The new President of France, Francois Hollande, has stated that he is against the severe austerity that European governments have been adopted and forced into by the EU, ECB and most notably, by Berlin. He has stated that the solution to France (and Europe’s) economic problems is more government spending. He is calling for the ECB to do more to “stimulate” the economy – which is political speech for printing money and devaluing the Euro – it is the only lever the ECB has available. He also calls for more government spending to spur growth.
This cannot work. Quantitative Easing, which is simply indirect expansion of the money supply, will lead to inflation – in fact that is the whole point. Governments require inflation to make the debt shrink in future currency terms, resulting the bond holders taking losses without an immediate default. The economists of the Austrian school are the only ones who have accurately predicted the outcome of such “money printing” schemes, and this is where we are headed now.
Also, government spending CANNOT grow the economy, especially when such spending is financed by debt. First, the government must raise the money: they can either increase taxes, which withdraws money from the economy and is detrimental to growth; or they can borrow the money from the market – in which case they are taking money from lenders (i.e. bond buyers) who would otherwise need to invest that money in business ventures that actually do produce growth; or finally they can borrow the money from the central banks via Quantitative Easing, which invariably leads to inflation and devaluation which will reduce the incomes and wealth of everyone in the economy, and this is also bad for growth.
Another Frenchman, Frederic Bastiat, wrote in the 1840s:
…public spending is always a substitute for private spending, and that consequently it may support one workers in place of another but adds nothing to the lot of the working class as a whole.
If Hollande and the other leaders in Europe want to stimulate economic growth, they must unshackel free businesses by eliminating regulation, red tape and the complexities of doing business there. And I don’t mean doing a regulation by regulation assessment. I mean simply throw out any regulation passed in the last 20 years… They have done nothing to improve the lot of the average European.
- Hollande, Merkel seek growth for Europe – Sydney Morning Herald (news.smh.com.au)