangled financial products rather than focus on their traditional role. No doubt gambling is far more fun than serious work. Still, with luck, Congress might soon pass some responsible legislation (including the Volcker rule) that will help curb the financial hubris that has hurt everybody (except the bankers, of course).

Yet European politicians are strangely impervious to this. All they see are the rising public debt - a natural outcome of their earlier interventions to sustain the economy - and they feel they must do something about it. Immediately. And they've brought their Weltauschauung to the G-20 in Toronto - with the odd result that every country agrees that cuts are in order but everyone is left to do as it pleases...

Cut, cut, cut! That is what the financial markets demand, says Trichet. That is what will restore confidence to the German consumer, says Merkel. She knows Germany is accused of not consuming enough and focussing only on its export industry (which in fact is now roaring along, thanks to the weakened Euro).

Do German consumers really need to see a government austerity programme in place to spend their money? Have you ever met anybody who worried about Government debt when contemplating the purchase of, say, a car? And an austerity programme, by cutting down on government posts and pensions etc and sending people home with less money, is bound to cut back on personal income and cause a further drop in German consumption...

But why should a Central Banker ever bow down to a speculative attack on his currency? What is the problem with the European Central Bank? Normally any Central Banker worth his salt would defend his national currency with all means available, including purchasing treasury bonds to control undue rises in interest rates. So why should the European Central Bank not act as any other Central Bank would ? Why should it feel apologetic when it does? Trichet a couple of days after buying Greek bonds immediately announced to the press in Frankfurt that he would "sterilize" the purchases - meaning reverse them.

The answer? He means to please the Germans - everybody in Europe is following in German footsteps. When the Greeks confessed their sins and proceeded to reign in their budget deficit, there was an uproar in Germany and much indignation. That, as we have seen,after much huffing and puffing, set the stage for the next round of budget cuts, including the Germans.

But these are indiscriminate cuts and they come at a very, very bad time, when the Euro-zone economy still hasn't recovered from the recession. Unemployment is still high and, in many places, still rising. Consumption is flagging. Only exports have recovered - mainly German exports, and among them, most remarkably, big luxury cars produced by Audi, Mercedes and BMW. They're reportedly doing particularly well in China and the USA. Why? Because there's a market for them again: the rich are back to being as rich as before the Big Recession (there are some 10 million billionaires across the world, and their combined wealth has increased). And the Euro has lost some 15 percent since the start of the Greek budget crisis.

So far, this weakening of the Euro does not seem to have helped Greek tourism (presumably would-be tourists fear to get enmeshed in strikes). Because that's the real problem with austerity programmes: the social unrest they are bound to cause. The cuts hit the low and middle classes first and foremost. So it is natural to expect everybody to descend in the streets and scream to high hell. The French Finance Minister, Ms. Lagarde, had called for austerity programmes that would cut the budget yes, but at the same time "preserve growth". The Italian Finance Minister, Mr. Tremonti, has also tried to limit the damage, although he now reckons that his package of cuts will cost a half percentage point in future GNP growth (and he's probably being optimistic - it is likely to be much more of a brake than that).

The result of this social unrest? My bet is that the eventual austerity programmes that will be passed by parliaments across Europe will be less severe than those first announced. Ms. Merkel could still lose political support because of her programme - and she already has lost a lot.

So is all this a great deal of noise about nothing? Not quite. Budget cuts, even modest ones, will inevitably cause a loss in revenues and consumption - precisely at the wrong time in what is still a very fragile recovery. So one can expect, without being unduly pessimistic, that the Great Recession is bound to last a little longer - even much longer than necessary.

If only European politicians had remembered Keynes' lesson about using the weight of the State in the economy as a counterbalancing power: when there is an economic slowdown in the private sector, you accelerate the public sector. You spend money, you run deficits and you worry about balancing the budget only once the economy has fully recovered. That's when improved tax revenues fill government coffers, and that's when you start acting virtuous about budget deficits. Indeed, with the increased tax revenues, it will be that much easier to balance the budget!

What really makes me angry is the way this budget deficit saga has unfolded.

It would have been a wonderful political opportunity for REFORM, in particular to CUT back on UNNECESSARY government expenses. True, much was done on that score - but not enough: for example, there are still invalidity pensions and early so-called "baby pensions" that are a scandal in most Southern European countries.

