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‘Europe to Continue Its Low Growth Trap, Because Gov'ts Are Too Big’ – Professor

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Euro banknotes - Sputnik International
The EU might have to pay billions of euros if Britain refuses to pay its Brexit divorce bill. According to the EU’s financial chief Gunther Oettinger, the remaining 27 member states will face significant spending if London doesn’t pay the 39 billion as promised.

According to Oettinger, Germany alone might have to spend hundreds of millions of euros, the Telegraph reported. Meanwhile, a committee of British MPs has urged a right for parliament to have veto power over any trade deals that the UK signs after it exits the Eurozone in March.

Sputnik has discussed the issue with Steve Hanke, professor of applied economics at The Johns Hopkins University and senior fellow at the Cato Institute. Over four decades Hanke has advised dozens of world leaders from Ronald Reagan to Indonesia's Suharto on currency reforms, infrastructure development, privatisation, and how to tame hyperinflation.

Sputnik: The European Union has admitted it will have to pay billions to fill in the gap if Britain leaves the bloc without a deal. It seems that a no-deal scenario is a likely outcome, although we've had guests here on air saying today that the chances of a deal are like 50 percent. How likely is the bloc to budge regarding its stance on the Brexit negotiations?

Steve Hanke: I think there will be a deal. There is no question about that, in my view. Whether it is a good deal remains to be seen. That is really the open question; what kind of deal they will come up with. They will come up with a deal. That's all these people now how to do, is make deals, so there will be a deal. And as far as the gap you've mentioned, if the Brits are out there will be a budget gap that somebody has to fill in.

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Well, one way to fill the gap is to cut the ridiculous expenses that are imposed by the European Union; so they can easily fill the gap by cutting spending. Who says that spending they are making is a requirement that has to be done? This is not a requirement, this is flexible. That's a big problem in Europe. These governments are so massive; and overspending and overtaxing can easily be cut back.

Sputnik: Obviously, there will be a lot of opposition to such a measure as cutting spending to deal with the situation…

Steve Hanke: Well, if they don't, Europe is going to continue to be in its low growth trap because the states are too big and the taxes are too high. And growth is lagging way behind the United States; it's been lagging behind for about one percentage point for years now. The EU is losing its share of the global economy; it's basically shrinking relative to the total size of the world economy, and the productivity is very weak in Europe. They are ultimately going to have to change or continue to wither away and become weaker.

Sputnik: We recently have seen the European Union giving in to some of the demands of member states; we saw this in the case of Italy and in the case of France. In your view, will some shift in negotiations be made between Brussels and London and how soon? What has to happen for them to finally agree to a shift?

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Steve Hanke: I think the recent turning of a blind eye to Italy and France with regard to their budgets is just part for the course. I mean, no one follows the Maastricht agreement; the only country that does with regard to the fiscal constraint of three percent of GDP as a deficit is Estonia. I think Estonia has hit the mark almost every year; Bulgaria is also very good. But the rest of them, they just ignore it and nothing happens. So, that's the Italy and France story; Brussels and London is a completely different ball game, they are talking about very substantive serious things that neither side will turn a blind eye to.

Sputnik: What about Germany? It has been suffering from an economic slowdown…

Steve Hanke: Germany has been suffering from a slowdown and I think they've lost a great deal of momentum and primarily it's a little bit of a confidence problem. I think Merkel has blundered into so many bad policies and not put any good policies in place for Germany; that again they've lost complete momentum and they have lost all confidence in the political system. As I talk to my German friends in business they have absolutely no confidence in the political class to do anything correct; and no one is on the horizon. So, there is a very low level of confidence in Germany and as a result investment is sagging and in general the mood is downcast.

Sputnik: You have just said that the bloc itself, the EU, is in pretty bleak and dismal state and radical changes have to be made; what kind of changes can we expect within the bloc in the future? And what kind of changes are really essential for the bloc to either maintain economic stability or get some momentum going there?

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Steve Hanke: I would say it's very hard to predict what changes might be made and what their probabilities of success would be because there's essentially no consensus. If you watch the EU politicians, they just run around from one meeting to the next. They have no idea of what's going on, they don't have time to even take a breath. So there's no consensus at all about what can be done or what should be done. To the extent that they talk about policy changes, it's usually a big pie-in-the-sky things like a banking union or fiscal union, or something like that — very big grandiose things that aren't going to happen. What they need to do is another story and as I said the EU has very weak productivity and it is losing its share in the global economy in a low growth trap.

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They have to cut a lot of government expenditures, number one. They have to open their services sector for digital competition. They all need massive labour reforms to free up the labour markets. Education is way behind, there are really no top-rate universities in Europe anymore. And all the pension systems and entitlement systems that they have in Europe are essentially bankrupt. So they have big technical financial problems that they're facing. But in short, the visible hand of the state is all over everything in Europe; you can't do anything without dealing with the government. And what they have to do is introduce the invisible hand of Adam Smith and free markets, that's the essence of the problem.

The views expressed in this article are those of Steve Hanke and do not necessarily reflect those of Sputnik.

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