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Algerie: La Loi de Finances 2014, ou le régime Militairo-Policier

January 3, 2014 Leave a comment

On voit très bien les priorités de notre gouvernement

-Présidence de la République 9.422.733.000
- Services du Premier ministre 2.712.507.000
- Défense nationale 955.926.000.000
- Intérieur et Collec/locales 540.708.651.000
- Affaires étrangères 30.617.909.000
- Justice 72.365.637.000
- Finances 87.551.455.000
- Energie et mines 41.050.228.000
- Ressources en eau 38.922.265.000
- Affaires Relig/Wakfs 24.260.117.000
- Moudjahidine 241.274.980.000
- Aménagement du ter/Env 2.405.141.000
- Transports 13.148.714.000
- Education nationale 696.810.413.000
- Agriculture et dev/rural 233.232.749.000
- Travaux publics 19.405.864.000
- Solidarité nat/Famille 135.822.044.000
- Culture 25.233.155.000
- Commerce 23.801.125.000
- Enseignement sup./Re/Sci 270.742.002.000
- Relations avec le parlement 277.547.000
- Formation et Ens/Prof 49.491.196.000
- Habitat et urbanisme 19.449.647.000
- Travail, Em/Séc/Sociale 274.291.555.000
- Santé et Réformes/hospi 365.946.753.000
- Tourisme et Artisanat 3.007.737.000
- Jeunesse et sport 36.791.134.000
- Développement industriel 4.452.530.000
- Postes et TIC 3.680.186.000
- Pêche et ress/Halieutique 2.323.410.000

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Categories: Algerian politics, Algerie, Arab revolutions, Bouteflika, Economie Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Algeria: L’ autoroute Est-Ouest, ou The “Highway To Hell”

December 19, 2013 5 comments

Ne laissez pas le titre du bulletin vous induire en erreur, même s’il est tout à fait approprié. Oh, on ne va pas parler du fameux bones-shattering head-shacking, hips-swinging guitar-smashing tube de AC/DC  “Highway to Hell”, mais on va plutôt parler  de l’autoroute Est-Ouest en Algérie qui pourrait aussi bien être une autoroute pour l’enfer. C’est une autoroute d’une distance totale: 1216 km ou près de 783 miles, et en comptant les routes annexes 1720 km ou près de 1069 miles. Le coût, 12 milliards (selon TSA, El -Watan et d’autres sources).

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J’ai passé un peu de temps a lire la littérature qui traite de l’analyse du coût de construction des autoroutes, et d’après cette littérature, il devient évident que le coût de construction d’une autoroute varie considérablement en fonction de plusieurs facteurs tels que: 1) les coûts d’acquisition des biens immobiliers; 2) le terrain; 3) le degré d’urbanisation; 4) la largeur de la chaussée; 5) l’épaisseur du revêtement de base; et 6) les caractéristiques de sécurité et les précautions environnementales. Cependant, ce qui semble avoir un impact vraiment sur le coût de la construction d’une autoroute aux États-Unis sont deux facteurs. Tout d’abord, l’impact de l’acquisition de la propriété – -c’est à dire, l’achat de terrains des propriétaires privées ou des organismes de l’État ou du gouvernement fédéral. Deuxièmement et de loin le facteur le plus important dans l’évaluation du coût de construction, c’est le déplacement urbain or l’aménagement/réaménagement urbain– c’est à dire, le déplacement de quartiers entiers, la reconstruction parfois de certains quartiers, creuser sous les lignes de métro, creuser sous des sections entières d’une ville, reconfigurer les réseaux des conduites d’eau, du systèmes des eaux usées, des conduites de gaz, la construction de tunnels sous des sections d’une ville, le renforcement des fondements, la construction de plus de 4 voies, etc., Par exemple , le déplacement ou réaménagement urbain de la ville de Boston à cause du projet “The Big Dig” a été énorme et a été le principal facteur dans le coût du projet qui au final a coûté 300 millions de dollars par mile de route.

Or, selon The U.S. Federal Highway Administration (l’administration fédérale des autoroutes) les travaux de construction d’une autoroute dans une zone rurale et même de banlieue coûtent beaucoup moins chers que les travaux de construction d’autoroutes dans une zone urbaine ou dans les grandes villes, car il y a peu ou pas de réaménagement urbain et il y a généralement moins de voies par route. La plupart des autoroutes aux États-Unis coûtent un peu plus qu’ 1 million de dollars par mile de construction (Grossman, 1996 voir la citation de référence ci-dessous). Autres travaux de construction d’autoroute varient normalement entre 1 million de dollars et 5 millions de dollars par mile. Cependant dans les régions montagneuses (comme dans la Virginie de l’Ouest, le Colorado, et la région des Appalaches) les coûts peuvent être aussi élevés que 15 millions de dollars par mile (Brogan 1997 voir la citation de référence ci-dessous).

Le projet de l’autoroute Est-Ouest en Algérie a été officiellement estimé à 12 milliards de dollars. Je vais donc utiliser l’estimation la plus haute de 5 millions de dollars par mile, puis j’ajouterai le coût de plus exorbitant pour les grands centres urbains de Constantine, Annaba, Sétif, Alger, Tlemcen, et Oran.

1069 miles à 5 M $ par mile = 5,345 milliards de dollars

On ajoute 500 millions de dollars comme coût supplémentaire pour chacun des 6 centres urbains (Constantine, Annaba, Sétif, Alger, Tlemcen, et Oran) = 3 milliards de dollars.

Le coût total avec un supplément ridiculement exagérée est 8,345 milliards dollars–c’est à dire, moins que l’estimation officielle de 12 milliards de dollars. Et il faut aussi considérer que la main d’oeuvre en Algérie est moins chère que la main d’oeuvre aux États-Unis. En moyenne, le salaire horaire d’un ouvrier américain de construction d’autoroute est d’environ 30 dollars par heure. Un travailleur algérien ne toucherait jamais ce montant horaire. Donc, les frais généraux du projet en Algérie doivent être moins cher qu’aux États-Unis

Passons à des exemples concrets de la construction de routes dans des centres urbains et utilisons le projet d’expansion de l’autoroute de Los Angeles Métropolitain du comté de Ventura (Ventura County). Le réaménagement urbain était modéré, les échangeurs sont très complexes; la chaussée et l’épaisseur de base étaient de la plus haute complexité pour prévenir l’érosion du sel de mer et du vent de l’océan Pacifique et avec des normes parasismiques (c’est la California et il a des siesme là-bas), la norme sécuritaire était de standard comme partout aux USA; et les précautions environnementales étaient de qualité supérieure parce que c’est la Californie et le lobby écologiste est extrêmement puissant. Quel est le coût par mile de cette autoroute dans le comté de Ventura dans la ville de Los Angeles? Les coûts par mile d’autoroute pour les 4 projets du comté de Ventura ont été de 1,7 millions de dollars par mile, 2,1 millions $ par mile, 2,4 millions $ par mile, $ 2,9 millions par mile respectivement (Green, 1996 voir la citation de référence ci-dessous). Lorsque vous faites la moyenne du coût des 4 projets, le mile revient a un peu mois que 2,3 millions de dollars. Ce chiffre est très loin ou nulle part près des 5 millions de dollars que j’ai choisi pour le projet de l’autoroute Est-Ouest en Algérie. En fait, le coût par mile de l’autoroute Est-Ouest est de un peu plus de 15 millions de dollars ($15.325.670) ou un peu plus de 11 millions de dollars si l’on inclut les routes annexes. C’est comme si les 783 miles de l’autoroute Est-Ouest ont été construits dans une région montagneuse de l’est de l’Algérie a l’ouest.