It would have been a wonderful opportunity to tighten fiscal systems and MAKE people PAY their TAXES. Again, and especially in Southern Europe, too many people get away with paying no taxes at all - and I don't just mean income tax but also the sales (VAT) taxes. In Italy alone , the "economia sommersa", the "submerged economy" as the Italians call it, is some 20 percent of GNP. That's the segment of the economy that's not counted in national statistics, it simply "disappears" - meaning no one is paying any taxes at all.

Why is everybody in Europe - and especially in Southern Europe - so keen on avoiding their taxes?

Two reasons: one, the State especially in Southern Europe, is "weak". It hasn't the structures needed to collect taxes efficiently. Two, the tax rates are too HIGH. Again, in Italy (this is where I live so I know), the rates are way too high - much higher than in most of Europe and definitely higher than in the States - . People are inevitably tempted to avoid paying taxes. If the rates were brought down to a more reasonable level, people would be more willing to pay. Lighten the tax burden for everyone - and thus gain political consensus for your reforms - but make sure that everyone pays exactly what they should pay and right on the dot! No tax evasion allowed in return for lower tax rates...How does that sound to you?

Then, of course, it wouldn't hurt, would it, if the State really did deliver the public services it is supposed to...Why pay taxes if you get nothing - or very little - in return?


A medieval chicken soup

No, it's not another comment on the Euro crisis, the Middle East situation or the mess in Belgium (though it could be!). It's just a plain, simple recipe, far away from Nouvelle Cuisine and inspired from an older time than Escoffier and classical cuisine - much older, the Middle Ages actually.

Two years ago, as we spent a couple of weeks in Touraine going around all the various Renaissance castles and gardens, I came across some neat restaurants serving medieval cuisine (or so they pretended!). I was so intrigued that I picked up a couple of cookbooks about medieval cuisine to study it.

Fascinating! Not everything our forefathers ate six hundred years ago is good or in line with contemporary tastes but it's worth digging into.

It would seem that much of medieval cuisine was characterized by a lavish use of meat broths variously done and lots and lots of herbs. And for making sauces, medieval cooks tended to use bread as a thickener rather than wheat flour as we do now. Chinese cuisine of course uses corn flour to thicken gravies - possibly rice flour in older-style recipes - and it would seem natural that Europeans should have used bread, the classic food of Western civilization. Some of them still do, for example the Spaniards when they make Gazpacho which, as everyone knows, is thickened with bread.

By the way, if you try to use bread as a thickener, I've noticed through trial and error that the traditional method for thickening Gazpacho - slices of stale bread soaked in water and then squeezed dry before adding to the vegetable mix - is by far the best. Any short cut you might be tempted to use, such as throwing slices of bread directly in the mix and then reduce everything to a pulp,doesn't give a satisfactory result: your soup or sauce might present itself as thick as you might want it to be, but you'll find it hard to digest. I don't know why, but the step of soaking bread in water and squeezing it dry is somehow essential. Maybe with the water running off, it gets rid of some indigestible elements in the bread (perhaps yeast?), but whatever it is, it makes quite a difference for your internal hydraulics!

Now to my recipe. I use no oil of any kind to cook it - only add a little olive oil at the end when it's done. As to the ingredients, they're very simple: a chicken in pieces (I use only the breast, whole, but you can put in legs or whatever you like) and every fresh vegetable you can find...

It's a little like the Irish Stew in Three Men in a Boat where the dog adds a rat he found floating in the Thames (and that's when you realize half-way through the book that the protagonists are not four but really three men in a boat as in the title - the fourth voice belonging to the dog!). Well, I'm not suggesting you add a rat to it, but it's important to use vegetables that are in season. It's a medieval recipe after all, and they didn't transport exotic produce from abroad. Speaking of exotic produce, that's why potatoes or tomatoes are optionals: medieval cooks probably didn't use them but I do simply because I love them and I am no purist: I'll tweak any recipe to make it better tasting!

Here is the way I did it yesterday (for 3 to 4 persons). I served it lukewarm and it was just the right thing for a summer evening. But it would work equally well in winter if you served it piping hot.

