Economic View: This 'lost decade' is not Europe's first

 

It is time to stand back. We have had a few days of deep disruption in both Greece and Spain, and for anyone who knows and respects both countries the sight of people rioting in the streets is profoundly troubling. Economic policy has to work with the grain of society: no government in a democracy can impose policies that are not seen, by a sizable majority of the population, to be both necessary and fair. Try and you might get sullen acquiescence for a while, but you will also get, at best, economic stagnation with all the corrosive effect that has on society.

This sense of despair across much of southern Europe is caught in the new forecasts from Ernst & Young for the eurozone economies, from which the graphs here are taken. As you can see, the surge in unemployment that has taken place shows only modest signs of receding two or three years away. The authors of the report write in terms of a "lost decade" for Europe – not what it said on the can when the single currency was sold to the people.

You can also see the scale of the squeeze on fiscal policy – the amount by which governments have chosen, or been forced, to tighten policy over the three-year period to 2013. Everyone is tightening but the weakest are tightening the most. We are seeing the results in the streets.

That much we can observe. How we filter the mass of information coming out of Europe depends on our mental model. Some people focus on the economic projections, looking at when growth might resume, the scale of wage cuts needed to make the fringe countries competitive again, and so on.

Others look at the money: how much debt has Greece accumulated, the interest on that debt, and how it might be repaid, or rather not repaid. But if you look to economic history to seek parallels there seem to me to be two that sort of fit the story.

One is the break-up of the Bretton Woods fixed exchange-rate system, which ran from the end of the Second World War through to 1972. Those of us who were taught our economics in the 1960s will recall that while there was a huge amount of work done on the weaknesses of the system, there was no real acceptance that it might come to an end. The alternative of floating exchange rates was seen as a recipe for chaos, which in a way proved to be the case in the 1970s. However, despite the flaws in the fixed exchange-rate system, it took several years to die. If you take as a starting point the sterling devaluation in 1967, it was about five years.

The other parallel is more relevant to the events of the past few days. It is Britain's "winter of discontent" of 1978-79. The protests and disruption continued through the 1980s but it took the experiences of that winter to convince a majority of the population that we could not go on like this. We had already had the experience of Edward Heath's three-day week (the joke in the German newspapers was that "now you British can only strike for three days a week") and the IMF bailout of 1976. But before that winter there was not the critical mass in the country to demand change.

No parallel is a perfect fit. In the run-up to the UK's IMF bailout there was a lot of hostility to the world's banking community – the "gnomes of Zurich" – but not to Europe as such. In the three bailouts so far, of Greece, Portugal and Ireland, hostility has been focused on the bankers, as you might expect, but also on the European authorities and, in Greece particularly, on Germany.

Some of us think that it is monstrously unfair to single out the one country that has followed its own advice and scrunched down costs and consumption to make itself competitive. It is also unwise, since German taxpayers are, one way or another, underwriting the whole eurozone project. When Spain gets its formal bailout, presumably very soon, it will be interesting to see how the blame is distributed.

Apply these two parallels to what is happening now, and what might this tell us about the future? The first thing to be said is that we are not yet at any sort of turning point. As far as the Bretton Woods experience is concerned we are still in the 1960s. We can see the weaknesses of the design but the majority view is both that these can be fixed and that the consequences of a break-up are so serious that they don't really bear thinking about. Some of us disagree with that and think the costs of keeping the system going are almost certainly greater than the costs of change, but that is not a majority view.

As far as winter of discontent parallel is concerned, I think most of southern Europe is still very much where we were in the mid-1970s. Of course, the situation varies from country to country, with things more advanced in Greece than in Spain, still more so than in Italy. But even in Greece the professional elite, now dubbed technocrats, is still in control. No one can hope to predict the event or events that will crystallise change. Nor can we see to what extent change in one country will feed into another. Street protests can carry on for a while and there may need to be some external event to transform protest into policy action.

My own guess is that sullen acceptance will be the norm for some time yet – maybe years. So the notion of a lost decade may prove right. But it is not a lost decade for northern and eastern Europe. The German boom is slowing but there is the prospect of sustained growth. Sweden has got its public debt down below 40 per cent of GDP and is running a surplus. Parts of eastern Europe are managing an astounding recovery: Estonia has become the fastest-growing European economy.

So, we should not be too gloomy about the future of Europe as a whole, notwithstanding the protests in parts of it now.

PROMOTED VIDEO
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Life and Style
Phillips Idowu, Stella McCartney and Jessica Ennis
fashionMcCartney to continue designing Team GB Olympics kit until 2016
Sport
Shinji Kagawa and Reece James celebrate after the latter scores in Manchester United's 7-0 victory over LA Galaxy
football
Voices
voicesGood for Lana Del Rey for helping kill that myth, writes Grace Dent
Sport
Farah returns to the track with something to prove
Commonwealth games
Life and Style
fashion Designs are part of feminist art project by a British student
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Junior Research Analyst - Recruitment Resourcer

£18000 - £20000 per annum + OTE £25K: SThree: SThree Group has been well estab...

Senior Analyst - Financial Modelling

competitive: Progressive Recruitment: This really is a fantastic chance to joi...

Associate CXL Consultant

£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

Business Anaylst

£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

Day In a Page

Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform
Climate change threatens to make the antarctic fur seal extinct

Take a good look while you can

How climate change could wipe out this seal
Should emergency hospital weddings be made easier for the terminally ill?

Farewell, my lovely

Should emergency hospital weddings be made easier?
Man Booker Prize 2014 longlist: Crowdfunded novel nominated for first time

Crowdfunded novel nominated for Booker Prize

Paul Kingsnorth's 'The Wake' is in contention for the prestigious award
Vladimir Putin employs a full-time food taster to ensure his meals aren't poisoned

Vladimir Putin employs a full-time food taster

John Walsh salutes those brave souls who have, throughout history, put their knives on the line
Tour de France effect brings Hollywood blockbusters to Yorkshire

Tour de France effect brings Hollywood blockbusters to Yorkshire

A $25m thriller starring Sam Worthington to be made in God's Own Country
Will The Minerva Project - the first 'elite' American university to be launched in a century - change the face of higher learning?

Will The Minerva Project change the face of higher learning?

The university has no lecture halls, no debating societies, no sports teams and no fraternities. Instead, the 33 students who have made the cut at Minerva, will travel the world and change the face of higher learning
The 10 best pedicure products

Feet treat: 10 best pedicure products

Bags packed and all prepped for holidays, but feet in a state? Get them flip-flop-ready with our pick of the items for a DIY treatment
Commonwealth Games 2014: Great Scots! Planes and pipers welcome in Glasgow's Games

Commonwealth Games 2014

Great Scots! Planes and pipers welcome in Glasgow's Games
Jack Pitt-Brooke: Manchester City and Patrick Vieira make the right stand on racism

Jack Pitt-Brooke

Manchester City and Patrick Vieira make the right stand on racism
How Terry Newton tragedy made iron men seek help to tackle their psychological demons

How Newton tragedy made iron men seek help to tackle their psychological demons

Over a hundred rugby league players have contacted clinic to deal with mental challenges of game