Ventura County, California, Highway

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Question: Pourquoi le mile de l’autoroute Est-Ouest coûté si cher? Pourquoi un mile d’une autoroute Californienne a coûté près de la moitié du mile d’une autoroute Algerienne? Comment peut-on expliquer cette facture? Qui peut expliquer cette facture? Le gouvernement doit présenter au peuple Algériens l’étude de l’analyse des coûts de ce projet. Il n’est pas normal que la construction d’une autoroute en Algérie coûté plus cher qu’a Los Angeles où la valeur de l’immobilier est parmis des plus chers en Amérique. Je suis prêt à comprendre et dire que je me trompe si le gouvernement publie une étude logique de ce projet. Autre que la transparence totale sur ce gâchis gargantuesque, les Algériens ont le droit d’appeler leurs dirigeants, tous leurs dirigeants, des voyous.

Brogan, Pamela (1997) Millions in Transportation Funds at Stake for Ohio. Gannett News Service, January 31.

Green, Nick (1996) Widening of Highway 126 Enters the Final Phase. Los Angeles Times, Ventura County Edition, April 27.

Grossman, William L. (1996) History of Transportation. Colliers Encyclopedia CD-ROM, February 28.

AC/DC–Highway to Hell

Categories: Algerian politics, Algerie, Bouteflika, Economie Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Algerie: Un avenir très sombre, peu importe le prochain leader

May 19, 2013 3 comments

Peu importe qui sera au pouvoir, des réformes très douloureuses seront notre pain quotidien dans le future le plus proche. Ceci n’est pas une spéculation, mais une vérité et une réalité amère.

“Shale oil production in the US is still in its early stages, and its full potential remains uncertain, but development is happening at a faster pace than shale gas. Preliminary estimates for 2020 range from 5-15 million barrels per day with a production breakeven price as low as $44-68 per barrel depending upon the fields. By the 2020, the US could emerge as a major energy exporter.” The Global Trends 2030 page 35-36

Je ne suis pas un alarmiste d’habitude, mais les alarmes en Algérie doivent être données.

Selon les perspectives économique de 2012 du FMI, l’Algérie doit avoir le coût du baril de pétrole entre $100 à $120 pour pouvoir équilibrer et balancer les dépenses fiscales et budgétaires–c.a.d: pas de déficit et ni de dette publique. En 2011, l’Algérie a enregistré le 2ème plus gros déficit budgétaire des pays producteurs de pétrole au Moyen-Orient et l’Afrique du Nord avec un déficit égale à 3,6% du PIB–c.a.d: 6.8 milliards de dollars. En 2012, elle a enregistré une dette publique relative au PIB de 8,80%–c.a.d: 16.62 milliards de dollars–avec une croissance économique relativement faible de 2.6%. Il faut noter, au passage, que la croissance économique en Algérie est très largement dépendante des exportations du pétrole et du gaz naturel.

L’Algérie se dirige vers une crise budgétaire d’une magnitude et d’une gravité dont le peuple n’ai jamais vu pareille. Le pétrole, le gaz naturel et les produits pétroliers représentent 97% des exportations de l’Algérie. Les hydrocarbures ont longtemps été l’épine dorsale de l’économie Algérienne, et en 2012, le pétrole et le gaz naturel représentaient environ 60% des recettes budgétaires et 44% du PIB. Si l’Algérie ne diversifierait pas son économie d’une manière très brutale et rapide dans les 10 à 15 prochaines années, le pays se dirigera littéralement vers des troubles sociaux gigantesques et le collapse total du système politique.

Pourquoi?

C’est très simple: Les USA commencent déjà a diminuer drastiquement leur importations de gaz naturel (les USA seront totalement indépendant en gaz naturel en 2020), et pour ce qui est du pétrole, ils seront indépendant des importations, et même exportateurs entre l’an 2025-30. Quand les USA entreront le marché du gaz naturel comme exportateur en 2020 (et par la suite, le marché du pétrole en 2035), les prix de ces 2 produits vont chuter et d’une manière drastique. Non seulement le plus grand consommateur de pétrole au monde n’est plus un importateur de pétrole et de gaz naturel, mais il les exporte en plus. Cela représentera un choc énorme dans les marchés du gaz naturel et du pétrole. Certains économistes ont estimé un swing de $45 à $55 dans le prix du baril. Ceci veut dire une baisse drastique du PIB Algérien, une croissance économique négative, autrement dit une récession, et une baisse d’environs 40% des recettes budgétaires. C’est une catastrophe pour le pays. L’heure du réveil pour l’Algérie est maintenant parce qu’il ne reste plus beaucoup de temps.

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A tout casser, l’Algérie a une fenêtre d’opportunité de 10 à 15 années au plus pour agir durant laquelle il faut mettre en place des réformes sérieuses et radicales du système économique entier, et il faut commencer dès maintenant. Si de sérieuses réformes ne sont pas engagées dans les 10-15 prochaines années, l’avenir, pour  l’Algérie, sera d’une laideur absolu.

L’Algérie doit réformer radicalement son système bancaire. Elle doit totalement restructurer son système fiscal (perception de l’impôt, collection d’impôt et sa redistribution). Tous les programmes de prestations sociales doivent être totalement revus (retraire, santé, couverture sociale, prestations familiales, le coût du travail, prestation de chomage, logement social, les prestations de Moudjahideene, de fils de Chouhada, et des veuves de Moudjahideenes etc). Certains de ces programmes de prestations sociales doivent complètement être éliminés, d’autres pourraient être renforcés. Il faut éliminer toutes les subventions dans presque tous les secteurs à l’exception des programmes d’éducation, et de santé des enfants, et certains produits de base. Il faut réduire le budget de la défense, fermer et consolider des bases militaires, réduire l’effectif de l’armée, arrêter complètement tous les nouveaux contrats d’armement. Et surtout, il faut ouvrir le marché Algérien et abandonner la règle des 51% parce que le gouvernement Algérien sera forcé de l’abandonner un jour contre son gré; alors il faut le faire dès maintenant quand le gouvernement et l’État sont encore en contrôle de leurs actions.

Depuis 1962, l’Algérie s’est efforcée  sans aucun succès a développer des industries hors-hydrocarbures, et en raison de la réglementation lourde étatique, d’une bureaucratie lourde et archaïque, et en raison de l’accent mis sur la croissance mené par l’État, toutes ces réformes ont échoué. Les efforts du gouvernement ont fait peu pour réduire les taux élevés du chômage chronique des jeunes ou à remédier à la pénurie de logements. Une vague de protestations économiques en Février et Mars 2011 a incité le gouvernement Algérien à offrir plus de 23 milliards de dollars de subventions publiques, des augmentations de salaires rétroactives, et d’autres avantages sociaux. Malgré cela, les mouvements sociaux continuent de peser sur les finances publiques, et sur l’environnement politique qui est devenu explosive ces derniers temps.

Les défis économiques à long terme sont plus qu’essentiels, ils sont obligatoires, et doivent comprendre comme partie intégrale la diversification de l’économie au détriment de sa dépendance aux exportations d’hydrocarbures, le renforcement du secteur privé, l’attraction des investissements étrangers, et la création des emplois adéquats pour les jeunes Algériens. Cette diversification de l’économie ne se fera pas sans les réformes susmentionnées.