250 g or half-a-pound of chicken meat or more if desired in big pieces (I used breast and cut it in 4 chunks)
1 big onion chopped plus 3 or 4 spring onions whole
1 leek in chunks
1 big carrot scraped and cut in thick slices
1 or 2 large potatoes peeled and cubed
2 celery stems in chunks
4 or 5 big pieces of cauliflower (that's an important medieval type veggie - can be replaced by any sort of cabbage)
1 large tomato peeled and cut in 4 pieces or use a handful of cherry tomatoes whole (they're very tasty when cooked and to make it easy to peel, throw them in together with the other veggies without peeling them; let them boil a couple of minutes then fish them out with a slotted spoon; run cold water over them to cool them down and peel off the skin: it comes off very easily; at that point slice them in half and return to the soup)
1 zucchini in big chunks
Some green beans cut in pieces, fresh peas, watercress or spinach leaves or whatever greens you may have at hand (you need a green touch for your eyes...and taste!)
salt and pepper (instead of salt I use a Knorr cube or you can add consommé or ready-made chicken broth - whatever broth works best for you but not too much of it: remember you've got chicken meat in your soup, and you don't want to smother your chicken!)

To thicken and finish the soup:
Parsley, lots of it (a handful!)
2 Bread slices soaked in water and squeezed dry
1 spoonful of wine vinegar (to taste)
1 spoonful olive oil (to taste)


This is the big difference with the way one makes Italian Minestrone (where you start off by frying onion in olive oil and then add the vegetables): here, you put all the vegetables together in your pot and you barely cover with cold water. Flavour it with either salt and pepper or broth, but always remember to grind pepper from your pepper mill (the industrial ground variety has little flavour).

Bring to a boil and at that point add the chicken meat making sure it is immediately covered in the boiling liquid and turns white (this prevents the meat juice from escaping and turning the meat dry). Let everything simmer with a lid half on. It will cook very quickly - in about 20 minutes (I like my veggies slightly crisp and in any case chicken meat cooks fast - you don't want to overcook or everything will get stringy and sad-looking).

When it's done, you'll notice you have a soup with little liquid - that's the way it should be and DON'T ADD water! This isn't really a soup - more like a stew and now you need to thicken that liquid. Ladle some of it into your osterizer where you've placed the bread and parsley and switch the machine on, pouring from the top a little vinegar and oil. Taste and see if you like it. It has to have a fresh taste, the way Gazpacho does (it's the vinegar that does it) but not too much.

Then put it back in your pot and swirl it. And don't cook it anymore or you'll lose the fresh flavour of the parsley. Serve it in a deep earthenware dish if you've got one (that makes it look more medieval), taking care to place the pieces of chicken in the middle so people can see them and easily help themselves.

Ad I said before, if it's summer, don't heat it up: it's very nice at room temperature. And it certainly makes the life of a hostess easier when she's got guests to look after!

P.S. You can experiment with additional herbs other than parsley (for example tarragon). Let me know how it comes out!

P.P.S. Since it's a cross between a soup and a stew, I think a new word should be made up for it: a chicken "stoup" or "stoop"...How does that strike you?


The Latest Fashion in Economics? Cut the Budget!

The Greeks started the ball rolling. They weren't actually the first to adopt an austerity programme in Europe, the Irish were. But the Irish austerity policy created no waves. Somehow the Irish people accepted the fact they had to tighten their belt - maybe it's the Catholic in them. They know there's a time for everything, after abundance comes famine. The Greeks, being loud Mediterraneans, were far more vocal about it. They went on a wild rampage and managed to attract world attention. They gleefully burned down shops and banks in Athens, killing in the process a few hapless employees. That unfortunate event seems to have calmed them somewhat, but the damage was done. It added (greek) pathos to the proceedings, and helped ensure that austerity programmes came to the fore everywhere in the world media. Balancing the budget became the mantra across Europe. The only way to save the Euro, the only way to defend sovereign debt.

