Recession in Europe, stagnation in the UK? Oh dear. It is inherently improbable that the debt problems of one small European country should plunge the entire continent into recession and it is worth remembering that. But if the developed world as a whole experiences a pause in its recovery, as now seems likely, the weaker bits of that world may indeed slip back into recession. That outcome, however troubling, would still be a long way from the dire predictions of a decade or more of stagnation.
The next few weeks will be difficult. It remains an odds-on probability that the eurozone authorities will succeed in stitching together a deal acknowledging an orderly Greek default, recapitalise the European banks that are under water as a result, boost the stability funding mechanism, and have the European Central Bank pump more liquidity into the markets.
The detail is less important than the fact that some sort of co-ordinated action is taken. There is however a significant possibility that such a deal will not be agreed or that it will be so flimsy as not to be credible. In that case there will be a less orderly default and one that may well spread beyond Greece. Whichever outcome occurs, growth is damaged.
That is partly because fiscal consolidation in southern Europe is being forced at a rather faster pace than would otherwise be the case: Italy and Spain are big economies and both are having to scrunch down. It is partly because of a lack of confidence in the business and banking communities, and it is partly because there is a more general global slowdown taking place.
How general? The IMF's forecasts last month suggested a slowdown in the developed world but nothing more grave. But the mood has darkened since then. Some new numbers from Goldman Sachs this week capture that shift. The world as a whole continues to grow in 2012 but thanks largely to the emerging world. The eurozone grows by just 0.1 per cent, Italy and Spain both shrink by 0.4 per cent, while Germany and France grow by 0.6 and 0.2 per cent respectively. The UK looks almost sunny by comparison at 1.0 per cent growth, but that is savagely down from Goldman's earlier expectations of 2.3 per cent. The US is expected to grow at only 1.4 per cent.
This may still count as a recovery but it is a profoundly disappointing one. There is no disguising that. But it is another leap to go from there to suggest that the developed world as a whole faces a decade of stagnation. In round numbers most developed countries ought to be able to generate 2 per cent growth a year – continental Europe maybe somewhat less, the US somewhat more. Set aside half that growth for repaying debts, not an unreasonable assumption, and you are still left with some resources to go into increased consumption.
What I think it does mean is that the developed world as a whole has to become more efficient. We need later retirement, better education, better-judged investment decisions – a host of changes to the way we live now. Some calculations, also by Goldman Sachs, put the likelihood of stagnation at close to 50 per cent in the case of Belgium, Italy, Austria, Japan and France. The US does not look too good either. If it is any consolation it rates UK danger at "only" about 20 per cent. Not great, but not utterly dreadful.
Bank lending may not be the problem
To what extent is a shortage of credit holding back British business? The Government seems to accept that there is a funding shortage and the Treasury is taking action. Intuitively, there may well be a problem, but the Government is heading into dangerous territory for at least three reasons.
The first is a genuine doubt on the fundamental issue: is the problem of low corporate borrowing principally one of lack of supply or one of lack of demand? There will always be individual businesses that feel they are wrongly denied credit by banks. But there are always individual businesses that go bust. Having been unduly lax in their lending standards, the banks may be being over-cautious; but equally there are companies that have been so bloodied by the recession that they too are being over-cautious.
Second, you have to ask who is carrying the risk. If more funds are made available than the banks feel they can supply, does this mean the taxpayer is on the hook? Public investment in commercial ventures, from the Groundnut Scheme to DeLorean, has a miserable record.
And third, the Government has almost complete control of the RBS group. Why doesn't it use that power to direct it towards more commercial lending? Perhaps because in private it accepts the bankers' view that the real problem is demand,not supply.
Singapore is doing something right
A final word. Some facts I learnt during a visit to Singapore last week: unemployment is 2.5 per cent, growth is 5 per cent, the budget is in balance and the country has the lowest rate of infant mortality in the world. All that is delivered with government spending only 15 per cent of GDP.
To note those is not to say other countries should slavishly follow the Singaporean economic system. But if we and most other developed countries have to learn to do more with less, we need to look around the world to models that seem to work and figure out what we might learn from them.