US Edition
Europe has been in an economic depression for an entire political generation. There have been mini-cycles of growth within this span, but the underlying picture has been one of chronically low investment and wasting decline.
“Growth has been appalling for two decades by world standards,” said Costas Lapavitsas, a professor at the University of London (Soas) and author of the State of Capitalism.
“The manufacturing base has been disappearing since 2000 and I don’t see any real evidence that they are responding to it. The balance of probability is that this decade will be even worse than the previous one,” he said.
“The social tensions beneath the surface are enormous and it’s unclear how they are going to hold the whole system together,” said Prof Lapavitsas, who was a radical Greek MP during the Athens Spring.
The EU institutions will not revert to extreme budget retrenchment of the lost decade, though there will be some belt-tightening as the Stability Pact comes back into force. “There has been a great deal of learning,” said Mark Blyth, author of Austerity: The History of a Dangerous Idea.
“They got the message once the crisis began to morph into political populism. They discovered that when you run a contractionary fiscal policy the effects are in fact contractionary, and if you keep doing this to people, they are going to get really angry,” he said.
“The EU is not going to do that again. The danger I see instead is a kind of monetary austerity that is quasi-deflationary and does just enough damage to an economy already in trouble that you end up in a bad equilibrium. The real risk is the long-dragging condition of semi-slump that festers slowly like a bad marriage,” said Professor Blyth, now at Brown University in the US.
Europe has seen no economic growth for a year. The eurozone contracted by 0.1pc in the third quarter. S&P Global’s composite PMI survey of manufacturing and services crashed to 46.5 in October. New business has dropped to levels last seen during the debt crisis in 2012.
The European Central Bank has pencilled in recovery this quarter, followed by accelerating growth early next year, as if by some Deus ex machina, yet to be discerned. The man who saved the euro after the ECB’s previous errors does not agree.
“It is almost sure that we are going to have a recession by the year-end. It is quite clear that the first two quarters next year will show that,” said Mario Draghi at a Financial Times forum.
He warned that the EU will not survive as a meaningful project unless it grasps the nettle. “The European economy has been losing competitiveness in the last 20-plus years. In many, many technological fields, we have lost footprint.”
He admitted tacitly that this downward slippage coincides with the launch and life of the euro. In his mind this has occurred because EU leaders failed to understand the economic implications of what they had done. Monetary union remains unfinished, lacking the political and fiscal union necessary to make it work.
What he cannot admit, as one of those responsible, is that the constituent countries of the eurozone never were an “optimal currency area” under Mundell theory and therefore that EMU should never have happened.
The project has hard-wired austerity into the legal structure of the Acquis in order to overcome this fact. It has hollowed out the governing institutions of the nation-states, and reduced their freedom of action to pursue competing ideological models – the sine qua non Europe’s great flowering, after the unitary control of the papacy was broken.
The Acquis makes it all but impossible to experiment, whether with industrial policy on the corporatist Left, or with Thatcherism on the free-market Right. There is no legal mechanism to respond to America’s Inflation Reduction Act.
Germany is belatedly flouting this with massive state aid, but that in turn is to destroy the competition framework needed to stop strong predators from pauperising weak states no longer able to fight back within the currency union by means of devaluation.
Loan demand by eurozone firms has fallen to the lowest since the Lehman crisis. Key measures of the money supply have been contracting at record rates. Producer price inflation has dropped to minus 12.4pc.
The longer this goes on, the greater the risk of metastasis. The Economic Cycle Research Institute in New York warns that the eurozone is on the cusp of a “self-reinforcing negative feedback loop” unless steps are taken to arrest it.
Far from trying to do so, the ECB is still draining the money supply. The full impact of the most aggressive rate cycle since the start of the euro has yet to feed through. Germany’s members on the ECB’s governing council are still talking about further rate rises.
No matter that inflation has collapsed to 2.9pc, and is in any case a lagging indicator; no matter that world commodity prices have been falling for eighteen months: Isabel Schnabel says the ECB must preempt the possibility that inflation could bounce back. “In long-distance running, the last mile is often said to be the hardest,” she said.
Michael Hüther, head of the German Economic Institute (IW), says the ECB is overlaying one error with another. “The ECB acted too late in reversing its highly expansionary monetary policy, and now it is in danger of doing the opposite out of a bad conscience. It runs the risk of pushing rates too high,” he said.
Dario Perkins, head of global macro at TS Lombard, said the ECB has already gone beyond that point. “Every month they spend in denial only compounds a series of policy mistakes. How deep this recession will be depends on how quickly they reverse course,” he said.
“This all went wrong in the middle of last year when they freaked out over all that nonsense about 1970s inflation, and started three-quarter-point rate hikes,” he said.
Mr Perkins thinks there is no science in their actions. “They are just chasing the latest CPI inflation number. They think ‘oh my God’, we’ll go down in history as complete jokers if we get 1970s inflation, but nobody will remember a recession. This is about people covering their backsides,” he said.
An ECB “dialogue paper” by expert outsiders put the matter slightly differently in March, concluding the institution is haunted by (justified) perceptions of fiscal dominance. It needs to stifle talk in Germany that the ECB has been captured by a debtors’ cartel in the South. “The ECB knows that it is in the cross-hairs in Germany,” said Prof Blyth.
To be clear, I see zero risk of a eurozone debt crisis akin to 2011-2012. That episode spiralled out of control for one simple reason: the ECB did not have political licence to act as a lender of last resort. This grotesque omission has been corrected. Henceforth, when push comes to shove, the ECB will always rescue Italian debt.
But EU leaders did not place monetary union on viable foundations. They did just enough to save the euro a decade ago, but not enough to make it prosper. They shied away because there is no political consent anywhere in Europe for the fusing of disparate national identities into a unitary superstate.
Europe is doomed to struggle on with its own deformed creation.
Europe is slowly destroying itself as it heads for another lost decade
The Continent is doomed to struggle on with its own deformed creation