In truth, a fashion had been started. A trend that spread like wildfire to the other countries that felt threatened by waves of speculators under the banner of grading agencies like Moody's or Fitch. As soon as Portugal and Spain faced a downgrade of their debt, they rushed to announce cuts to their budget. Italy has not been downgraded (yet) but it followed soon with its own 24 billion Euro austerity policy. Then the Brits. Within a week of taking over government, Cameron had announced cuts, and you can bet bigger cuts are coming soon. The Germans have just announced wallopping cuts: nothing less than an eye-boggling 80 billion austerity programme. They've outdone everybody: three-to-one to the Italians, ten-to-one to the Brits. But, as I said, the game isn't over. It's just starting. The Hungarians have also joined the melée, and I wonder who's coming next, the French? Perhaps not, they've got a very sober lady as finance minister, the kind of woman who's too intelligent to follow a fashion, but you never know. And Obama beware! The fashion could come to America, riding the wave of the Republican Tea Party.

Fashion? Yes,because budget cutting is the latest fashion.

I know what you're going to say. This is ridiculous, it's not just a matter of fashion. It's hard, cold numbers: the size of the deficit in relation to GNP is the key indicator. Fiscal discipline makes sense. One has to follow the rules or else the whole system will collapse. It hasn't collapsed yet but it might. So you prop it up.It's nothing but preventive medicine, stupid!

I beg to disagree. Austerity programmes in times of recession (such as now, for God's sakes!)are nonsense. Economic nonsense, and highly dangerous. You put on the brakes just as the economy has stalled and finds it hard to start up again.

Yes, I know, I'll confess my sin right away: I'm a hard core Keynesian. I'm not the only one, I'm in good company: so is Stiglitz, the Nobel Prize winner. You ought to read his analysis of our current Great Recession: Freefall (published by Norton, 2010). It's a must. Unfortunately he wrote it midstream through the crisis and focused on the (dramatic) effects of failure in the financial system, with Wall Street unwilling to lend to Main Street. He didn't mention sovereign debt. At the time he wrote, it hadn't become a problem yet. But now it is. At least in Europe: we are in the midst of a different kind of crisis, and it is certain to reach America soon.

Why? Because to control the financial crisis and put their economic house in order, all G20 governments have engaged in stimulus packages. Now, all of a sudden, the implications of a stimulus package are hitting home: it means deficit spending. Or worse, resorting to the money printing press. So the next thing that needs fixing is the deficit. Off with its head!

Not so. You cut the deficit, you close down 10,000 government jobs as the Germans plan to do, plus all the parenthood subsidies etc etc and you find that you've effectively cut down on national consumption. Less consumption means fewer products sold. Trade winds down, investments slow, people are laid off, incomes fall and so do taxes. Governments in adopint policies to balance their budget will only succeed in obtaining less funds in their coffers as people have less money and pay less taxes in the coming years.

It's a downward spiral. And the Great Recession is already a downward spiral caused by the private sector. Now if you add the public sector to the equation - going in the same downward direction - there's no end in sight. Some central bankers are aware of the danger. The Italian Mario Draghi, a man of great common sense and (in my view) a perfect candidate to run the European Central Bank after Claude Trichet retires, has warned the Italian government that its proposed austerity programme would cause a slowdown in growth - a small one, but then the Italian programme is relatively modest, with a good third focussed on better controlling tax evasion (a perennial problem in Italy) which has no direct incidence on consumption.

Perhaps the adoption of austerity programmes won't cause a double dip recession as so many have feared, but it sure is going to ensure that the recession will be a very long, slow downward slide. It could last years, if not decades.

Surely there's a better way to defend the sovereign debt? It seems that governments have been bending backward so hard to please their electorate that they have forgotten something very simple and essential: they're sovereign. To defend the Euro - or any currency for that matter - what is needed is not silly consumption-cutting policies that make a politician feel morally good. What is needed is an intelligent economic policy that correctly handles the main elements that make an economy function: consumption, savings and investment.

Yes I know, I'm back to Keynes, but nothing else works. You're going to say we didn't get out of the Great Depression thanks to Keynesian policies but because of World War II expenditures. And I'll tell you that (1) Roosevelt never had the political courage to consistently apply Keynesian policies, and (2) World War II expenditures were the precise equivalent of what Keynes was talking about: he suggested digging holes and covering them up - any work was better than none - and that's exactly what the war did. Unfortunately putting corpses in the holes.

Let's hope we don't need another war to get us out of this Great Recession!


