Curious Capitalist

Europe’s False Recovery

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RALPH ORLOWSKI / REUTERS

A graffiti depicting European Central Bank President Mario Draghi and German Chancellor Angela Merkel outside the construction site for the new ECB headquarters in Frankfurt in July 3, 2013.

When is a recovery not a recovery? When it comes in the euro zone.

On Wednesday, Europe officially vaulted out of its longest recession since the creation of the single currency, growing 0.3% after shrinking exactly that much in the first quarter. While that still only adds up to 0% growth, European officials are already lauding their “success” and attempting to rebrand their much maligned economic formula of austerity. “The data … supports, in my view, the fundamentals of our crisis response: a policy mix where building a stability culture and pursuing structural reforms supportive of growth and jobs go hand in hand,” said Olli Rehn, the E.U.’s Commissioner for Economic and Monetary Affairs.

The markets, desperate for a bit of good news in Europe, are now hoping for more: investors are more bullish on euro-zone equities than at any time since January 2008, according to a monthly fund managers’ poll from Bank of America Merrill Lynch. But a better European stock market presupposes continued economic growth. And if you look closely as the last quarter recovery, it’s built on shaky foundations, like a one-off weather-related rebound (German and French construction picked up after a long, slow, cold winter), as well as a boost in export demand from outside Europe that German manufacturers themselves say probably won’t continue. Credit is still tight, which will constrain business investment, and while consumer spending has picked up a bit, French and German shoppers can’t make up for a lack of demand in countries like Spain, Italy and the Netherlands, which are still in recession. Meanwhile, some 20 million people in the euro zone are still out of a job — a record 12.1%. That’s unlikely to change anytime soon.

(MORE: How Germany Can Save the Euro)

The problem is as it always has been: an unresolved debt crisis precipitated by an E.U. built on faulty foundations. As I explained recently in a TIME magazine article about how Germany must save the euro to save itself, austerity hasn’t worked at all — and bailouts have merely papered over the fact that the E.U. isn’t an integrated economic union, but rather a collection of states operating on two speeds, with no integrated fiscal policy. “The return to modest rates of economic growth in the euro zone as a whole won’t do much to address the deep-seated economic and fiscal problems of the peripheral countries,” wrote Jonathan Lyons, chief European economist of London-based Capital Economics, in a note to clients. “Indeed, stronger growth in the core could even have some negative effects on the periphery by maintaining an undesirably strong euro and deterring the European Central Bank from providing further monetary stimulus.”

And of course, there’s still nobody talking about the elephant in the room, which is the fact that Germans will need to go much further in shifting toward a consumer-spending and higher-income model, even as southern European countries work on reforming their labor markets and trimming their budgets.

While commissioners in Brussels and politicians in Berlin are lauding the so-called recovery, the truth is that Europe won’t be out of the woods until it makes real, lasting structural changes, like creating a banking union, underwriting euro bonds, and moving toward a real fiscal union in which both core and peripheral countries shift toward an economic middle, rather than everyone trying unsuccessfully to emulate Germany. The recession may be over, but Europe’s deep-seated economic problems, along with its slow-burn debt crisis, most certainly are not.

MORE: Is Europe’s Economy Finally Showing Some Signs of Life? Don’t Hold Your Breath

12 comments
jjmerelo
jjmerelo

BTW, decreasing 0.3 and then increasing 0.3 do not add up to 0%. Check your math: 0.97 (0.3 contraction) times 1.03 (0.3 expansion) is 0.9991. Close, but no cigar: it's in fact a smallish contraction of about 0.001%

jjmerelo
jjmerelo

In fact, everybody is talking about that elephant in the room. Most people, or at least the economic ministers of the governments in Southern Europe, acknowledge that labor markets need to be reformed, although in some cases they have already been overhauled (in Spain, for instance). Budgets are being trimmed by the day, and probably be even more. And, in some cases, they are in fact contributing (a small percentage, but, hey, it's a small country) to that growth: Portugal, surprisingly, grew 1.1% this second quarter. 

Of course it's not the moment to throw a party and start spending as if it was the year 2003. But good news is good news, the same as bad news (negative growth) is bad news.

my-new-life-in-asia
my-new-life-in-asia

I agree that that the recovery is just non-existent and has been publicised for tactical and political reasons. I also agree that higher wages and more consumer spending in Germany would help the recovery. However, this is just one part of the story.

The economic discourse of the last forty years has been dominated by neoliberal orthodoxy. This ideology has not only destroyed every kind of open debate about economic policy, but with its assumption that the market is always best, has disempowered governments, it has made words like "industrial policy, economic policy, tariffs," and so on, appear like taboos that no one can dare even talk about. 

But if you look at the actual history of economic development, the state has always played a crucial role, and in fact, what distinguished poor countries like Portugal from industrial powerhouses like Britain and the United States, was that the latter pursued a conscious economic policy. While Portugal exported wine, according to its comparative advantage, Britain nurtured its domestic industry through import substitution (in the wool industry, for example), and aggressive commercial economic policy (the East Indian Company had received a royal charter) and so on.

The same in the US. Founding father Alexander Hamilton in his "Report on Manufactures" argued in favour of state protection of infant industries and government-sponsored industrial development, and that was the policy the US followed for about 150 years.

