EU Hangs On with Hookers, Drug Dealers & Gun Runners

The questionable accounting gimmick countries are using to claim economic progress.

[](/sites/default/files/uploads/2014/10/20140531_FNP0021.jpg)Karl Marx was wrong about virtually everything, but he was spot on when he said, “history repeats itself, first as tragedy, second as farce.” For the third time in six years, the European Union (EU) is on the verge of recession, a tragedy fueled by slow or non-existent growth, a strong possibility of continent-wide deflation, and debt burdens that remain onerous, if not catastrophic. Enter farce: the economic doyens of the EU have determined that Italy is no longer in recession due to a new way of measuring economic growth and GDP—one that counts illegal activities such as drug trafficking, prostitution and arms smuggling as part of the mix.

The new method of measuring economic data is called SEC2010 (also known as ESA2010) and is occasioned by the differing laws individual EU nations have regarding the legality of dubious activities. SEC2010 was originally published in June 2013, but it was implemented beginning last month. It is aimed at realizing “developments in measuring modern economies, advances in methodological research and the needs of users,” according to a statement by Eurostat.

As a result, the third largest EU economy has seen its “growth” rate revised by the Italian National Institute of Statistics from a 0.1 percent first quarter decline, to zero. Italy also had a 0.2 percent decline in the second quarter which was left unrevised. But because of the first quarter’s revision, the two consecutive quarters of negative growth necessary to define a recession has now been averted.

The move ostensibly gives Italian Prime Minister Matteo Renzi a brief respite in his effort to boost the economy, while staying below European Central Bank’s (ECB) requirements that budget deficits not exceed 3 percent of GDP, and gross debt not exceed 60 percent of GDP. Italy is one for two in that regard as its national debt remains more than double the ECB limit at 132 percent, even when black market activity is taken into account.

Renzi is attempting to reform Italy’s economy with a budget containing tax cuts for businesses and lower-income individuals, which he characterizes as “the biggest tax cut ever done by a government in a year,” and “a sign of Italy’s great strength, solidity, and determination.” But the government will remain saddled with debt and despite spending reductions to fight it, the budget deficit will rise from 2.2 percent to 2.9 percent. Moreover, Italy still intends to maintain its delay in reaching a structurally-adjusted balanced budget until 2017.

Italy is far from the EU’s only basket case. Germany, the EU’s largest economy, has seen its recovery falter and it endured an economic contraction of its own in the second quarter. France, the EU’s second largest economy, was flat over the same period, and growth in the EU as a whole was near zero.

Adding fuel to the debt-laden EU fire is an anemic rate of inflation, moving precipitously towards deflation. It has fallen to 0.3 percent in Sept. in the 18-member Eurozone, a level not seen since 2009. It is only marginally better in the EU as a whole at 0.4 percent. By comparison, inflation in the Eurozone in Sept. 2013 was 1.1 percent, with the EU at 1.3 percent during the same time frame, Eurostat reported. This marks the 20th straight month the ECB has missed its target inflation rate of 2 percent. Moreover, it looks like the region’s GDP will contract in the third quarter, precipitating the aforementioned triple-dip recession.

During an August 7 press conference, ECB president Mario Draghi promised the bank’s monetary policies would remain “highly accommodative.” “We are strongly determined to safeguard the firm anchoring of inflation expectations over the medium to long term,” he said. And once again, and equally as farcical, the ECB will embrace quantitative easing to “fix” the problem, which is also once again being blamed on too much “austerity.”

As Steve H. Hanke, professor of Applied Economics at Johns Hopkins University explains, the EU definition of austerity is a joke. “The leading political lights in Europe–Messrs. Hollande, Valls and Macron in France and Mr. Renzi in Italy–are raising a big stink about fiscal austerity,” he writes. “They don’t like it. And now Greece has jumped on the anti-austerity bandwagon. The pols have plenty of company, too. Yes, they can trot out a host of economists–from Nobelist Krugman on down–to carry their water.”

