Europe’s Economic Woes: Right Description, Wrong Prescription

June 15, 2024 by Dan Mitchell @ International Liberty

Economic freedom has been declining in the United States in recent decades. But it’s also been declining in Western Europe over the same period.

 

It’s almost as if politicians on both sides of the Atlantic are having a race to see who can do the most damage to prosperity.

Perhaps because they started with more statism, it appears that European politicians are winning. Which means that the European people are losing.

Two months ago, I wrote about the widening gulf between the United States and Europe and shared a chart about a growing wage gap between the U.S. and other major nations.

And that builds upon the two columns I wrote in 2023 (here and here) and the three columns I wrote in 2022 (here, here, and here), all of which show America out-performing Europe.

Today, let’s revisit the issue.

Here are some excerpts from a Washington Post column by Fareed Zakaria. Here’s his comparison of the U.S. and Europe.

In Europe, the talk is all about how Europe has been unable to keep up with the U.S. powerhouse. …In 2008, the United States and the euro-zone economies were roughly the same size. Today, the American economy is nearly twice the size of the euro zone. And it’s not just one measure. Average European income is now 27 percent lower than in the United States, and average wages are 37 percent lower. …The U.S. economy towers above Europe’s these days. The United States’ technology companies dominate the continent.

U.S. banks are far more profitable than European ones. U.S. energy production has created a boom in manufacturing which is luring many European companies to the United States. As one German CEO said to me. “America is an easier place to do business, has fewer regulations, and now has much lower energy costs. How do I rationally invest in Europe?” ……every year 300 billion euros is diverted to overseas markets to find superior investments, most of them in the United States.

I think it’s a gross overstatement for him to call the United States a powerhouse. After all, inflation-adjusted wages and household income numbers in America have been quite dismal.

But Zakaria is correct to say that Europe is in much worse shape.

Where he goes astray is in his proposed solution. He thinks more centralized power in Brussels (the headquarters of the European Union) is the key to faster growth.

The solution to Europe’s woes can be summarized in one line — a deeper, more united, more strategic Europe. But that solution means, inevitably, more power to the European Union.

This is completely backwards. Europe needs more federalism and jurisdictional competition, not more centralization and harmonization.

To be fair, there are plenty of good things about the European Union, particularly the goal of free trade among the member nations.

But the E.U. also is a major source of bad policy, such as carbon protectionism and tax harmonization.

The bottom line is that more power for Brussels means expanding the cost of supranational government in Europe while doing nothing to fix the primary problem of bad policy by national governments.

Argentina and Dollarization

August 25, 2023 by Dan Mitchell @ International Liberty

I wrote earlier this month about the shocking first-place finish by a libertarian in Argentina’s presidential primary. Today, let’s take a close look at what is arguably Javier Milei’s most radical proposal, which is to eliminate his country’s central bank and instead adopt the US dollar as the national currency.

 

The first thing to understand about “dollarization” is that it is not an untested theory. Panama has been using the dollar for more than 100 years. And Ecuador and El Salvador have been dollarized for more than 20 years. There are also nations that use the euro, as well as many nations that explicitly link (“peg”) their currencies to dollars or euros. So there is no debate about whether dollarization works. Instead, the issue is whether it would be appropriate for Argentina. At the risk of understatement, the answer is a resounding yes. Argentina has a chronic problem of bad monetary policy, mostly because the government uses the printing press to finance wasteful spending. Dollarization would end that possibility.

In a column for Bloomberg, Professor Tyler Cowen explains why Argentina will be better off without its own currency.

The case for dollarizing is straightforward: Since 1980, by one measure, Argentina has had an average annual inflation rate of more than 200%. Significant portions of the economy already have moved to the use of dollars, and for that matter crypto. Why not go all the way and give the economy a stable currency, one which its politicians cannot manipulate? Argentines would find it easier to safeguard their savings, economic calculations would be easier, and foreign investors would be encouraged.