Cela va être douloureux; c’est une thérapie de choc; un choc au système économique qui a été moribond depuis plus d’un demi-siècle. Mais hélas ce choc doit être fait et donné autrement la douleur sera insupportable quand l’Algérie n’aura plus aucun contrôle sur ses politiques économiques et sociales, et surtout aucun contrôle sur son destin. Sans cette douleur, qui doit être partagée équitablement par tous les Algériens, le désordre social et l’anarchie seront le pain quotidien du pays. .

Et peu importe qui sera au pouvoir, il n’y aura pas de miracles. Peu importe qui sera au pouvoir, il sera obligé de réformer. Peu importe qui sera au pouvoir, il sera obligé d’infliger de la douleur à une population entière et de faire des choix très impopulaires. Aucun dictateur ne peut engager ces réformes douloureuses sans causer un mécontentement populaire, et même un soulèvement. Les dirigeants actuels du pays, la classe actuelle de nos politiciens, n’ont aucune crédibilité auprès du peuple, et sont  profondément doutés et haïs par les Algérien. C’est pour cela que celui qui sera à la tête du pays dans un très proche avenir doit jouir d’un large mandat populaire. Ce futur président ou la majorité parlementaire doit avoir le plein appui, le soutien, et la confiance du peuple Algérien. Aucun dirigeant autoritaire peut avoir cela; aucun dirigeant de l’Algérie d’aujourd’hui, de l’Algérie de Bouteflika et des généreux Toukif et Tartag, n’a ce soutien et cette confiance. Seules de véritables réformes démocratiques, avec des élections propres, ouvertes et transparentes donneraient au pays ce leader et cette classe politique qui mèneront le combat des réformes structurelles et institutionnelles.

D’ailleurs, je conseille vivement à ce prochain président de prononcer ce passage légendaire de Churchill lors de son premier au discours a la nation Britannique–ce passage d’une sérénité grave et sérieuse que Churchill a prononcer devant la Chambre des Communes le 13 mai 1940, juste avant l’invasion Nazie et la grande et héroïque Bataille de l’Angleterre.

“Nous sommes dans la phase préliminaire de l’une des plus grandes batailles de l’histoire….nous devons être préparés.

Je voudrais dire à la Chambre comme j’ai dit à ceux qui ont adhéré à ce gouvernement: je n’ai rien à offrir que du sang, du labeur, des larmes et de la sueur. Nous avons devant nous une épreuve des plus graves et des plus sérieuses. Nous avons devant nous beaucoup, beaucoup, de longs mois de lutte et de souffrance.”

Du sang, du labeur, des larmes, de la sueur, et de la souffrance, c’est exactement ce que le futur président Algérien doit promettre au peuple. Tout autre promesse sera un mensonge.

Union Européenne: La crise de la démocratie européenne

May 23, 2012 1 comment

This is an Op-Ed written by Dr. Amartya Sen for the NYTimes.  Dr. Sen is  Thomas W. Lamont University Professor, and Professor of Economics and Philosophy, at Harvard University and was until 2004 the Master of Trinity College, Cambridge. He is also Senior Fellow at the Harvard Society of Fellows. Earlier on, he was Professor of Economics at Jadavpur University Calcutta, the Delhi School of Economics, and the London School of Economics, and Drummond Professor of Political Economy at Oxford University. To top this already impressive resume, Dr. Sen Nobel was awarded the 1998 Nobel Prize in economic sciences for his work on welfare economics and social choice theory. Briefly stated, Dr. Sen is an authority in the field.

The Crisis of European Democracy

By AMARTYA SEN

May 22, 2012Cambridge, Mass.

IF proof were needed of the maxim that the road to hell is paved with good intentions, the economic crisis in Europe provides it. The worthy but narrow intentions of the European Union’s policy makers have been inadequate for a sound European economy and have produced instead a world of misery, chaos and confusion.

There are two reasons for this.

First, intentions can be respectable without being clearheaded, and the foundations of the current austerity policy, combined with the rigidities of Europe’s monetary union (in the absence of fiscal union), have hardly been a model of cogency and sagacity. Second, an intention that is fine on its own can conflict with a more urgent priority — in this case, the preservation of a democratic Europe that is concerned about societal well-being. These are values for which Europe has fought, over many decades.

Certainly, some European countries have long needed better economic accountability and more responsible economic management. However, timing is crucial; reform on a well-thought-out timetable must be distinguished from reform done in extreme haste. Greece, for all of its accountability problems, was not in an economic crisis before the global recession in 2008. (In fact, its economy grew by 4.6 percent in 2006 and 3 percent in 2007 before beginning its continuing shrinkage.)

The cause of reform, no matter how urgent, is not well served by the unilateral imposition of sudden and savage cuts in public services. Such indiscriminate cutting slashes demand — a counterproductive strategy, given huge unemployment and idle productive enterprises that have been decimated by the lack of market demand. In Greece, one of the countries left behind by productivity increases elsewhere, economic stimulation through monetary policy (currency devaluation) has been precluded by the existence of the European monetary union, while the fiscal package demanded by the Continent’s leaders is severely anti-growth. Economic output in the euro zone continued to decline in the fourth quarter of last year, and the outlook has been so grim that a recent report finding zero growth in the first quarter of this year was widely greeted as good news.

There is, in fact, plenty of historical evidence that the most effective way to cut deficits is to combine deficit reduction with rapid economic growth, which generates more revenue. The huge deficits after World War II largely disappeared with fast economic growth, and something similar happened during Bill Clinton’s presidency. The much praised reduction of the Swedish budget deficit from 1994 to 1998 occurred alongside fairly rapid growth. In contrast, European countries today are being asked to cut their deficits while remaining trapped in zero or negative economic growth.

There are surely lessons here from John Maynard Keynes, who understood that the state and the market are interdependent. But Keynes had little to say about social justice, including the political commitments with which Europe emerged after World War II. These led to the birth of the modern welfare state and national health services — not to support a market economy but to protect human well-being.

Though these social issues did not engage Keynes deeply, there is an old tradition in economics of combining efficient markets with the provision of public services that the market may not be able to deliver. As Adam Smith (often seen simplistically as the first guru of free-market economics) wrote in “The Wealth of Nations,” there are “two distinct objects” of an economy: “first, to provide a plentiful revenue or subsistence for the people, or, more properly, to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services.”

Perhaps the most troubling aspect of Europe’s current malaise is the replacement of democratic commitments by financial dictates — from leaders of the European Union and the European Central Bank, and indirectly from credit-rating agencies, whose judgments have been notoriously unsound.

Participatory public discussion — the “government by discussion” expounded by democratic theorists like John Stuart Mill and Walter Bagehot — could have identified appropriate reforms over a reasonable span of time, without threatening the foundations of Europe’s system of social justice. In contrast, drastic cuts in public services with very little general discussion of their necessity, efficacy or balance have been revolting to a large section of the European population and have played into the hands of extremists on both ends of the political spectrum.

Europe cannot revive itself without addressing two areas of political legitimacy. First, Europe cannot hand itself over to the unilateral views — or good intentions — of experts without public reasoning and informed consent of its citizens. Given the transparent disdain for the public, it is no surprise that in election after election the public has shown its dissatisfaction by voting out incumbents.

Second, both democracy and the chance of creating good policy are undermined when ineffective and blatantly unjust policies are dictated by leaders. The obvious failure of the austerity mandates imposed so far has undermined not only public participation — a value in itself — but also the possibility of arriving at a sensible, and sensibly timed, solution.

This is a surely a far cry from the “united democratic Europe” that the pioneers of European unity sought.

