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The Weekend Neos Kosmos : 31 August 2019
2 THE WEEKEND NEOS KOSMOS | SATURDAY 31 AUGUST 2019 NEWS DIGITAL.NEOSKOSMOS.COM RICHARD HOLDEN It's four years since Prime Minister Tony Abbott warned Australia had been heading to "a Greek-style economic future". He was referring to what he said had been happening under the previous Labor government. When Labor left office in 2013 the federal government's budget deficit had been three per cent of gross domestic product. The Greek government's had been seven per cent. The Australian government's debt to GDP ratio was Economically, Australia is at risk “ of becoming Germany… or Greece; and neither of these options are good 20 per cent. The Greek government's was 177 per cent. Australia was never on the path to becoming an economic basket case like Greece, but right now we are on the road to becoming like another European nation. It also starts with "G". Becoming economically like Germany isn't as scary. But it is genuinely troubling nevertheless. GERMANY IS NOT IN GOOD SHAPE Germany's GDP growth in the June quarter was minus 0.1 per cent. That means economic activity shrank. Its central bank, the Bun- desbank, doesn't see things getting better any time soon, saying growth "is probably set to remain lacklustre in the third quarter of 2019". Interest rates have fallen so low that investors are now paying the German government to take their money. The nominal interest rate on two-year German government debt is -0.90 per cent, and on extremely long-term 30-year bonds is -0.15 per cent. That's right: even for 30 years into the future, investors think its safer to lose money by parking funds with the German government than to try to make money by using them in other investments. Published by Ethnic Publications Pty Ltd (ABN: 13005 255 087) of 169 Burwood Rd, Hawthorn, Victoria 3122. Printed by Streamline Press Pty Ltd, 155 Johnston Street, Fitzroy, VIC 3065. NEOS KOSMOS Published since 1957 Contacts Reception Phone: (03) 9482 4433 Fax: (03) 9482 2962 Email: email@example.com Advertising Phone: (03) 9482 4433 Email: firstname.lastname@example.org Web: www.neoskosmos.com Letters Email: email@example.com NEOS KOSMOS - English Publisher: No. 6238 Address: Level 1, 169 Burwood Road, Hawthorn, Victoria 3122 Subscriptions Phone: (03) 9482 4433 Email: firstname.lastname@example.org Fax: (03) 9482 2962 Letters should not be more than 200 words and they must indicate your full name, address and a daytime telephone number for verification. By submitting your letter to us for publication you agree that we may edit the letter for legal, space or other reasons and may, after the publication in the paper, republish it on the internet or in other media. Christopher Gogos Editor-in-chief: Sotiris Hatzimanolis English Editor: Mary Sinanidis Journalists: Nelly Skoufatoglou, Eugenia Pavlopoulou, Zoe Thomaidou, Anastasia Tsirtsakis Contributors: Richard Holden, Maria Kampyli, Apollonas Kapsalis, Stella Sevastopoulos, Vasilis Vasilas, Thoedora Maios, Dean Kalimniou, Fotis Kapetopoulos, George Stogiannou Graphic design: Vangelis Karakasis, Anthony Rallis, Gregory Sembelides Mail: PO Box 6068 Hawthorn West, Victoria 3122 Put another way, markets think the German economy will be in trouble for decades, meaning short-term German interest rates will have to remain ultra-low for decades. The German penchant for balanced budgets became (there's really no other way to put it) fanatical in the wake on the financial crisis of 2008. Like centre-right governments around the world – Britain was a leading example – a dark fiscal austerity took hold, at precisely the wrong time. 2009 was a time of chronically weak private demand that required both lower in- terest rates and, as monetary policy was running out of steam, continuing budget deficits. Instead Germany cut government spending, pushing the budget back into surplus from 2014. It didn't get everything wrong. As I wrote at the time, Germany was largely right to insist that Greece get its outof-control spending and government debt under control. But Germany's approach to its own economy hurt it and other European economies such as Italy and Spain. WE'RE TURNING GERMAN… With apologies to British 1980s band The Vapors, we're at risk of "Turning Germanese". Like Germany, our interest rates are getting close to zero. OK, Germany has negative nominal 30-year interest rates, but we've got negative real 10-year bond interest rates, and zero 30year bond rates. Both of our major political parties are gripped by balanced-budget fetishism, appearing to want to balance the budget regardless of the economic context. Again, here we are not quite as fanatical as Germany, but Labor seems determined to "out-surplus" the Coalition to prove its economic management credentials. And the If we’re not careful the old Abbott narrative of “we’re about to become Greece” will become true, except about another country whose shoes we would rather not be in. government has made delivering a surplus the centrepiece of its economic agenda. And, like in Germany, our economic growth is slowing. We don't yet have negative GDP growth like in Germany, but we do have negative per capita GDP growth. …BUT THERE'S TIME TO PULL BACK Poor old Reserve Bank governor Philip Lowe has been pleading over and again for more aggressive government spending, particularly on infrastructure, to help complement what he is doing on interest rates. A couple of cheesy photo ops with Treasurer Josh Frydenberg aside, there's no evidence of him gaining any traction in Canberra. Structurally balanced budgets are important, and thinking government debt doesn't matter is deeply misguided. But this is the situation we face: private demand is chronically weak our physical infrastructure has not kept pace with population growth and modern needs our social infrastructure (including all levels of education) is not up to standard interest rate cuts are running out of puff the government can bor- row in its own currency, long-term, for close to nothing Any government that won't borrow and spend up big and smart in these circumstances is making a huge mistake – one for which we and our children will pay dearly. If we're not careful the old Abbott narrative of "we're about to become Greece" will become true, except about another country whose shoes we would rather not be in. * Richard Holden is Professor of Economics at the University of NSW. He does not work for, consult or own shares in or receive funding from any company or organisation that would benefit from this article that first appeared in The Conversation.
24 Aug 2019
07 September 2019