Austerity, Social Unrest, And Europe's 'Lose-Lose' Proposition

[dkf]

The link between government spending cuts and social unrest is highly non-linear and extremely troublesome. We first noted the must-read quantification of the relationship between so-called CHAOS of social unrest and spending cuts back in early January and this brief lecture reiterates some of the frightening conclusions. Critically, small spending cuts impact social unrest in very marginal ways but once the cuts begin to rise to 2-3% of GDP then the probability of considerable and painful social unrest becomes much higher. As Hans-Joachim Voth points out in this INET lecture, analogizing between a burning cigarette as a catalyst for a forest fire in an arid landscape, he suggests the rapid build up of combustible material caused by austerity (youth unemployment in Spain perhaps?) could be inflamed by a seemingly small catalyst that would otherwise be ignored in general (a poor immigrant being shot or motorist murdered in a bad part of town) when spending cuts are at the extremes we see across Europe currently. The frightening reality of the non-economic, real social costs of the Troika's handiwork look set to be tested going forward as the link between periods of very heavy unrest (clusters of rioting for instance) and austerity is very strong. His findings on the post-chaos fiscal policies, (what does the government do once social unrest explodes) are perhaps more worrisome in that governments will immediately withdraw from austerity patterns which leads to some tough game-theoretical perspectives on the endgame in Europe in a 'lose-lose proposition' for austerity as the uncertainty shock of these events cause dramatic drops in Industrial Production.

http://www.zerohedge.com/news/austerity-social-unrest-and-europes-lose-lose-proposition

JPMorgan recently noted this study:

The authors tested to see if results varied with ethnic fragmentation, inflation, penetration of mass media and the quality of government institutions; they did not. Results are also consistent across time, covering interwar and postwar periods.
 
The independent variable that did result in more unrest: higher levels of government debt in the first place.
 
Compounding the problem is the way some decisions are being taken, which may reinforce perceptions of a "democratic deficit" at the EU level, an issue highlighted by Germany’s Constitutional Court. It remains to be seen if Europe can sustain cohesion around its path of most resistance. One sign of rising tensions: the following (staggering) comment by the head of the Bank of France: "A downgrade does not appear to me to be justified when considering economic fundamentals," Noyer said. "Otherwise, they should start by downgrading Britain which has more deficits, as much debt, more inflation, less growth than us and where credit is slumping." At a time of increasing budgetary pressures and declining growth, I suppose there are limits to European solidarity.

http://www.zerohedge.com/news/austerity-unrest-and-quantifying-chaos