And if you look at Asian countries today, it is indisputable that all of them (with the exception of Hong Kong, but only partially) have pursued an interventionist policy, Singapore being one notable example of this (although Singapore doesn't publicise the active role of its government and pays lip service to free market economics). 

As long as we don't have a debate about economic policy, and as long as different parties don't challenge the hegemony of neoliberal ideology, both our democracy and our economy will not recover.  

mrbomb13
mrbomb13

"Europe's" so-called "recovery" is much like our recovery here in the U.S..  By standard economic metrics, the U.S. economy is technically expanding (even if by only 1.1%, or .8% more than Europe's .3%). 

Yet, like Europe, the U.S. is not adding jobs fast enough to keep pace with retirements, etc..  That results in a persistently high unemployment (and U6) rate, and adds to the feeling of economic uncertainty amongst consumers.

Unfortunately, those problems are not helped by globalization, which has shifted former Western industrial powerhouses to Asia and elsewhere.  Those problems are further allowed to persist, because of periodic bailouts and quantitative easing measures. 

Always getting bailed out never forces a weaker nation to correct its structural inefficiencies, and only prolongs the problem - or, in the case of Europe and the U.S., the uncertain recovery.

arvay
arvay

This matches up quite well with he fake American "recovery." 

The game is over in America, there can be no more debt-fueled consumer spending orgies built on inflated home prices that never go down. (Ge,, i thought the socialists were the utopians). And it's probably only a matter of time before the EU starts to dissolve. The IMF will see to that.

The reining economic "order" needs to be scrapped. The so-called "marketplace" -- that mystical force invoked by capitalist true believers -- can be shown to be specific individuals and the institutions they own -- physical entities that can be located, hunted down and brought to heel. 

arvay
arvay

@dakinsky @arvay 

Do yourself a favor. Google "non-sequitur." That will save you some embarrassment. 

arvay
arvay

@dakinsky @arvay

Stalin is a reminder, that if you want a humanistic outcome, you need to be prepared to do some very non-humanistic things. Eventually after Robespierre, came the French Republic. Need to think long-term.

I was watching some old newsreels of Stalin the other day, and he referred to "our ancestors" such s Alexandr Nevsky --and I thought -- he's Georgian! Having Stalin heading the USSR was for Russians a bit like having a black president, except it was a long time ago.

For the Motherland and Dzhugashvili! No, doesn't quite have the same resonance. Must really mess with the current Georgian leadership's mind, in any case. OK,now I'm going to play a recoding of Katyusha. 

Sorry, I'm an incurable sentimentalist . . .

arvay
arvay

@dakinsky 

Sadly, its Putin who's pushing Russia toward nationalism/Slavofilism/racism rather than the Germans making "Aryan" noises. 

He said that the collapse of the USSR was a geopolitical tragedy, and I agree. This multi-national/multi-racial union was a very progressive idea. It needed economic reform, not dissolution. You could hear the Anglo-American supremacists cheering loudly.

But hunkering down and encouraging the worst aspects of atavistic nationalism and religious sentiment is going backwards even faster. 

arvay
arvay

@dakinsky @arvay 

I get the Nonaggression Pact reference, but of course this would have a very different purpose -- peace and profit rather than war.

I suppose this is rather improbable, and it's one of the reasons I'm so virulently and bitterly opposed to nationalism. Can I make that even more emphatic, somehow?

A Eurasian federation stretching from the Atlantic to the Pacific would be an incredibly powerful, rich and culturally productive thing -- if only the humans could see their common interests rather than their differences.

Absent this -- I'm rather pessimistic about or survival for too much longer as a species. 


arvay
arvay

@dakinsky @arvay

I'm certainly no pundit, but a few things seem clear to me.

--This is no brilliant insight, but worth repeating -- trying to make Europe a single entity, a federation -- with separate economies, is doomed to fail. As recent history demonstrates. Perhaps the open borders and trade agreements can be salvaged, but no United States of Europe is in the offing. But how many uprisings will it take before Greece quits and reverts to its own currency?

-- This is probably not going to happen for a number of reasons, sadly, but I think the best outcome for both Europe and the world would be a German-Russian entente that overarches the EU. Let Brussels keep making meaningless declarations, but start to unite the two economies and collaborate in the political, military and foreign policy spheres.

-- One major benefit to Russia would be to attract German investment so that the disgraceful situation where Russia lives like a third-world country by selling oil and gas can be gradually overcome by more productive enterprises. Germany, in addition o gaining favorable access to those resources, would also be in a position to make sure that the rest of the Europeans are receptive to the entente's suggestions. 

Among which would be -- all US military out of Europe -- no bases, no missiles, go home -- WWII is over.

-- If this did happen, it would make both Britain and the US "offshore islands" and start the process of dismantling the economic stranglehold the US exercises as part of its global hegemony. 

You may say that's a strange desire coming from an American -- but I think the sooner it's obvious that we can't run the world, and that would take some serious and effective opposition -- the sooner we'll stop our crazy wars and focus on making life better.

 A world composed of regional powers that work things out is infinitely better than someone trying to police the world. Right now, the US can strangle countries and impose its will willy-nilly via economic power -- this is bad for the world and bad for America also.

Getting back to the main focus, he Germans can't really "save" the EU because it can't reorganize the continent rationally and put major investments in Italy, Greece and Spain, start new industries there and make the regions productive instead of numb and dumb. Someone tried reorganizing Europe once recently, that didn't work out too well. 

A lot of stuff, I know.