…For whatever reasons, Argentina’s political economy has some features that are not conducive to monetary stability and fiscal responsibility, and so further fine-tuning is unlikely to fix the problem. A drastic step is necessary. Three Latin American economies — Panama, Ecuador and El Salvador — have already moved to explicit dollarization. …

They have all moved from regimes of very high periodic inflation to relative monetary stability. None appears likely to return to its national fiat currencies anytime soon. …Argentina…has been losing ground since the 1920s, when it was one of the richest nations in the world. …it needs dramatically better public policy. At this point, doing nothing, or continuing on the same path, is more risky than chancing some radical reforms.

Patrick Horan makes similar points in an article he wrote for National Review.

Perhaps Milei’s most controversial economic proposal is to abandon the Argentine peso, close the central bank, and adopt the U.S. dollar as the country’s new currency. …Embracing another country’s currency (the dollar being the most common) is a radical move, but it has been done before. Panama has used the dollar since 1904. Ecuador and El Salvador dollarized in 2000 and 2001. These are examples of official dollarization, in which the government formally adopts the dollar. …

Typically, an economy dollarizes because high inflation has seriously weakened the local currency. For example, economists have estimated that roughly half of all transactions in inflation-ravaged Venezuela and Lebanon in the past two years have been conducted in dollars. …Argentina suffers from severe inflation. Since February, the year-over-year inflation rate has exceeded 100 percent.

Also, …many Argentines already deal in dollars. …Dollarization would mean that the government would no longer be able to turn to monetary policy, a tool Argentine governments have repeatedly misused, to fund imprudent fiscal policy. …dollarization would bring an end to Argentina’s inflationary woes. Also, since monetizing deficits would no longer be an option, dollarization could also motivate policy-makers to pursue pro-market, pro-growth reforms.

In a column for the Wall Street Journal, Max Raskin focuses on the economic benefits that accrue when a government no longer has the ability to finance wasteful spending by printing money.

Mr. Milei has promised to close the central bank and dollarize the economy—a process that would essentially outsource the country’s monetary policy to the Federal Reserve. …my recent co-authored research in the Journal of Financial Stability and Brown Journal of World Affairs demonstrates the economic gains that can be had for a country that chooses to forgo its monetary prerogative. Currency competition, especially through liberalizing legal-tender laws, restrains the inflationary impulses of a central bank.

If foreign currencies are able to be used and not taxed or regulated disfavorably, then the central bank will have less power to inflate because of consumer choice. …Argentina used to be one of the most developed and wealthiest countries in the world, but a century of state intervention in the economy has shown how dangerous it is to disrupt the normal functioning of markets. Even a selfish government that’s keen on reaping increased tax revenue from growth should have an interest in making a commitment to monetary liberalization.

Let’s close with some excerpts from an article that Marcos Falcone authored for the Foundation for Economic Education.

This article was published back on May 5, well before Milei’s shocking first-place finish in Argentina’s presidential primary, and it has some good information on how Ecuador has benefited from dollarization.

Initially, those who supported the elimination of the peso were viewed as crazy: How could a nation deprive its 45 million inhabitants of their currency? But Argentina is a country with never-ending inflationary conditions: The current annual inflation rate is over 100 percent and rapidly accelerating, while many fear that hyperinflation—which the country experienced multiple times during the 20th century—is coming back.

… the use of dollars would not be an imposition by the government, but merely a recognition of the current state of affairs. Dollarization has, in some aspects, already occurred. …pesos lose value more rapidly than dollars, euros, or other currencies. This happens, in turn, because the government continues to print money to finance its deficit. …adoption of the dollar has helped other countries stabilize, like Ecuador. …inflation has ceased to be a problem in this country… not even a strong populist leader like Rafael Correa was able to overturn dollarization, as the dollar itself was always more popular than him.

By the way, the adoption of the euro currency has some parallels for dollarization. Consider the cases of Italy and Greece, which habitually suffered from high inflation. Joining the euro was a positive step for those nations because it meant their governments no longer could print money to finance wasteful spending. Sadly, this story does not have a happy ending. The European Central Bank has become politicized in recent years and is now indirectly printing money to subsidize wasteful spending by the Italian and Greek governments.

Fortunately, I don’t think the US Federal Reserve would adopt bad monetary policy to help Argentina (though the Fed certainly is capable of adopting bad monetary policy for other reasons).

P.S. One reason to support cryptocurrencies is that they provide an option for people in nations with terrible monetary policy (Sri Lanka being a recent example).