Union Européenne: Non, l’euro ne survivra pas la sortie de la Grèce

May 19, 2012 8 comments

No Mr. Wolfgang Schäuble, the euro won’t survive Greece’s exit


The German minister of Finance, Wolfgang Schäuble, stated in an interview with the “Rheinische Post on 11 May 2012 that Europe has the capacities to cope with a Greek euro area exit. He went on to say that Germany and its partners have learned a lot during the last two years and have put in place several protection mechanisms. Basically, this is a strong signal from one of the highest German officials stating that the euro can survive without Greece.  Let me say this upfront: No, the euro—and probably the whole European Union project–cannot survive Greece’s exit from the Eurozone. Schäuble’s statement could have been correct if it was given 2 years ago. But now, his statement is tantamount to a Eurozone suicide. And this is why.

However, before we get to why Greece’s exit from the Eurozone would lead to the total collapse of the euro as a currency and probably to the collapse of the European Union as an ambitious yet salutary political project, we need to briefly remember how we got to this point.

The project of the European Union started or was imagined as a purely political project by its founding fathers.  On the ruins of the disastrous and destructive second World War, Robert Shumann, Jean Monet, Alcide De Gasperi, Paul Henri Spaak and Konrad Adenauer (two Frenchmen, an Italian, a Belgium, and a German respectively) began imagining a political project that would knit together the different European countries and make the prospect of another destructive war between European countries an impossible endeavor. Of course, this started with a closer economic cooperation limited to a certain number of goods and services and just between a small numbers of countries, which would later on represent the core countries of the European Union. This limited economic cooperation created a spillover effect, and over time, more goods and services were included and more countries wished to join. Long story short, this economic cooperation spilled over into a political cooperation and led to the necessity of creating a common currency—i.e., the euro.

After the Maastricht Treaty (also know as the Treaty on the European Union) was adopted and ratified by most of the countries, the euro was introduced.  It was first introduced to the financial markets as an accounting currency in 1999 (it replaced the old ECU) and then introduced in circulation in 17 of the 27 EU member states replacing their national currencies in 2002.  The introduction of the euro caused a certain euphoria in the financial markets. Suddenly, countries that were deemed risky for investment saw a drastic influx of cheap capital—i.e., loans. Basically, cheap money started pouring in southern European countries like Greece, Italy, Spain, and even in Ireland and Austria. Belonging to the Eurozone made these countries safe places, though some of them had deep structural flaws (as we came to discover that later on). This influx of cheap capital financed huge housing boom-like bubbles and increased trade deficits.  And then, the 2007-2008 financial crisis hit. It started in the U.S., but soon migrated to the European continent. The influx of cheap money dried up. This caused severe economic slowdowns and downturns in almost all of the Eurozone.

Since the European Union is an unfinished economic integration project topped by an even more unfinished political integration, countries like Greece, Spain, and Italy were literally up the creek without a paddle.  The economic crisis of 2008 led to a huge fiscal crisis in these countries since they had no control over their monetary policies, and they were obliged to keep their budgetary spending within the 3% allowed by the EU agreements.  However, in a time of severe economic crisis, one needs to engage in fiscal deficit spending in order to get out of the hole. The last thing a country needs is drastic cut in public spending. Why? Because drastic cuts in public spending lowers consumption, which lowers demand, which leads to less investments, which leads to less revenues.  And the more austerity measure a given country adopts, the more it reinforces this infernal downward spiral. But what did the EU leaders do? They did exactly what they should not have done.

Germany and France (Sarkozy’s France) forced most of the EU members to engage in drastic public spending cuts hoping that fiscal discipline would calm financial markets and stop speculations. However, these EU leaders misread completely the message that most financial markets have been sending. They were not looking for strict fiscal discipline, though some discipline doesn’t hurt. They were looking for serious economic growth prospects.  Since spending cuts depress economic growth (just look at the economic growth in the Eurozone countries in the last 2 years and you notice that cuts caused economic stagnation and recession in France, Spain, the UK, Italy, Greece, and so forth), investors and bond markets lost confidence in the Eurozone, and that led to higher interest rates on short term borrowing. Not only are these countries killing their economic growth with all those drastic cuts, but also they can’t even find cheap capital to fund short-term operations. Consequence: 3 European countries—Greece, Spain, and Italy—are on the verge of total economic collapse and serious political turmoil.

So, what if we let Greece out of the Eurozone like Wolfgang Schäuble wants? What would happen to the rest of the Eurozone?

Let us game this scenario for a second.

As we speak, Greece is under a slow-moving financial blitzkrieg.  There is a slow moving bank-run on the Greek banks (or what the bankers call a bank-jog). What does that mean? It means that depositors are pulling out their capital to anticipate a possible Greek default or an exit from the Eurozone.  This bank-jog has been going on at a very low rate for the last 2 or 3 months, but it has accelerated since the last legislative elections.  However, the ECB is backstopping, or for the lack of a better word, financing this bank-jog through lending to Greek banks the necessary capital. More accurately, the Greek banks are using the emergency liquidity assistance until the EFSF (European Financial Stability Facility) agrees to release its bonds, so they can use them as collateral.

However, when the ECB decides to stop financing Greek banks (and that’s what the German minister of Finance, Wolfgang Schäuble, means), Greece would effectively be forced to leave the Eurozone and abandon the euro as a currency, and revert to issuing again its own national currency, the drachma.

The first fallout of such a move is that financial markets would lose total confidence in every Eurozone countries. Greece leaving the Eurozone means that the euro is reversible, and any country could decide to abandon it.  Do you remember that bank-jog we just talked about in the previous paragraph? Well, that bank-job would turn into a bank-run on Spanish, Italian, Irish, and possibly French banks. All investors and all financial markets would pull out all of their money at once. Ladies and gentlemen, no bank in the world and in the history of banking has had enough cash or securities in its vaults to face a cataclysmic event like this one. This means that most banks in Spain and Italy would collapse overnight.  A large numbers of banks in France, Germany, Austria, Netherlands, and Belgium would also collapse. This would trigger a worldwide chain reaction and some U.S, Japanese, and Russian banks exposed to Eurozone debts would also be severally affected.

What we would be looking at is a total blow-up of the European Union and a severe global depression.

This is what it means to let Greece leave the Eurozone now. On top of the financial and economic global calamity, we would also have a political one. The rise of extreme right and left political parties in Europe and elsewhere would surely be the most likely political outcome. Mainstream parties would be blamed for the catastrophe and would be completely discredited in the eyes of most voters, which would directly benefit the extreme right and extreme left political leaders.

What to do then to avoid such a calamity? Not only must Greece stay in the Eurozone, but also a more encompassing political economy must be devised. First, the mutualization of the debt must be organized. Second, the ECB must be restructured to issue euro-bonds so member states can directly borrow from the ECB at low rate instead of borrowing from banks. Third, a serious economic growth agenda must be considered so countries like Spain, Italy and others could trigger decent economic growth rates and emerge from the infernal cycle of austerity and depression.

Finally, the ECB must increase the Eurozone inflation rate to at least 4%. Why?  In a recession, you expect average wages to adjust to a lower level. As the unemployment rate increases, workers are willing to accept lower wages, and as wages decrease, employers become more willing to hire more workers. If this does not occur, the recessionary cycle deepens and becomes persistent.  There are several ways to fix this problem, but let us concentrate on the one most suited for the Eurozone. One of the problems in Spain, Italy, Greece and most of Europe is that their workers have become increasingly uncompetitive over the past decade—higher wages, high unemployment rates, and low investments leading to a highly uncompetitive Eurozone worker. One way to correct this is by devaluing the currency, which would effectively reduce wages in a country compared to the rest of Europe. But this solution is not available to most Eurozone member states because they do not have control over their monetary policies. The Eurozone monetary policy is dictated by the ECB.  So how do you reduce wages in those countries when you can’t manipulate your currency? Well keep wages constant, but allow a higher inflation rate. If the ECB allows the inflation rate to run at a 4% level, you effectively get no wage increase, but an effective drop by 4%. This would increase the competitive edge of the European worker.

