Time for Europe to celebrate spending

With consumption stagnant, core Europe could catch the Japanese disease

HOW DO you persuade people to spend more money? This might seem a novel problem, for here in Britain there has never been much difficulty in stoking up a consumer boom: all you have to do is cut interest rates.

We also build the temples to consumerism, the physical entities designed to encourage people to part with their cash - as the Bluewater complex, the largest shopping centre in Europe - shows. And we have, by European though not by US standards, long shopping hours.

But in Euroland this happy state of affairs does not invariably exist. Some countries are booming. The Netherlands, Denmark and Ireland are all growing fast, helped by solid growth in consumption. But elsewhere, particularly in Germany and Italy, growth is slow. Indeed overall, continental European consumption remains pretty stagnant, giving rise to the worrying thought that core Europe might catch the Japanese disease, where interest rate cuts and fiscal packages fail to stimulate any growth at all.

Both Germany and Italy are quite close to slipping back into recession, with negative growth in the last quarter of the year. Neither can rely on exports to pull the economy up this spring, investment is pretty flat and government spending is constrained by the Maastricht rules. So the only source of demand has to be the consumer.

That is obvious enough. What is less obvious is what is actually happening to consumption, for European consumers are saying that they are confident but they are not buying much more. The divergence between reported consumer confidence and reported business confidence is striking (see graph). Taking the euro-11 as a whole, ordinary people have seldom been more cheerful about their economic prospects. By contrast, the business community is plunging back into gloom. For most of the last two decades the two have moved together, so this divergence is puzzling. What is the explanation? Does it matter? And if so what is to be done?

The explanation comes in several parts. First, the confidence levels of European business have been depressed by lack of confidence in the governments in Germany, France and Italy. The most notorious anti-business minister, "Red Oskar", has been heaved out, which is a start, but immense damage has been done to the German business community's belief in its politicians.

As anyone who has had even a brief conversation with a German business leader in recent months will have found, within about three minutes the fury would begin to erupt. They thought they were the heroes of the German prosperity (which, of course, they were) and accordingly they would be listened to (which they weren't.)

Similar, though more muted concerns inflict some French industrialists, and while it is hard to make any sensible generalisations, it is probably also true that medium-sized businesses in Italy, the ones that matter, retain their traditional scepticism towards the government of the day.

But it is not just politics. European business also knows it faces a new and more competitive world with the transparency of pricing with the euro. The wave of reconstructions, mergers and other deals is a first stage in the response to it. But while it is early enough to feel the fears, it is too early to perceive the benefits. In as far as the introduction of the euro does anything to business confidence, I suspect that, so far at least, it has reduced it.

Finally, euroland business confidence will have been depressed by the fall off in demand from what has until recently been its best export market - the UK. Rapid growth, an open attitude towards imported goods, strong sterling and a high propensity to import has made the UK a very attractive market for continental Europe. Now that growth here is easing, that market has weakened, though this has yet to show up in the import numbers.

If it is easy to explain European commercial gloom it is much harder to explain European consumer cheer, particularly because it does not seem to be translated into spending.

The usual explanation when figures don't add up is that they are wrong, but I can't quite see how they could be wrong in this instance. Euroland has a population of 290 million so any survey of consumer opinion is going to be a very broad-brush effort. But if these people say they are confident I see no reason to try and question that. The puzzle is more that if they are indeed confident, why are they not spending more?

I have two possible explanations to offer. The first - not very good one - is that the consumer spending figures have become unreliable, perhaps that additional spending is now going on in the cash economy rather than in the taxed one.

So people are more confident, but their reaction to the higher taxation needed to meet the Maastricht targets has encouraged them to spend their money in ways which minimises the tax-take.

The second is that the shift to a near-zero inflation world has changed buying patterns, delaying purchases. So consumers feel more confident, but they also see no need to rush out and buy now. Things may be cheaper next year.

What is to be done depends on what is wrong. But we may not be able to risk waiting for explanations if demand continues to remain flat. The range of policy options is really quite limited.

Governments can't ease fiscal policy without busting the Maastricht rules - indeed they used a lot of creative accounting to get within them. Monetary policy is outside their control, and in any case may be much less effective than it used to be. When interest rates are down in the 3 per cent region, you may not achieve much but cutting the odd half percentage point off rates. When they were in double digits then a sharp cut in rates was at least noticed. In any case a cut in short-term rates might have the opposite effect to that intended if long-term rates rose as a result.

No, the only available policy is structural reform. In that sense Euroland is in pretty much the same position as Japan - fiscal and monetary policies are unavailable or ineffective, so you have only one further thing you can do. But structural policies - removing labour market rigidities, easing business regulation, changing planning controls and so on - carry costs too. Consumption in Euroland will not remain flat for ever, but developing a culture which celebrates spending (as America does and Britain seems to be trying to do) takes a long time. The great European consumption boom may not come in time to rescue the world economy when the US economy eventually slackens.

News
Susan Sarandon described David Bowie as
peopleSusan Sarandon reveals more on her David Bowie romance
Sport
sportDidier Drogba returns to Chelsea on one-year deal
Arts and Entertainment
The Secret Cinema performance of Back to the Future has been cancelled again
film
News
people
PROMOTED VIDEO
Arts and Entertainment
Christian Grey cradles Ana in the Fifty Shades of Grey film
filmFifty Shades of Grey trailer provokes moral outrage in US
Sport
Louis van Gaal would have been impressed with Darren Fletcher’s performance against LA Galaxy during Manchester United’s 7-0 victory
football
Voices
The new dawn heralded by George Osborne has yet to rise
voicesJames Moore: As the Tories rub their hands together, the average voter will be asking why they're not getting a piece of the action
Sport
Dejan Lovren celebrates scoring for Southampton although the goal was later credited to Adam Lallana
sport
News
newsComedy club forced to apologise as maggots eating a dead pigeon fall out of air-conditioning
Arts and Entertainment
Jo Brand says she's mellowed a lot
tvJo Brand says shows encourage people to laugh at the vulnerable
Life and Style
People may feel that they're procrastinating by watching TV in the evening
life
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Sport
Rhys Williams
commonwealth games
News
Isis fighters travel in a vehicle as they take part in a military parade along the streets of Syria's northern Raqqa province
i100
Arts and Entertainment
Southern charm: Nicolas Cage and Tye Sheridan in ‘Joe’
filmReview: Actor delivers astonishing performance in low budget drama
Life and Style
fashionLatex dresses hit the catwalk to raise awareness for HIV and Aids
Travel
travel
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

Senior Risk Manager - Banking - London - £650

£600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

The benefits of being in Recruitment at SThree...

£18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

Test Analyst - UAT - Credit Risk

£280 - £300 per day + competitive: Orgtel: Test Analyst, Edinburgh, Credit Ris...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Day In a Page

Finding the names for America’s shame: What happens to the immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert?

Finding the names for America’s shame

The immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert
Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
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