P.P.S. Nations are less likely to dollarize if the US government engages in global bullying.

 Editor's Note:  Please take some time and review My Argentina File, which goes back to 2012.  RK

China Sells Dollars in Desperate Bid to Keep Yuan Afloat

John Hayward 28 Jun 2023 

The People’s Bank of China (PBOC), central bank for the Chinese Communist regime, on Tuesday pushed a massive sale of dollars by state banks in a desperate bid to prop up the cratering yuan. China’s currency lost four percent of its value against the dollar over the past two months, a serious problem for a Chinese economy that appears to be fizzling out after early signs of post-pandemic recovery. Nervous investors have been underwhelmed by the stimulus measures Beijing has announced thus far.........To Read More....

My Take - Okay, so this is the nation that's spearheading the BRICS effort to replace the dollar as the world's currency?   Imagine that. 

Joe Biden Has Had Two Years of Disaster. Who Will Answer?

By Rich Kozlovich

On April 12th  Victor Davis Hanson published this article, The Biden 10-Step Plan for Global Chaos.  Anyone who follows events have taken note of the consequences of Biden's insane policies, not only domestic policies but geopolitical policies.  He starts out asking the following questions, such as, why are the French getting chummy with China?  It's amazing, they're slamming the nation that kept them from having to speak German, twice!

Why are Japan and India ignoring any embargoes on Russian oil? That one is really easy to answer.  Biden has taken our nation, which was not only energy independent, but was capable of providing the necessary energy for our allies, and made America energy dependent.  South American nations are now sidling up to China, and what's worse, Mexican President Andrés Manuel López Obrador bragging that millions of Mexicans have entered the United States, most of them illegally? And urging his expatriates to vote for Democrats.

The world is now discussing replacing the dollar as the global currency with BRICS.  Have you ever heard of BRICS nations?

BRICS stands for Brazil, Russia, India, China and South Africa, who are attempting to end the U.S. dollar as the world's reserve currency, and wish to dominate the world's economy, mostly being pushed by China, and there's a lot of money involved and they "represent" around 3 billion of the world's population, and I use the word "represent" loosely. 

 

There are 5 factors limiting the impact of the BRICS nations, which makes it clear this is all about China and their desire to dominate the world, all of which is now and will always be the fly in the ointment.  So in my really unsophisticated opinion, who cares?  Remember, this stuff makes my eyes roll up into the back of my head.  

 

This article article by Rebecca Holcomb,  What happens if the United States loses its world reserve currency status?, tries to explain it, and it isn't pretty, but I don't know if it's represents reality.  The main problem regarding the dollar as I see it is the national debt, and the unending devaluation of the dollar through inflation.  These countries are all fake economies.  They aren't capital generating nations, they can't create their own national markets to sustain any kind of growing economy.  

 

Because of Biden's antipathy Israel is existentially being challenged internally as well as externally.  The great success toward peace in the Middle East was created by Donald Trump, called the Abraham Accords, and Biden is destroying it, even refinancing radical Palestinians.  Turkey is dictating who can be in NATO and is making threatening moves against fellow NATO member Greece, and Egypt, "who receives over $50 billion in military and $30 billion in economic assistance", is supplying Russia with rockets and Russia is threatening to use nuclear weapons.   All this came into being because for a mere two years Biden and his band of incompetent nitwits and misfits have fowled up everything.

Afghanistan was a pull out disaster, leaving behind billions of dollars of military equipment, some of which the Taliban was prepared to sell to Russia, "the largest air base in central Asia—recently retrofitted at a cost of $300 million—and a $1 billion embassy", but worse yet, he allowed un-vetted Afghans to board planes to America and left actual Americans behind, then claimed all that a success.  But when called on it, he said it was a mess created by Trump.  

Chinese send spy balloons over America and Biden does nothing.  The Chinese unleash a virus on the world and then have the nerve to lecture America on toxicity and hypocrisy.  Russian cyber attacks are treated as minor incidents, and their invasion of Ukraine was just an incident he called a "minor incursion".  Which makes sense because he believes allowing tens of millions of illegal aliens into America, feeding them, housing them, educating their children and providing free health care is no big deal.  So what if all this is an avenue for Mexican gangs to sell illegal drugs in America, and worse?