The Saga of the "Peace Flotilla" that set out to force the Gaza blockade...

Once again, we are treated to another round of calamities in the Middle East. Whenever the Palestinians do something ghastly, like blow up an Israeli schoolbus or throw a bomb in a market full of innocent civilians, your sympathies inevitably and rightly go to Israel. But you can be sure that the Israeli will do something equally reprehensible the next time around. Like build more settlements in occupied territory or launch an attack on Gaza killing women and children, and your sympathies swing again and go to the Palestinians.

This time (we've all read about it) a bunch of ships loaded with humanitarian aid - reportedly some ten thousand tons of medicines, toys and building material - and with six or seven hundred pacifists aboard, sailed towards Gaza in an attempt to force the Israeli blockade. As expected it was stopped dead in its tracks by the Israeli military.

This episode might have passed unnoticed - several such ships have tried to force the blockade before - if the Israeli military hadn't totally bungled their operation. First, they attacked in international waters ships that were clearly civilian. Second, the attack was, as President Sarkozy immediately noted, "disproportionate": on board the ships there were only knives and clubs (no firearms), and while some Israeli soldiers got unfortunately wounded, the dead (9 of them according to the latest reports) are all on the side of the civilians aboard the ships.

This particular Israel vs. Palestine round has clearly come out in favour of Palestine. As a result of the attack, Israel has lost two of its most important supporting neighbours in the region: Turkey and Egypt.Turkey is clamouring for an international investigation, and so is the EU top diplomat, Lady Ashton. Egypt has reopened its Rafah border post which had been closed in deference to Israeli pressure.

Can America repair the damage done as two of its more trustworthy allies, Turkey and Egypt, clash with Israel? If nothing is done, there is little doubt that this episode signals the end (for the moment) to American efforts to revive the Israel-Palestine peace talks. But America so far hasn't done anything: Obama's silence has been deafening. He keeps talking (rightly so, no one will disagree this is a major issue) about the BP spill in the Gulf of Mexico, but why nothing about Gaza? Worse, American diplomats at the UN Security Council are reportedly busy shooting down any proposal for an independent international investigation, demanding that it should be entrusted to Israel.Are they serious? How independent can they expect Israel to be in this matter?

America is giving the world the impression that it has not yet taken the real measure of the situation. Seeing it from where I live (in Italy),the differences in reporting the episode in the American press compared to the European were very striking. American newspapermen talked of the passengers aboard the ships as "pro-Palestinian activists", reflecting the terminology used by the Israeli Government and echoed the concept that it was an action of self-defense on the part of Israeli forces. In contrast,Europeans talked of "peace activists" or pacifists and underlined that Israel attacked in international waters and that Gaza has become over the last three years, because of the blockade, an "open-air prison" for the 1.4 million Palestinians living there.

Who's right? Nobody, of course. Hamas is wrong in continuing to deny Israel's right to exist and in supporting despicable and horrific terroristic methods. Israel is wrong in over-reacting, establishing blockades and building Berlin walls around Gaza, in continuing with its settlements policy and, more importantly, in denying Palestine's right to become a free, independent state.

What is the way out of this impasse that has lasted now nearly half-a-century? It is undoubtedly in the hands of America. Everyone in the Arab world is convinced that (a) Israel is more than a preferred ally of the United States but a de facto extension of America (even its Prime Minister is a born American), and (b) it has nuclear weapons, which explains why it has recently refused to join the international anti-nuclear pact. Maybe it does, and that is certainly a reason why Israel is so concerned about Iran getting its own nuclear bomb.

What are we supposed to do? Watch the Middle East burst into a nuclear mushroom or recognize Palestine?

With such a simple solution at hand (i.e. mutual recognition of Palestine's and Israel's right to exist as independent states), one wonders about Man and how stupid he can get...But then, we should remember that it took 110 years to solve the "Irish question". So I suppose we've still got time on our hands...

In the meantime, the ships' passengers who had ended in Israeli jails have all been expulsed and deported home (citizens from some 40 countries were involved - many Europeans, even some Americans but most of them were Turks). But what about the humanitarian aid the ships had brought? Not a word about it in the press. I assume that now everything has been confiscated by the Isreali...

And once again, it is the poor and the destitute in Gaza who are the real victims...