In Britain, thanks to the wiles of George Osborne, one lucky punter’s enormous lottery win and the projections of modest economic growth, the past week has been dominated by often quite frivolous talk – the Lamborghini hypothesis – about wealth and how to spend it.
So the huge protests in Spain at the weekend against its government’s austerity policies, involving hundreds of thousands who had marched from all corners of the country, are a rude but timely reminder of the true situation that Europe, not excluding Britain, is still in.
In all the countries on the eurozone’s southern fringe, recovery has been palsied where it is present at all. The draconian economic policies mandated by the so-called troika of the International Monetary Fund (IMF), the European Central Bank (ECB) and the European Commission, in return for rescuing national banks, are still having a crushing impact. But aside from the political consequences of those policies, there remains a graver danger: that austerity will fail to bring the patient round.
Unemployment remains unacceptably high in all these countries: 24 per cent in Spain and Greece, 16 per cent in Portugal, nearly 13 per cent in Italy. At the same time, many tens of millions of people are affected by the swingeing cuts to social budgets mandated by the troika, whose “dictatorship” was one of the main targets of the marchers’ anger. As the size of the protesting crowds indicates, these policies, imposed year after year, are socially corrosive, sapping morale and draining reserves of hope and self-esteem. The organisers of Spain’s protests crystallised this fact when they called them “marches of dignity”.
But beyond the cruel social impact, the long-term danger of Europe’s austerity medicine is that it will not work. These economies are still either stagnant or shrinking – Greece’s shrank last year by 6.4 per cent – and both government debt and the deficit are still stratospheric: the IMF estimates that in Italy government debt is more than 130 per cent of annual GDP.
The fear that Europe is treading in the grim footsteps of Japan, which suffered two “lost decades” of stagnation after failing to recover from the bursting of the economic bubble in the late 1980s, has not gone away. Instead it has returned: the ECB hopes to raise inflation across the eurozone to 2 per cent, but last week it was revealed that in the year to February 2014 the figure was a mere 0.8 per cent. Europe could yet become locked in a spiral of lowering prices and wages, as Japan was. When the greatest challenge economies face is bringing down private and public debt, deflation only makes it worse.
The eurozone’s crisis was apparently solved at a stroke in the summer of 2012 when the ECB’s president, Mario Draghi, declared that the bank would do “whatever it takes” to preserve the euro. Rather extraordinarily, this was sufficient to take the heat off the currency and banish fears that it could suddenly fall apart.
Yet the contradictions that precipitated the crisis have not gone away: the fact that the euro has caused economies not to converge, as was the intention, but to fly apart; and that when weak economies are dragged into cohabitation with much stronger ones, swingeing cuts to national budgets are one of the very few and very blunt tools at their governments’ disposal.
The United Kingdom can count itself lucky that it was Brown the sceptic not Blair the enthusiast who ended up getting his way on the currency question. But if Europe, much our most important trading partner, falls prey to chronic deflation, that will be cold comfort.