A new budget and economic forecast from the European Commission shows pretty clearly what has gone wrong in Europe. The above chart shows the composition of EU austerity. In 2011-2012, 1.3 percentage points of GDP retrenchment comes from taxes, while 2.0 points comes from spending cuts.
In other words, a massive 40% of EU fiscal adjustment is from the tax side in high-tax Europe, a region already at the top of the Laffer Curve. Successful fiscal consolidations in general are more like 80-20, not 60-40. Europe, given its giant tax burden, probably should have been all spending cuts.
The EC also downgraded its growth forecasts for the entire region, with the exception of Germany and Great Britain. Here is Jeremy Warner of the Daily Telegraph:
Even so, the forecasts still look far too optimistic. Does anyone honestly believe that Italy and Portugal will be growing again by next year, or indeed that Greece will have stopped contracting?
The whole thing looks worryingly like one of those exercises in forecasting where the policymakers think about what they would like to happen, rather than what will. I’m not saying they are completely incredible, but they do rely substantially on the eurocrisis slowly resolving itself, even though that looks the least likely outcome right now. But the most alarming thing about them is that notwithstanding the forecasters’ efforts to show as much growth as they can just about get away with, there’s no sign of the hoped for progress in Europe’s public finances. Spain is expected to run a deficit of 6.4pc this year and 6.3pc next, both way in advance of the targets agreed with the EU.
As if that’s not bad enough, France poses an even bigger problem. The Commission forecasts that France too will miss its target of reducing the deficit to 3pc by next year without further cuts or tax increases. For a new president committed to fighting the present austerity medicine, that’s going to be something of an ask. The French deficit is expected to be 4.5pc this year, and only marginally lower at 4.2pc next.
The present approach to the crisis just isn’t working, even in core nations, let alone the depression hit periphery. If France is given a dispensation from the new fiscal pact, why should anyone else take it seriously?