Apocalypse now?

No, but possibly soon.

Europe, the eurozone and the UK, is forecast for recession by the IMF and the OECD.

Greece looks like limping out of the euro, unable to choose between the intolerable costs of staying in and disastrous consequences of getting out.

The US economy splutters along with lack of credit available to business, unreformed banking regulation, and unemployment hovering at 10%.

Reeling from lost export markets in Europe and USA, China's growth is down from last year's 9.2% (and pre GFC annuals in excess of 10%) to anticipated 8.2%.

The other emerging economies (BRICS) can expect a slowdown, equally due to shrinking exports.

None of this augurs well for Australia's mining boom, not to mention the impact of the high AUD on other exports, inbound tourism and foreign students.

PIIGS - houses of straw, houses of sticks

Portugal, Ireland, Italy, Greece and Spain (PIIGS), were all seen as economic basket cases, which needed to be isolated and dealt with by austerity measures to prevent contagion to other economies.

The austerity measures have been successful in producing skyrocketing unemployment, up to 24% - a level seen in the USA during the Great Depression, and even more disconcerting, in excess of 50% for the under 30 age cohort.

As well there has been not only no growth, but a reduction in the economies of the PIIGS.

The Greek tragedy

Greek debts total 291 billion euros (over AUD377 billion).  Debt to GDP is 170% (Australia is 23.8%).

Greece owes Germany 84 billion euros and France 65 billion euros, over 3% of each country's GDP.

If Greece exits the euro there will be a flight of capital, end of investments and collapse of the Greek banking system.  Contagion of the other PIIGS and creditors will be inevitable.

We are all Germans now

The leading arguments for austerity as the only way out of the economic predicament of the PIIGs and prevention of contagion come from Germany.

Germany, a country scarred by the hyperinflation of 1923, the destruction of middle-class confidence, and the growth of extremism as a consequence, sees austerity and political rectitude going hand in hand.

While its EU partners have suffered economic slowdown in varying degrees since the GFC of 2008, Germany has bounced back to become the world's principal exporter and showing continued economic growth.

While the Germans can boast that this is the result of increased productivity and just hard work, a less vaunted factor is the artificially low price of German exports consequent to Germany's membership of the eurozone.  The major part of German exports go to its neighbours, purchasing in the same currency, and the balance is sold in euros, as much an artificially undervalued currency for the Germans as the yuan is for the Chinese.  It has been estimated that if the Germans had to revert to the Deutschmark, the cost of its exports would increase by approximately 40%.

Germany therefore has a vested interest in ensuring that the euro continues.

John Maynard Keynes, Franklin Delano Roosevelt, Paul Krugman, François Hollande and Brian Hillman

As was pointed out in the last addition of the Bugle, austerity is no solution to economic difficulties without growth.

The simplistic application of austerity measures was in fact the downfall of the Weimar Republic and its social order, and the Great Depression brought on by the application of such measures by President Hoover.

The growth of extremist parties in the last Greek elections, and in the French presidential elections shows the impact of austerity measures and fear of the future on voters.

Any growth can only be achieved by an increase in confidence.  This requires expansionary monetary policies and willingness on the part of Europeans in general, and the Germans in particular, to share the burden.

Public profligacy was not the main cause of the crisis in the eurozone countries.  Many had relatively prudent fiscal policies and most have run up smaller deficits than Japan, the UK and the USA.   Other than Greece, where there were active and successful efforts to fudge the figures, the main cause of profligacy was the flood of funds from sober French and German banks into investments that turned out to be housing bubbles once the music stopped.

Holler for a Marshall

Eurozone countries need to carry out reforms, such as collecting taxes, exposing labour markets and industries to the rigour of economic competition.

But these reforms need to be supported also by easing of borrowing costs, available by tolerating a little more inflation than the Germans would like, and availability of funds from fiscal transfers within the eurozone countries, the creation of euro bonds so that borrowings by any of the PIIGS will ultimately be backed by Germany and others, and fundamentally a smaller version of the Marshall Plan that brought Europe out of the economic wreckage of the Second World War, under the auspices of the IMF, and supported by emerging economies and others in the G20.

Pack the rocket, Jar-El

The end of the euro and consequences may not be the end of Krypton, but a slow move into a depression could well be on the cards.

Maybe don't pack the rocket, but be prepared to batten down the hatches.

Australia felix

The OECD has released its Better Life Index for 2012.

This measures well being in countries across 11 essential categories for material living conditions and quality of life.

Australia beats Norway for the top spot, to be the happiest country in the world.

Keeping happy

The consensus of opinion is that the last budget is a political budget, aimed at people who have been less than successful in the increasingly evident 2 speed economy.

Company taxes have not been reduced, but promised reviewable in the future, to make Australian business more competitive.

Most OECD countries have company taxes hovering between 25-30%.

But in the neighbourhood Hong Kong comes in at 16.5%, Macau at 12% and Singapore at 17%.

Australia is still one of the well performing economies, growth of the economy at just over 3.1%.

However, Australia will not be immune from a worldwide downturn.

Who said money can't buy happiness?

Chris Bowen, The Minister for Immigration and Citizenship has announced a new permanent residence visa for people who can invest at least $5 million in Australia.

This new visa will join a number of "pay and come now" visas for both temporary and permanent residence.

There are:

- the temporary (2 year) contributory parent visa (subclass 173) at $1,995 application fee and $24,010 per person for visa issue;

- the permanent contributory parent visa (subclass 143) at $1,995 application fee and $40,015 per person for visa issue; and

- the investor retirement, temporary but renewable, visa (subclass 405) at $270 application fee and $10,925 per person for visa issue, plus the requirement to invest and maintain $750,000 in treasury bonds of the Australian state of proposed residence.

People can pay their way into the happiest country on Earth.

Golden handshakes

From 1 July 2012 tax offset for employment termination payments (ETP) will be limited so that it only applies up to where it takes the terminating employee's total annual taxable income (including the ETP) to no more than $180,000.  Amounts above this will be taxed at marginal rates.

If it quacks like a duck - When are independent contractors employees?

A recent case, Ace Insurance Ltd v Trifunovski (2011) FCA 1204, shows how it is becoming increasingly difficult to avoid obligations of an employer by classifying workers as independent contractors.

The Federal Court held that insurance agents were employees of Ace Insurance and as such were entitled to annual leave and long service leave entitlements.

Employers need to be aware that classification as employees rather than contractors opens employers to:

- claims for back pay and penalties for nonpayment of tax and superannuation;

- application of penalty of up to $33,000 under the Fair Work Act for sham contracting;

- deemed employee provisions under superannuation and workers' compensation legislation.

Contracts need careful examination to reflect the reality of the relationship.

Contracts need careful drafting to ensure that the criteria for contractors are met and those for employees are not.

Brian Hillman

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