The EU's leaders abhorred stimulus. Now the eurozone is so weak they fear the very idea that the US might stop spending
At the launch of Richard Roberts's new book about the great financial crisis of 1914, Saving the City, Andy Haldane, the widely respected executive director of the Bank of England, confessed that when the recent financial crisis occurred, not many people in the Bank of England were even aware of the economic upheaval that immediately preceded the first world war – a classic case of the modern economics profession's obsession with mathematics rather than history.
If Roberts's book had been available at the time, they would immediately have realised that the 2007-08 crisis was not simply one of the liquidity of the financial system but also of solvency. The penny, or the cent, eventually dropped in official circles.
Gordon Brown has been widely acknowledged around the world – but hardly at all in this country – for having demonstrated international leadership in moves to recapitalise the banking system and, via the coordinated "stimulus" agreed by the G20 in April 2009, to arrest what had become a freefall in world economic activity.
Unfortunately, international understanding of the scale of the crisis and the need for a protracted stimulus proved shortlived. In the runup to the G20 meeting the following June in Toronto, the consensus collapsed: a development lucidly explained in Mark Blyth's book Austerity – The History of a Dangerous Idea.
By the summer of 2010, Brown was out of office, and the German government and the European Central Bank were opposing his allies in Washington who argued that "the withdrawal of fiscal and monetary stimulus… needs to proceed in step with the strengthening of the public sector."
Far from strengthening the public sector, European policymakers, egged on by a new British chancellor called George Osborne, conducted a brilliant propaganda coup, managing to persuade far too many people that the crisis had been caused by excessive public spending – not by the real perpetrators: the banks and other practitioners of the dark arts of modern "financial engineering".
Until the onset of the financial crisis, the ratio of debt to gross domestic product in the UK had been lower than in the final year of the previous Conservative government. Again, the much-maligned Italian government had managed to bring public debt down from 125% to 100% of GDP.
But, with the German finance minister Wolfgang Schäuble and, alas, my old friend Jean-Claude Trichet, then president of the European Central Bank, in the vanguard, Europe embarked on a period of "growth-friendly fiscal consolidation", which soon evolved into the oxymoronic label "expansionary fiscal contraction".
The Organisation for Economic Co-operation and Development (OECD) estimates that between 2010 and 2013 the fiscal contraction in the euro area has amounted to about 4% of GDP on average, although the contraction has been much more severe in countries such as Greece. (Incidentally, anyone who wishes to know how serious the crisis has been in Greece could do worse than invest in Vicky Pryce's updated Greekonomics, which is a riveting read.)
Things have been bad enough elsewhere, but Greece has suffered a decline of more than a quarter in GDP in the past five years. Greece may have been one of the few European countries where public spending actually was out of control, but medicine should not, on the whole, be designed to kill the patient.
The OECD calculated that fiscal contraction next year in the euro area will be "only" 0.5% of GDP. In an interesting analysis, Russell Jones of Llewellyn Consulting notes that with "fiscal consolidation" almost complete in the euro area, "the key question [is] whether the private sector will prove robust enough to establish the economy on a sustainable recovery trajectory".
The eurozone has had its fiscal contraction, which, except in the special case of Germany, was not accompanied by a revival of confidence in the private sector.
It is very interesting that the ECB is concerned about a slowing down or withdrawal of monetary stimulus by the Federal Reserve, for fear of the repercussions on a euro area whose banking system remains deeply suspect.
It almost beggars belief that the ECB, after its support for fiscal contraction, should now be crying for help from the Federal Reserve.
Llewellyn Consulting concludes: "In our judgment, investors should…prepare for variations on the theme of outright debt monetisation, fiscal repression, trade and capital controls, and so on."
Our chancellor always blames the situation in the eurozone, not his own austerity policies, for the fact that this economy has "flatlined" for three years. If, in his coming autumn statement, he is relying on a great European recovery, he may be sadly disappointed.
AusterityEconomic recoveryEuropean UnionEconomicsEconomic growth (GDP)Economic policyEuropean monetary unionBankingEuroEuropeWilliam Keegantheguardian.com © 2013 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds |
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