This is the only way out. But to reach these set of solutions, the ECB and the Germans need to get over their obsession about spending, inflation, price stability, and moral hazard. If Angela Merkel keeps on doing what she has been doing and keeps on bullying the rest of the Eurozone member states into these suicidal austerity programs, she would literally cause the collapse of the European Union. Lastly, the ECB needs to embrace its function as an independent central bank facing drastic economic crisis with a possible political and economic collapse of the whole area. The ECB needs to get over its rigid ideology of price stability and face  reality. Otherwise, there will not be an ECB in a couple of years.

Message de Paul Krugman aux “Français” et…les autres

April 28, 2012 1 comment

If you read some of my previous posts on the economy and the crisis of the eurozone, you would know already my opinion about the stupidity of fiscal austerity during recessionary cycle. Well, i hate to say it, but i have been right all along. This past week, however, more and more European policymakers have been softly whispering another tune and getting themselves ready to leave the sinking austerity policy ship to board the demand-side one.  It warms my heart that they have finally seen the light.

Of course, i wasn’t the only person highly critical of fiscal austerity. Paul Krugman, one of the most brilliant economists out there, has been arguing the same point since the beginning of the crisis.

Those of you who do not know Dr. Paul Krugman, well he is Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and winner of the  Nobel Prize in Economics (aka Sveriges Riksbank Prize in Economic Sciences) for his work on New Trade Theory and New Economic Geography. Since the beginning of the crisis, Dr. Krugman has been writing a series of articles in the New Times explaining the origin(s) of the crisis and advocating for the soundest way of getting out of it. Needless to say that Dr. Krugman has been right on almost everything he has said.

Here is his latest article that he could’ve titled it, “I told you So!”

Death of a Fairy Tale

By

This was the month the confidence fairy died.

For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets.

Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the “austerians” insisted that the reverse would happen. Why? Confidence! “Confidence-inspiring policies will foster and not hamper economic recovery,” declared Jean-Claude Trichet, the former president of the European Central Bank — a claim echoed by Republicans in Congress here. Or as I put it way back when, the idea was that the confidence fairy would come in and reward policy makers for their fiscal virtue.

The good news is that many influential people are finally admitting that the confidence fairy was a myth. The bad news is that despite this admission there seems to be little prospect of a near-term course change either in Europe or here in America, where we never fully embraced the doctrine, but have, nonetheless, had de facto austerity in the form of huge spending and employment cuts at the state and local level.

So, about that doctrine: appeals to the wonders of confidence are something Herbert Hoover would have found completely familiar — and faith in the confidence fairy has worked out about as well for modern Europe as it did for Hoover’s America. All around Europe’s periphery, from Spain to Latvia, austerity policies have produced Depression-level slumps and Depression-level unemployment; the confidence fairy is nowhere to be seen, not even in Britain, whose turn to austerity two years ago was greeted with loud hosannas by policy elites on both sides of the Atlantic.

None of this should come as news, since the failure of austerity policies to deliver as promised has long been obvious. Yet European leaders spent years in denial, insisting that their policies would start working any day now, and celebrating supposed triumphs on the flimsiest of evidence. Notably, the long-suffering (literally) Irish have been hailed as a success story not once but twice, in early 2010 and again in the fall of 2011. Each time the supposed success turned out to be a mirage; three years into its austerity program, Ireland has yet to show any sign of real recovery from a slump that has driven the unemployment rate to almost 15 percent.

However, something has changed in the past few weeks. Several events — the collapse of the Dutch government over proposed austerity measures, the strong showing of the vaguely anti-austerity François Hollande in the first round of France’s presidential election, and an economic report showing that Britain is doing worse in the current slump than it did in the 1930s — seem to have finally broken through the wall of denial. Suddenly, everyone is admitting that austerity isn’t working.

The question now is what they’re going to do about it. And the answer, I fear, is: not much.

For one thing, while the austerians seem to have given up on hope, they haven’t given up on fear — that is, on the claim that if we don’t slash spending, even in a depressed economy, we’ll turn into Greece, with sky-high borrowing costs.

Now, claims that only austerity can pacify bond markets have proved every bit as wrong as claims that the confidence fairy will bring prosperity. Almost three years have passed since The Wall Street Journal breathlessly warned that the attack of the bond vigilantes on U.S. debt had begun; not only have borrowing costs remained low, they’ve actually fallen by half. Japan has faced dire warnings about its debt for more than a decade; as of this week, it could borrow long term at an interest rate of less than 1 percent.

And serious analysts now argue that fiscal austerity in a depressed economy is probably self-defeating: by shrinking the economy and hurting long-term revenue, austerity probably makes the debt outlook worse rather than better.

But while the confidence fairy appears to be well and truly buried, deficit scare stories remain popular. Indeed, defenders of British policies dismiss any call for a rethinking of these policies, despite their evident failure to deliver, on the grounds that any relaxation of austerity would cause borrowing costs to soar.

So we’re now living in a world of zombie economic policies — policies that should have been killed by the evidence that all of their premises are wrong, but which keep shambling along nonetheless. And it’s anyone’s guess when this reign of error will end.

Iran: Analysis by Juan Cole of the US/European financial and oil embargo of Iran

April 19, 2012 Leave a comment

Prof. Juan Cole’s (University of Michigan) interview on RT television and his analysis of the current US/European sanctions leveled against Iran’s financial transactions and oil exports.

Europe: Le terrible échec de la politique d’austérité économique

February 21, 2012 4 comments

For months, I have been arguing that economic austerity in time of severe economic downturn is highly counter-productive. The last thing the economy of a country needs when a country is going through a recessionary cycle (or experiencing a contraction of its economic activities like in many European countries) is a drastic reduction of public spending. The reason for that is very simple: when the economy is in a recessionary cycle, an influx of spending (even deficit spending) is a must to boost and trigger economic growth, consumption, create jobs, and restart the economic engines against. Once those economic engines are restarted, then an increase in taxes (on the highest brackets) and progressive cuts in spending (spending in non-economic growth sectors) can be established again. Cutting spending when spending is needed the most is like depriving a patient of a blood transfusion when that patient is heavily hemorrhaging from every orifice, which would ultimately lead to the death of the patient.

Well, European countries of the eurozone such as France, Ireland, Spain, Italy, Portugal, and i add to them the U.K (I am not even going to talk about Greece in this post. My position on Greece has been clearly stated in previous posts here and specially here) have been engaged in drastic  reductions of their public spending since the beginning of this crisis. These are the infamous austerity policy packages that most eurozone countries (and the U.K) have put in place to calm down financial markets. The result is an economic growth close to zero in almost all the eurozone (and the U.K). The economic forecast for 2013 and 2014 if the same policies are followed is even worse–i.e., an economic growth around 0% leading to a long lasting recession, high unemployment, and even higher public deficits. These countries fundamentally misunderstood the demands of the financial markets. What markets (across the globe) have demanded since the beginning of the euroze crisis is not an immediate and a drastic reduction of public deficits, but credible plans and policies for generating positive economic growth again. Most markets have already factored in and digested the fact that the eurozone countries have high deficits and those deficits won’t be reduced anytime soon, and the debt won’t be repaid in the foreseeable future. There is nothing that can be done about that in the short-term, and worrying about balancing budgets and cutting spending during a recession is an economic suicide.

