There’s been so much economic news recently it’s been hard to keep track of what going on, particularly because of the intense focus of catastrophic cases like Ireland and Greece. In order to help order my own thoughts, in this post I’ve compile most of the recent growth, unemployment, inflation and deficit figures across in the United States of America and the European Union, including between countries. I don’t think the current, basically Germano-centric, situation is sustainable and I briefly look at recent pushes for a change away from deflationary policies and possibly towards further integration.
Comparable Performance in Europe and the U.S.
The performance of the two economic giants has been comparable, especially if one takes into account the effect US demographic growth on GDP (and thereby a growing labor force and more slowly growing pensioner-worker ratio), which is almost 1% for Americans but only 0.1% for Europeans. The European Commission’s estimates on growth rates for 2010 the EU have doubled from 0.8% in May to 1.8%. Circa 2% growth is also expected 2011 and 2012. In contrast, the US Federal Reserve has revised down its growth projections by about half a point to 2.6-3.1% for 2011.
The Commission predicts the unemployment rate will be shaved by a measly 0.5% over the next two years, from 9.6% to 9.1% across the EU. It pithily forecasts a “rather jobless recovery and potentially persistent high unemployment” . Similarly, the Americans have seen the unemployment rate continue to increase, despite the formal end of the recession, to 9.8%. Average EU inflation is well under control at 2%, expected to drop to 1.75% next year while the US’s figure has also recently been revised down.
Europe’s Lower Deficits and the Overvalued Euro
For me, it’s quite amazing that even tepid growth in Europe has been possible despite the contrasting fiscal and monetary situations. While American officials have been scolding the Chinese for the unfair undervaluing of the Yuan, the Euro remains horrendously overvalued, hovering around $1.3-4, even bouncing back up to $1.34 today. In addition, European deficits are much lower. The average for EU members is expected to decline from around 6.8% in 2010 to 4.2% in 2012. In the US, the deficit was a record $1.416 trillion in 2009 (12.3%) of GDP, down to about $1.3 trillion this year. Given the continued wars, aversion to taxes and the renewed round of quantitative easing, this is unlikely to go away any time soon. No solution will come from flaccidly symbolic Liberal posing and compromise otherwise seems impossible.
Given this, and historically low inflation, Europeans have not used all the tools at their disposal to fight stagnation and unemployment. I don’t know how European industry is supposed to compete with with American exports – let alone Chinese – given the current exchange rates. The Commission’s press release, in its way, also points to austerity and the phasing out of Keynesian policies as reasons for the shaky situation: ”Overall conditions are set to remain weak though, reflecting, inter alia (!), the unwinding of policy measures taken in response to the recession and ongoing structural adjustment, not least in the public sector.”
Regional Disparities and Political Implications
Finding renewed growth – particularly in the peripheral countries – is a political necessity. The Commission calls the recovery ”gradual and uneven,” as good a euphemism as any for massive regional disparity. Interestingly, and against the simple orthodoxies of free market ideologues, performance across the EU has been largely independent of the degree of Statism/Welfarism. Flat-taxed Estonia and Slovakia have the best growth rates with about 3-4% over the 2010-2012 period. At the same time, the next fastest growing countries are Welfare-Statist Finland and Sweden at 2-3% over the same time, with Sweden achieving a whopping 4.8% this year. The worst cases, Greece and Ireland, are in some ways mirror images, the one suffering from crony welfarism and military Keynesianism (encouraged by France and Germany), the other, with its low corporate tax and lax financial regulation, a former neoliberal “star pupil” now fallen to crony capitalism.
The trouble, it appears, is with Germany. It has had very solid growth of 3.7% this year, expected to hovering around 2% for the next two. Too high exports to the rest of Europe and a domestic demand increase so low that one economist describes it as “homeopathic”. Our current fiscal and monetary policies appear driven by decidedly traditional “West German” priorities, namely, to fight inflation regardless of just about everything else, including growth, exports, employment or the increasingly desperate situation of peripheral nations locked into the Euro. This can be quite dangerous for the Union. A country like Spain can’t run around with 20% unemployment (and rising) without this leading to negative sentiment towards their overvalued and near-deflating currency.
These problems repeat similar ones in the 1980s over West Germany’s monetary policies, featuring notably an unequal conflict between Paris and Bonn. French discontent over this was one of the reasons for pushing for Monetary Union but it seems that has only shifted the seat of the problem from Frankfurt’s Bundesbank to Frankfurt’s European Central Bank without actually changing policy.
For all the flaws in the Euro’s creation however, in a sense the unsustainable situation we are now living in was intentional: a contradiction was created which, according to the European ideology, will need further integration to resolve. And, sure enough, last week in a meeting with the European Parliament’s economic and monetary affairs committee, the usually dour ECB head Jean-Claude Trichet called for no less than a “quasi-federation of budgets” in response to the Eurozone’s troubles. He said:
We have got a monetary federation. We need quasi-budget federation as well. [...] We could achieve that if there is strong monitoring and supervision of what there is. Because what exists doesn’t correspond with the actual situation that we are facing. It is a situation where we need quasi-federation of the budget.
What this would mean in practice is not entirely clear. It could mean the option of imposing austerity through institutions. Germany’ skepticism might suggest otherwise however. In addition, WikiLeaks has revealed that the governor of the Bank of England has genuinely feared the prospect a genuinely feared a political union of the Eurozone because of the crisis. Integration without Britain, of course, has always been the old nightmare, where lasting institutions are created without British interests being taken into account (historically, the Common Agricultural Policy and the humiliation of British exclusion from the Single market).
I don’t know if any last institutional change will come from the current crisis. It is easier to move forward with just the Eurozone (“multi-tier integration,” etc.) but no one wants a replay of the Constitutional or Lisbon Treaties. At the same time, without a significant change of policy (whether or not through institutional reform), Europe’s economic and the Union’s cohesion are going to continue to suffer greatly.