He insults Saudi Arabia's leader and tries to reinstate the Iran nuclear deal,  and while China is working diligently to upgrade it's military, Biden worries about gender issues and has created a "woke" military that can't fill it's recruitment needs, throws out trained and competent personal who won't accept the false vaccine shots for Covid, which are killing people all over the world, and a general in charge that called the Chinese military to let them know he would alert them if President Trump decided to act militarily.

The media and the left, especially the media, see everything through rose colored glasses, but, what does the world see?  Weakness, unreliability, stupidity, and total humiliation.  Is it any wonder they're moving in the direction they are?  Is it any wonder the world is a much bigger mess than it's been in decades.   And it only took Biden two years to accomplish that.  Imagine what he's going to do over the next 18 or so months. 

P&D Geopolitical Edition

By Rich Kozlovich Tags:  P&D Geopolitics Edition: Russo/Ukrainian War, and Donald Trump, BRICS

Have you ever heard of BRICS nations?  BRICS stands for Brazil, Russia, India, China and South Africa, who are attempting to end the U.S. dollar as the world's reserve currency, and wish to dominate the world's economy, mostly being pushed by China, and there's a lot of money involved and they "represent" around 3 billion of the world's population, and I use the word "represent" loosely.  And a lot of problems.

5 factors limiting the impact of the BRICS nations, which makes it clear this is all about China and their desire to dominate the world, all of which is now and will always be the fly in the ointment.  So in my really unsophisticated opinion, who cares?  Remember, this stuff makes my eyes roll up into the back of my head.  

This article article by Rebecca Holcomb,  What happens if the United States loses its world reserve currency status?, tries to explain it, and it isn't pretty, but I don't know if it's represents reality.  The main problem regarding the dollar as I see it is the national debt, and the unending devaluation of the dollar through inflation.  These countries are all fake economies.  They aren't capital generating nations, they can't create their own national markets to sustain any kind of growing economy.  

The U.S. has a huge internal market, and is a natural capital generating nation with an unending capacity for innovation.  We can grow our own food, generate all our energy needs internally, develop our own armament, defend the nation on our own, and if the nation's leaders would just do it, pay off the national debt with the 150 trillion dollars in assets of the federal government. 

As I said, all this stuff makes my eyes roll back into my head, but my grandfather was one of the world's great economists.  He said if you spend more than you make, you'll go broke, and China's broke.  China is central to this scheme, and yet they can't create it's own internal market to sustain their expansion economically or militarily, and other than coal, they seriously lack energy resources. 

These nations need the U.S. Does the U.S. need these other nations?  

I'll have more on this later, but if the Russo/Ukrainian War wasn't so terrible to so many innocent people, it would be laughable.  No one was prepared for this invasion, including Putin.  Everyone is running out of military hardware.  Ukraine needs far more munitions daily than the west has totally.  The western nations are depleting their own defensive stock by giving it to Ukraine.  So much so that when this over Ukraine may be one of the most militarized nations on Earth.  

Russia is buying drones from Iran, and they're negotiating with the Taliban for used U.S. military equipment left behind by Biden in Afghanistan.  Putin is recruiting massive numbers, but massive numbers are leaving Russia to avoid being drafted, and no on believes any of these young men will be properly trained or equipped.     

Putin is outraged the west is going to supply advanced aircraft, calling it an escalation.  Ya gotta give it to Putin for brass.  He starts a war, and undeclared war, with a nation with little military capacity, and then is outraged when it goes against him calling their efforts to defend themselves an escalation.  No, this invasion was the escalation, going from peace to war was the escalation, not what Ukraine is doing. 

There's a lot more going on regarding economics, and Russia is in trouble, economically, militarily, industrially, and most importantly, demographically.  The surrounding nations are no longer intimidated my Russia and are making a lot of economic decisions that over the long haul is going to diminish Russia.  

Is Ukraine any better off? No, but at this point, they don't need to be as they're being completely subsidized by western nations, especially the U.S., but that can't and won't last forever.  I do think there has to be a settlement soon.  This has exhausted the world and has exposed incredible weaknesses in all nations involved, including the U.S.