This fundamental misunderstanding of the crisis led most European political leaders (best example of this misguided strategy is David Cameron and Nicolas Sarkozy) to engage in crafting crazy austerity packages to reduce the yield on government bonds and securities (which means in everyday language, borrowing money at a lower interest rate). And in doing so, these political leaders sacrificed long-term economic growth for short-term financial gain and an ephemeral stability. At the end, they pretty much got nothing (most eurozone countries lost their triple-A rating–except Germany–and most eurozone banks are in a bad financial situation). This strategy would only lead to the deepening of the economic downturn on the short-term, and turning it into a long-term economic stagnation.

This is what has been happening in the eurozone countries (and England), and the data recently released by the IMF, OECD, and the Government Growth & Development Center illustrate  that clearly. Countries engaged in cutting spending (what i call slash-and-burn-economics) and austerity policies are performing worse than countries that did not. In fact, the data show that countries that adopted austerity packages have worsened their economic situation.

For a better understanding of this, i yield the floor to Dr. Paul Krugman, Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and winner of the  Nobel Prize in Economics (aka Sveriges Riksbank Prize in Economic Sciences) for his work on New Trade Theory and New Economic Geography. Since the beginning of the crisis, Dr. Krugman has been writing a series of articles in the New Times explaining the origin(s) of the crisis and advocating for the soundest way of getting out of it. Needless to say that Dr. Krugman has been right on almost everything he has said.

January 22, 2012

Is Our Economy Healing?

By

How goes the state of the union? Well, the state of the economy remains terrible. Three years after President Obama’s inauguration and two and a half years since the official end of the recession, unemployment remains painfully high.

But there are reasons to think that we’re finally on the (slow) road to better times. And we wouldn’t be on that road if Mr. Obama had given in to Republican demands that he slash spending, or the Federal Reserve had given in to Republican demands that it tighten money.

Why am I letting a bit of optimism break through the clouds? Recent economic data have been a bit better, but we’ve already had several false dawns on that front. More important, there’s evidence that the two great problems at the root of our slump — the housing bust and excessive private debt — are finally easing.

On housing: as everyone now knows (but oh, the abuse heaped on anyone pointing it out while it was happening!), we had a monstrous housing bubble between 2000 and 2006. Home prices soared, and there was clearly a lot of overbuilding. When the bubble burst, construction — which had been the economy’s main driver during the alleged “Bush boom” — plunged.

But the bubble began deflating almost six years ago; house prices are back to 2003 levels. And after a protracted slump in housing starts, America now looks seriously underprovided with houses, at least by historical standards.

So why aren’t people going out and buying? Because the depressed state of the economy leaves many people who would normally be buying homes either unable to afford them or too worried about job prospects to take the risk.

But the economy is depressed, in large part, because of the housing bust, which immediately suggests the possibility of a virtuous circle: an improving economy leads to a surge in home purchases, which leads to more construction, which strengthens the economy further, and so on. And if you squint hard at recent data, it looks as if something like that may be starting: home sales are up, unemployment claims are down, and builders’ confidence is rising.

Furthermore, the chances for a virtuous circle have been rising, because we’ve made significant progress on the debt front.

That’s not what you hear in public debate, of course, where all the focus is on rising government debt. But anyone who has looked seriously at how we got into this slump knows that private debt, especially household debt, was the real culprit: it was the explosion of household debt during the Bush years that set the stage for the crisis. And the good news is that this private debt has declined in dollar terms, and declined substantially as a percentage of G.D.P., since the end of 2008.

There are, of course, still big risks — above all, the risk that trouble in Europe could derail our own incipient recovery. And thereby hangs a tale — a tale told by a recent report from the McKinsey Global Institute.

The report tracks progress on “deleveraging,” the process of bringing down excessive debt levels. It documents substantial progress in the United States, which it contrasts with failure to make progress in Europe. And while the report doesn’t say this explicitly, it’s pretty clear why Europe is doing worse than we are: it’s because European policy makers have been afraid of the wrong things.

In particular, the European Central Bank has been worrying about inflation — even raising interest rates during 2011, only to reverse course later in the year — rather than worrying about how to sustain economic recovery. And fiscal austerity, which is supposed to limit the increase in government debt, has depressed the economy, making it impossible to achieve urgently needed reductions in private debt. The end result is that for all their moralizing about the evils of borrowing, the Europeans aren’t making any progress against excessive debt — whereas we are.

Back to the U.S. situation: my guarded optimism should not be taken as a statement that all is well. We have already suffered enormous, unnecessary damage because of an inadequate response to the slump. We have failed to provide significant mortgage relief, which could have moved us much more quickly to lower debt. And even if my hoped-for virtuous circle is getting under way, it will be years before we get to anything resembling full employment.

But things could have been worse; they would have been worse if we had followed the policies demanded by Mr. Obama’s opponents. For as I said at the beginning, Republicans have been demanding that the Fed stop trying to bring down interest rates and that federal spending be slashed immediately — which amounts to demanding that we emulate Europe’s failure.

And if this year’s election brings the wrong ideology to power, America’s nascent recovery might well be snuffed out.

January 26, 2012, 11:04 am

The Greater Depression

One thing everyone always says is that while this Lesser Depression may be bad, it’s nothing like the Great Depression.

But this is in part an America-centered view: we had a very bad Great Depression, and have done better than many other countries this time around. As Jonathan Portes at Not the Treasury View points out, the ongoing slump in Britain is now longer and deeper than the slump in the 1930s (the figure shows how far real GDP was below its previous peak in various British recessions; the red line is 1930-34, the black line the current slump):

I believe that when I began criticizing the Cameron government’s push for austerity, some right-leaning British papers demanded that I shut up. But the original critique of austerity is holding up pretty well, if you ask me.

January 28, 2012, 1:47 pm

The Worse-than Club

Further thoughts on the observation that the current British slump has now gone on longer than the slump of the 1930s. Is Britain unique?

No, it isn’t.

The NIESR has developed a monthly GDP series for Britain, which lets it use real-time data for the comparison. I can’t replicate that, but I can use the Maddison historical data and IMF data — including projections for 2012 and 2013 — to do some comparisons. When you do this for the UK, the worse-than pops right out (I use annual data; year zero is 1929 or 2007, and real GDP is expressed as a percentage of the pre-crisis peak in each case):

France and Germany are doing much better than in the early 1930s — but then France and Germany had terrible, deflationist policies in the early 1930s. (It was the Brüning deflation, not the Weimar inflation, that brought you-know-who to power).

With two of Europe’s big four economies doing worse than they did in the Great Depression, at least in terms of GDP — and that’s three of five if you count Spain — do you think the austerity advocates might consider that maybe, possibly, they’re on the wrong track?

January 29, 2012

The Austerity Debacle

By

Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries. It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.

Nor is Britain unique. Italy is also doing worse than it did in the 1930s — and with Spain clearly headed for a double-dip recession, that makes three of Europe’s big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.

And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.

O.K., about those caveats: On one side, British unemployment was much higher in the 1930s than it is now, because the British economy was depressed — mainly thanks to an ill-advised return to the gold standard — even before the Depression struck. On the other side, Britain had a notably mild Depression compared with the United States.

