And now, what’s next? British politics will settle down a little now that it is clear that the United Kingdom will continue to exist for a while yet, but economic issues will not settle down at all. The big question through the autumn will, I suggest, be whether the European economy will continue downwards into a triple dip.
We were so preoccupied last week with our own stuff that the failure of the European Central Bank’s attempt to pump more cash into the eurozone economy went unnoticed. One big element of the ECB package to pump up the economy is to offer cheap four-year loans to banks, funds that they can then lend on to European businesses. The take-up of the offer, €82bn (£65bn) out of a total of €400bn, surprised and disappointed the markets, and supported the view that the main reason why banks are not lending more money is that their clients don’t want to borrow it. You can take the horse to the water …
The tentative conclusion was that the ECB would have to resort to full-fat quantitative easing. It would have to start buying the bonds of European governments and pump cash directly into the system that way. This is what the Federal Reserve, the Bank of England and the Bank of Japan have done, but the ECB’s charter makes this at best difficult, and maybe impossible. But rules can be broken, as we discovered with the Maastricht curbs on fiscal deficits, and ultimately the decision will be Germany’s.
But to focus on rules and ECB intervention is to miss what is surely the bigger story: why on earth is the European economy not growing? The natural state of economies should be to grow. Human ingenuity and human desires should normally generate growth. We all have to cope with the business cycle, though wise policies may be able to reduce its amplitude. But what is happening in Japan, and now maybe much of Europe, is not cyclical. There ought to be a strong cyclical recovery in Europe, as there is in the US, UK and other English-speaking economies. But there isn’t. Last year the eurozone economy shrank by 0.4 per cent; this year it is projected by the OECD to grow by only 0.8 per cent; and next year by 1.1 per cent.
If these forecasts prove right, this will be pretty bad, but there is quite a bit of evidence that things may turn out worse still. There are perky bits of the eurozone, for example Ireland, but the overall picture is dire. German growth has stalled, and if the eurozone’s largest economy does not grow, what hope is there for the rest? What is surely more troubling is the idea that this entire region will barely grow for the next five years. What does that say to young people hitting the job market for the first time? The notion that Europe would be the new Japan did not seem realistic five years ago, even at the bottom of the recession, still less 10 or more years ago. Now I am afraid it does.
But why? There may be a partial answer in the creation of the euro and the design of the eurozone. I have just been reading a controversial book about this, The Euro Trap by Hans-Werner Sinn (OUP), head of the highly regarded Ifo Institute in Munich. His argument is that the design of the eurozone was fundamentally flawed. It encouraged huge capital flows into southern European countries, which undermined their competitiveness and made them vulnerable to the US-provoked global crash. Bailouts and austerity followed. But now the combination of the huge burden of debts and the rigidities of the eurozone prevent countries from escaping. His solution would be to write off public and bank debt and bring in a two-tier euro, allowing countries to devalue – but with the prospect of re-entering the eurozone at some later stage.
This is rather what I expect will eventually happen, but not for another three or more years and with even more pain on the way. Professor Sinn’s vision of the eurozone is of something between the Bretton Woods fixed exchange rate system and the progressive creation of the US dollar as a common currency of emerging America, but meanwhile countries have to have the escape route of devaluation.
This is strong stuff. The D-words of devaluation and default are not used in polite company – we Brits use them but we are not house-trained to European specifications. So Professor Sinn deserves credit for his candour. But lurking behind his criticism of the eurozone is the even more unpleasant possibility that the stagnation is not just down to the euro. It is that the European political and economic model actually undermines long-term growth prospects in a way that the Japanese model seems to have done. That is too huge a subject to tackle here, but it is one we will, I expect, hear much more of over the next two or three years.Reuse content