Hanke supplies a chart showing a continent sinking “under the weight of the State,” with the percentage of government spending relative to GDP that comes in at 58.5 percent for Greece, 57.1 percent for France, and 50.6 percent for Italy. In fact, out of the 30 European nations listed, only Bulgaria, Estonia, Latvia, Romania and Slovakia spend less than 40 percent of their respective GDPs on government.

In a column for Bloomberg News, Leonid Bershidsky presents an equally compelling chart. It reveals that between 2007 and 2013, spending in the 28-member EU “reached 49 percent of gross domestic product in 2013, 3.5 percentage points more than in 2007,” Bershidsky writes. He further notes it was slightly higher than 50 percent in 2009, but the subsequent decline had nothing to do with spending cuts. “Rather, the spending didn’t go down as much as the economies collapsed, and then didn’t grow in line with the modest rebound,” he explains.

So much for austerity and spending “cuts.”

Which brings us to why the EU really fears deflation. As economic correspondent Ambrose Evans-Pritchard illuminates in an Oct. 10 column for _The Telegraph, _it is debt-addled governments that need inflation to manage their irresponsible debt burdens. All of this is framed in “eco-speak,” such as “demand stimulus” and “deflationary traps,” but the bottom line is clear: unless many of these governments can “inflate away their debt” with monetization, sovereign default becomes a genuine possibility.

Investment advisor Peter Schiff puts this lunacy in terms most people can understand, noting that “politicians and central bankers (and their academic, journalistic, and financial apologists) have concocted a variety of tortured theories as to why inflation is not just good for overly indebted governments, but an essential economic good for all. In a propaganda victory that even Goebbels would envy, it is now widely accepted that purchasing power must decrease for an economy to grow,” he writes.

The clearest current example of this propaganda is the semi-hysteria surrounding the fall in global oil prices. CBS News speaks to worldwide “economic and political shockwaves” related to government “budget shortfalls,” even as it is forced to admit such price cuts are an absolute boon for fuel consumers. One suspects most ordinary Europeans (and Americans as well) prefer lower fuel prices than “taking one for the government/banker team” desperate to substitute inflation for the kind of staggering tax increases and genuine cutting it would take to balance budgets throughout the EU. Thus, Andrew Roberts, credit chief at the Royal Bank of Scotland, sounds the predictable alarm. “We are reaching the end game in Europe,” he warns. “If they don’t launch real QE and start reflation by the end of the year or soon after, the consequences are too awful to contemplate.”

Compared to what? In Greece, the current unemployment rate is 26.7 percent. In Spain, it is 25.3 percent. Even in “recovering” Ireland, 11.8 percent of the workforce remains unemployed. What Roberts is really talking about is a massive debt crisis, one where the proverbial can must be continually kicked down the road—lest the true scope of the fiscal fecklessness engendered by years of unsustainable government spending be revealed.

Hence the continuing desire to mask the truth by literally throwing money at the problem, all in the name of saving the Euro and in turn the European Union, despite the reality that the marriage of spendthrift nations such as Greece, Spain and Portugal, with the relatively level-headed nation of Germany is a triumph of politically-motivated fantasy over fiscal reality. And while the bankers and politicians undoubtedly bear the lion’s share of the blame for the current predicament, the people themselves are hardly blameless. Their appetite for big government knows no bounds, and thus, what constitutes “courageous” behavior by politicians to get a handle on the problem assumes comical proportions. The Economist cites a great example, noting that Italy employs ushers in gold-braided uniforms at the Italian Parliament whose top salary for carrying messages to lawmakers used to be $181,590 a year, before Renzi imposed “austerity” by cutting it—to $140,000. Using email is apparently out of the question.

So is genuine austerity. Instead, the specter of deflation will be held up as the ultimate bogeyman, and the debt crisis that never really went away, despite the mainstream media’s lack of attention, will continue. And if it becomes necessary to calculate the economic output of hookers, gunrunners and drug dealers to boost GDP, so be it.

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