Even so, surpassing the track record of the 1930s shouldn’t be a tough challenge. Haven’t we learned a lot about economic management over the last 80 years? Yes, we have — but in Britain and elsewhere, the policy elite decided to throw that hard-won knowledge out the window, and rely on ideologically convenient wishful thinking instead.

Britain, in particular, was supposed to be a showcase for “expansionary austerity,” the notion that instead of increasing government spending to fight recessions, you should slash spending instead — and that this would lead to faster economic growth. “Those who argue that dealing with our deficit and promoting growth are somehow alternatives are wrong,” declared David Cameron, Britain’s prime minister. “You cannot put off the first in order to promote the second.”

How could the economy thrive when unemployment was already high, and government policies were directly reducing employment even further? Confidence! “I firmly believe,” declared Jean-Claude Trichet — at the time the president of the European Central Bank, and a strong advocate of the doctrine of expansionary austerity — “that in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”

Such invocations of the confidence fairy were never plausible; researchers at the International Monetary Fund and elsewhere quickly debunked the supposed evidence that spending cuts create jobs. Yet influential people on both sides of the Atlantic heaped praise on the prophets of austerity, Mr. Cameron in particular, because the doctrine of expansionary austerity dovetailed with their ideological agendas.

Thus in October 2010 David Broder, who virtually embodied conventional wisdom, praised Mr. Cameron for his boldness, and in particular for “brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.” He then called on President Obama to “do a Cameron” and pursue “a radical rollback of the welfare state now.”

Strange to say, however, those warnings from economists proved all too accurate. And we’re quite fortunate that Mr. Obama did not, in fact, do a Cameron.

Which is not to say that all is well with U.S. policy. True, the federal government has avoided all-out austerity. But state and local governments, which must run more or less balanced budgets, have slashed spending and employment as federal aid runs out — and this has been a major drag on the overall economy. Without those spending cuts, we might already have been on the road to self-sustaining growth; as it is, recovery still hangs in the balance.

And we may get tipped in the wrong direction by Continental Europe, where austerity policies are having the same effect as in Britain, with many signs pointing to recession this year.

The infuriating thing about this tragedy is that it was completely unnecessary. Half a century ago, any economist — or for that matter any undergraduate who had read Paul Samuelson’s textbook “Economics” — could have told you that austerity in the face of depression was a very bad idea. But policy makers, pundits and, I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia.

February 19, 2012

Pain Without Gain

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Last week the European Commission confirmed what everyone suspected: the economies it surveys are shrinking, not growing. It’s not an official recession yet, but the only real question is how deep the downturn will be.

And this downturn is hitting nations that have never recovered from the last recession. For all America’s troubles, its gross domestic product has finally surpassed its pre-crisis peak; Europe’s has not. And some nations are suffering Great Depression-level pain: Greece and Ireland have had double-digit declines in output, Spain has 23 percent unemployment, Britain’s slump has now gone on longer than its slump in the 1930s.

Worse yet, European leaders — and quite a few influential players here — are still wedded to the economic doctrine responsible for this disaster.

For things didn’t have to be this bad. Greece would have been in deep trouble no matter what policy decisions were taken, and the same is true, to a lesser extent, of other nations around Europe’s periphery. But matters were made far worse than necessary by the way Europe’s leaders, and more broadly its policy elite, substituted moralizing for analysis, fantasies for the lessons of history.

Specifically, in early 2010 austerity economics — the insistence that governments should slash spending even in the face of high unemployment — became all the rage in European capitals. The doctrine asserted that the direct negative effects of spending cuts on employment would be offset by changes in “confidence,” that savage spending cuts would lead to a surge in consumer and business spending, while nations failing to make such cuts would see capital flight and soaring interest rates. If this sounds to you like something Herbert Hoover might have said, you’re right: It does and he did.

Now the results are in — and they’re exactly what three generations’ worth of economic analysis and all the lessons of history should have told you would happen. The confidence fairy has failed to show up: none of the countries slashing spending have seen the predicted private-sector surge. Instead, the depressing effects of fiscal austerity have been reinforced by falling private spending.

Furthermore, bond markets keep refusing to cooperate. Even austerity’s star pupils, countries that, like Portugal and Ireland, have done everything that was demanded of them, still face sky-high borrowing costs. Why? Because spending cuts have deeply depressed their economies, undermining their tax bases to such an extent that the ratio of debt to G.D.P., the standard indicator of fiscal progress, is getting worse rather than better.

Meanwhile, countries that didn’t jump on the austerity train — most notably, Japan and the United States — continue to have very low borrowing costs, defying the dire predictions of fiscal hawks.

Now, not everything has gone wrong. Late last year Spanish and Italian borrowing costs shot up, threatening a general financial meltdown. Those costs have now subsided, amid general sighs of relief. But this good news was actually a triumph of anti-austerity: Mario Draghi, the new president of the European Central Bank, brushed aside the inflation-worriers and engineered a large expansion of credit, which was just what the doctor ordered.

So what will it take to convince the Pain Caucus, the people on both sides of the Atlantic who insist that we can cut our way to prosperity, that they are wrong?

After all, the usual suspects were quick to pronounce the idea of fiscal stimulus dead for all time after President Obama’s efforts failed to produce a quick fall in unemployment — even though many economists warned in advance that the stimulus was too small. Yet as far as I can tell, austerity is still considered responsible and necessary despite its catastrophic failure in practice.

The point is that we could actually do a lot to help our economies simply by reversing the destructive austerity of the last two years. That’s true even in America, which has avoided full-fledged austerity at the federal level but has seen big spending and employment cuts at the state and local level. Remember all the fuss about whether there were enough “shovel ready” projects to make large-scale stimulus feasible? Well, never mind: all the federal government needs to do to give the economy a big boost is provide aid to lower-level governments, allowing these governments to rehire the hundreds of thousands of schoolteachers they have laid off and restart the building and maintenance projects they have canceled.

Look, I understand why influential people are reluctant to admit that policy ideas they thought reflected deep wisdom actually amounted to utter, destructive folly. But it’s time to put delusional beliefs about the virtues of austerity in a depressed economy behind us.

Pourquoi le prix du baril de pétrole défie la loi de l’offre et de la demande?

January 15, 2012 5 comments
I was going to write a post on the topic of oil prices, but Fareed beat me to it. The simple puzzle presented in the column below is that commodities prices are subject to the supply and demand rule. Constant supply, and a drop in demand would lead to a drop in the price. The question is why don’t we see this adjustment in the oil market. After all, the economies of China and India are cooling down (which is not good for reasons i will tackle in my next post), and the economies of the eurozone are on life-support literally. You add winter and the fact that people drive less during this time of the year, and the real demand for  oil is at a lower level compared with this past summer or with the summer prior to that. However, the price of the barrel is at $113, which is twice the price it was trading at 5 years ago when the global economy was booming and the demand for at all time high. The question is, why? What is driving oil prices up in a time of a low demand? This what Fareed tries to explain and i wholeheartedly agree with his analysis

Why oil prices will stay high

By Fareed Zakaria

The next time you pay $3.50 dollars for a gallon of gas, stop and think about a basic rule of economics. When demand is low and supply is strong, prices should fall. Right?

Now apply that to oil. People drive less in the winter. The American economy is slow. The Euro Zone has stalled. China and India are slowing down. So demand for oil worldwide is low. So why is oil trading high at $113 a barrel, more than twice the price it was trading at five years ago when the global economy was booming? What in the world is going on?

