October 29, 2012
Two recession strategies are competing ever more openly in Europe—two growth models and two economic philosophies that Americans should watch carefully. Just as the choice ahead could change the map of the European Union so could the election on November 6 change the course of the United States.
At the end of last week Britain surprised everyone—even the government, it seems—when it announced third-quarter GDP growth of 1 percent. It was Britain’s best quarterly performance in five years. This result followed the most rigorous austerity measures the British government has imposed since World War II, and it seemed to validate the neoliberal policies favored by Prime Minister David Cameron and other conservatives.
“These figures show we are on the right track,” declared George Osborne, Cameron’s chancellor of the exchequer. “This is another sign that the economy is healing and we have the right approach.” The bond and share markets in London seemed to agree, each taking a bounce upward after the economic results were announced.
The other argument for the neoliberal approach to the economic crisis is Ireland. Last week Ireland’s severe austerity measures got the seal of approval from the nation’s “troika” of international lenders—the International Monetary Fund, the European Union, and the European Central Bank. “Policy implementation remains steadfast,” the group said, “despite the challenging external environment.” This refers to large public-sector layoffs, cuts in pensions, government programs, and so on. Ireland is now judged to be emerging from a bailout two years ago that cost $82.7 billion. Bond yields are below 5 percent—expensive, but quite good for a nation in this category.
If these two countries represent economic success, we had better look for more imaginative solutions or a better definition of “success.”
Consider the Brits. Economists had forecast growth of only 0.6 percent for the quarter. A one percent growth rate is marginally better, but it does not indicate a successful turnaround. In fact, the economy is the same size as it was a year ago and smaller by 3 percent than it was pre-crisis. So it is essentially flat lining.
As has been reported, the queen’s Jubilee celebration and the London Olympics were one-off factors that added more than 0.2 percentage points to the figure. Then there was the most worrisome component of the result: a 2.5 percent drop in construction. Why worrisome? Because a healthy housing market spurs consumer spending. Economic analysts said the underlying growth rate was roughly 0.3 percent.
As to the Irish, while bondholders and investors may be halfway pleased, 14.8 percent of the work force is unemployed—and probably not pleased. Domestic demand will drop next year (as it has this year) and so will consumer spending (by 0.5 percent in 2013). Davy Stockbrokers, a Dublin firm, has just dropped its forecast for 2013 growth from 1.6 percent to 0.9 percent. “The key challenge,” Davy says in a new report, “is whether Ireland can achieve nominal GDP growth in excess of 4 percent over the medium term to stabilize the debt/GDP ratio.” It may be the key challenge, but it is not even close.
These two economies are technically out of a double-dip recession but teetering on the very edge of one, and they may get there yet. For Osborne and other Conservative officials to suggest otherwise is simply false advertising. Their neoliberal strategy has not delivered, and Continental Europe will climb out of recession exactly to the extent it can combine measured austerity with social policies that support demand.
The interesting thing to watch now is the gradual collision between the neoliberals and the Continentals, those across the English Channel who recognize the need for discipline but urge a more statist, interventionist, and less ideological approach to the European crisis. It is an historical echo: Social democracy began on the Continent a century and a half ago, and the mark of it still lingers.
This is a mixed bag politically. German Chancellor Angela Merkel, with an angry Bundestag at her back, is no longer getting along so well with French President François Hollande, a socialist who has just imposed a 75 percent super tax on incomes of more than $1 million a year. The Spanish government has to contend with autonomous regions such as Catalonia that are threatening to declare independence from Madrid. The Greeks are about to put yet more harsh austerity measures to a legislative vote in exchange for the $39 billion Athens needs to make up for budgetary targets it has missed. The government coalition is split on the issue.
However, there is an element of flexibility among the Continentals that you do not see in the Cameron government or in Dublin and is necessary if the European crisis is to be solved with the minimum of suffering among national populations. One good example is the EU’s agreement at a summit earlier this month to set a preliminary timetable for a single supervisory mechanism—a bank regulator installed within the European Central Bank. It is historic in importance and represents a degree of surrender on the part of every EU member.
Another example is the Greek plan for public-sector layoffs, which is painful but very necessary. The EU and the “troika” have at last agreed to stretch out the terms of implementation, such that 5,000 employees will go on reduced pay this year, followed by transfer or dismissal, and 20,000 more will follow them next year.
The neoliberals and the Continentals will have a joust of a sort in Brussels on November 22. That is when an EU summit will determine the guidelines for EU budgets over the next seven years. Cameron has been pushing for a budget freeze (in real terms) for the entire period. Brussels has proposed a cap of 1.1 percent of the EU’s GDP—more than $1.29 trillion. Merkel, for her part, proposes a compromise of 1 percent.
If Cameron insists on his freeze, Britain will be a big step closer to exiting the EU altogether. Cameron already has to contend with the United Kingdom Independence Party, a kind of Tea Party formation that has long pushed for Britain to forget about Europe. Merkel, however, is likely to prevail. No compromise, she has said to Cameron, and there will be no summit.