Rationality and Irrationality in the European Union

Comments on Telegraph.co.uk on the article:

Deutschland über alles does not mean a trickledown recovery in EMU

Germany is sizzling, for now. Manufacturing output grew at an annual rate of 26pc from March to May. Mercedes, BMW, and Audi are ramping up overtime. Economic growth in the second quarter may top 5.2pc By Ambrose Evans-Pritchard

Published: 6:24PM BST 11 Jul 2010

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7884077/Deutschland-uber-alles-does-not-mean-a-trickledown-recovery-in-EMU.html

One of the best international economics analysts in our time, Ambrose Evans-Pritchard presents his views on Germany and its precarious position in the European Union, such as it is.

My comment on his comments:

From a mathematical perch it is astonishing to think that an ensemble of dissimilar countries could manage to keep Germany in their clutches for long. There is no reasonable future for the German state acting as a kindly and wise-old money lender to other states who, for many reasons, cannot find ways to conduct their economies and are disintegrating in debt. .

If, the broad range of economic attributes of the members was a theoretical threat to the stability of the EU upon founding, then when Germany's economic might soars what will happen to the others whose economies are contracting? Does not this gap widen?

It appears that the European Union is a zero-sum game where those members who make mistakes or ignore prudent economic pathways are to be compensated by a state that lacks these morbid deficiencies and is thus profitable. This arrangement spreads around the wealth so that all citizens in the Union can have comparable living standards. This equivalent imbalance is seen in the U.S. where some states like California, New York and Illinois are seen to be basket financial cases and any tax proceeds from the successful states [mostly Texas and a few others in the South], are to be used to compensate for poor government in the others along with massive deficit spending from the federal government. If the deficit spending actually cured some economic problems in the wayward states then at some future time a balance might be restored. But, the stimuli seem to be working in the opposite direction so as to encourage many states to spend more on inefficient social programs and build asset bubbles such as windmills and solar panels and electric cars and to burden taxpayers with more taxes. The net effect here is to spend precious resources on finding novel ways to merely increase the cost of energy and transportation while increasing unemployment and those ‘advances’ do not help businesses. This scheme is tantamount to using massive debt to increase the costs of doing business. That cannot have a good outcome.

The danger in any such imbalance here is two fold: [1] the tax- burdened states may collapse under the pressure of debt and fail or [2] businesses who supply the tax revenues in such states will move away. This is a global economy now and it is absurd to believe that some state or nation can immobilize key industries and force the players to continue in business with corrosive taxes and insane regulations and to tolerate an ugly business environment.

The high taxes, high debt loads and potential bankruptcy of such nations and states merely provide an opportunity for corporations, big or small, to exit to more friendly places. Socialist governments have not learned how to share power with the private sector as yet and many still believe they can micromanage the business community with authoritative forces or terse command instructions. They are mistaken. What we face here is something worse than a stalemate in government/business relations—we face a potential resignation from the game. The notion of profitability is absent in the government cases while this concept is central and critical to the business world. Failed businesses reform with different leadership using existing assets. Failed governments become financially parasitic, tend to retain their party members at all costs and attempt to grab onto any and all wealth in view. Businesses cannot operate with massive loses for extended times {GM and Chrysler] so they will fail and may become victims of nationalization as in France and Greece. They can escape nationalization by leaving early and will do so piecemeal by dumping operating units in poorly run states.

The next two years will show us if governments are wise enough to encourage business growth in their respective regions. I doubt it. This anti business climate will just lead to more unemployment and poverty.

rycK [a 5th generation Californian in exile]

Comments to: ryckki@gmail.com