There’s a school of thought that suggests the global economy is doing better than we think. China and the U.S. are proving resilient to Europe’s problems and so traders are expecting renewed demand in the world’s two top economies. But another school of thought argues we’re in the midst of a bubble. Speculators have been driving up the price of oil and eventually it will crash.

Now I think that the economic fundamentals really can’t justify oil prices at their current levels. The real driver of high oil is not the stuff you find in the business section of the newspaper – the demand for oil in India and China. It’s on the front page: Global politics.

You see, traders worry about risk. And the biggest risk to oil supplies is the threat of war in the Persian Gulf. Meanwhile, in Nigeria mass protests are raising worries about the supply of fuel from there. Venezuela is in a slow-motion collapse because of Hugo Chavez’s mismanagement. There have also been protests in Russia, the world’s top oil producer. And remember the fallout of the Arab Spring – Libya’s oil production in 2011 was severely curtailed. Iraq continues to disappoint with its oil output and its recent political tensions certainly haven’t made things any better.

So a mix of war rhetoric and local troubles in key oil states are factors driving up the price of crude. And that translates to higher prices at the pump. Now that logic suggests that prices will fall when the news calms down.

But perhaps not. Perhaps oil producers want these sky high prices. Usually the major oil producers understand that keeping prices too high in the short term means people start finding alternatives to oil. They start driving more efficiently; they start looking for alternate energies. But this time, oil states face crucial challenges. Look closer at the Arab Spring. The only oil rich country that has been forced into regime change is Libya. Why? The Gulf states lavish subsidies and salary increases on their citizens. They’ve upped spending to record levels to suppress any popular discontent.

I saw some striking numbers this week: Look at the “break-even” costs for the world’s top oil producers. That is the minimum price at which these countries need to sell oil so that they can balance their budgets.

Russia now needs oil at $110 a barrel to manage its finances. For Iraq, the number is $100. Even Saudi Arabia now needs oil to trade around $80 a barrel just to balance its budgets. The numbers are also high for Algeria, Qatar, and Oman. Only a decade ago Saudi Arabia was able to balance its budget with oil prices averaging around $25 a barrel.

So now it is in these countries’ interest to keep oil prices high, which they do by curtailing supply in one way or the other. This is perhaps the most lasting impact of the year of global protest: High oil prices.

So, the bottom line is an oil crash seems unlikely. Even though the engines of global growth are sputtering, be prepared for a period of expensive commutes. Maybe it’s time to trade in your Escalade for a Prius.

Légendes de l’échec

November 12, 2011 2 comments

Today, i choose to post a New York Times Op-ed piece written by Paul Krugman. To those who do not who Dr. Krugman is, well let me just say that he is one of the most brilliant economists of our era. Dr. Krugman is professor of Economics and International Affairs at Princeton University.  He received his B.A. from Yale University in 1974 and his Ph.D. from MIT in 1977. He has taught at Yale, MIT and Stanford. And at MIT, he became the Ford International Professor of Economics.

Dr. Krugman is the author or editor of 20 books and more than 200 academic papers in professional journals and edited volumes. He has built his professional and academic reputation on his serious work in international trade and finance; he is one of the founders of the New Trade Theory, which represents a major rethinking of the theory of international trade. In recognition of that work, in 1991 the American Economic Association awarded him the John Bates Clark medal; the highest prize in economics which is given every two years to the “economist who is adjudged to have made a significant contribution to economic knowledge.” In 2008, Krugman won the Nobel Memorial Prize in Economic Science based on his work on the explanation of the patterns of international trade and the geographic concentration of wealth by examining the impact of economies of scale and of consumer preferences for diverse goods and services.

Briefly stated, when Paul Krugman speaks about economics, we all should shut up and listen closely to what he has to say. This is his take on the eurozone crisis.  And if i might add, his analysis is very close to mine, which is a great honor and validation of what i have been arguing for months now.

Legends of the Fail

By

This is the way the euro ends — not with a bang but with bunga bunga. Not long ago, European leaders were insisting that Greece could and should stay on the euro while paying its debts in full. Now, with Italy falling off a cliff, it’s hard to see how the euro can survive at all.

But what’s the meaning of the eurodebacle? As always happens when disaster strikes, there’s a rush by ideologues to claim that the disaster vindicates their views. So it’s time to start debunking.

First things first: The attempt to create a common European currency was one of those ideas that cut across the usual ideological lines. It was cheered on by American right-wingers, who saw it as the next best thing to a revived gold standard, and by Britain’s left, which saw it as a big step toward a social-democratic Europe. But it was opposed by British conservatives, who also saw it as a step toward a social-democratic Europe. And it was questioned by American liberals, who worried — rightly, I’d say (but then I would, wouldn’t I?) — about what would happen if countries couldn’t use monetary and fiscal policy to fight recessions.

So now that the euro project is on the rocks, what lessons should we draw?

I’ve been hearing two claims, both false: that Europe’s woes reflect the failure of welfare states in general, and that Europe’s crisis makes the case for immediate fiscal austerity in the United States.

The assertion that Europe’s crisis proves that the welfare state doesn’t work comes from many Republicans. For example, Mitt Romney has accused President Obama of taking his inspiration from European “socialist democrats” and asserted that “Europe isn’t working in Europe.” The idea, presumably, is that the crisis countries are in trouble because they’re groaning under the burden of high government spending. But the facts say otherwise.

It’s true that all European countries have more generous social benefits — including universal health care — and higher government spending than America does. But the nations now in crisis don’t have bigger welfare states than the nations doing well — if anything, the correlation runs the other way. Sweden, with its famously high benefits, is a star performer, one of the few countries whose G.D.P. is now higher than it was before the crisis. Meanwhile, before the crisis, “social expenditure” — spending on welfare-state programs — was lower, as a percentage of national income, in all of the nations now in trouble than in Germany, let alone Sweden.

Oh, and Canada, which has universal health care and much more generous aid to the poor than the United States, has weathered the crisis better than we have.

The euro crisis, then, says nothing about the sustainability of the welfare state. But does it make the case for belt-tightening in a depressed economy?

You hear that claim all the time. America, we’re told, had better slash spending right away or we’ll end up like Greece or Italy. Again, however, the facts tell a different story.

First, if you look around the world you see that the big determining factor for interest rates isn’t the level of government debt but whether a government borrows in its own currency. Japan is much more deeply in debt than Italy, but the interest rate on long-term Japanese bonds is only about 1 percent to Italy’s 7 percent. Britain’s fiscal prospects look worse than Spain’s, but Britain can borrow at just a bit over 2 percent, while Spain is paying almost 6 percent.

What has happened, it turns out, is that by going on the euro, Spain and Italy in effect reduced themselves to the status of third-world countries that have to borrow in someone else’s currency, with all the loss of flexibility that implies. In particular, since euro-area countries can’t print money even in an emergency, they’re subject to funding disruptions in a way that nations that kept their own currencies aren’t — and the result is what you see right now. America, which borrows in dollars, doesn’t have that problem.

The other thing you need to know is that in the face of the current crisis, austerity has been a failure everywhere it has been tried: no country with significant debts has managed to slash its way back into the good graces of the financial markets. For example, Ireland is the good boy of Europe, having responded to its debt problems with savage austerity that has driven its unemployment rate to 14 percent. Yet the interest rate on Irish bonds is still above 8 percent — worse than Italy.

The moral of the story, then, is to beware of ideologues who are trying to hijack the European crisis on behalf of their agendas. If we listen to those ideologues, all we’ll end up doing is making our own problems — which are different from Europe’s, but arguably just as severe — even worse.

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