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Britain’s Greatest Depression

This is just a disaster — and more prolonged than the depression of the 1930s:

GDP to January 2013

And even more of a disaster when we consider the impact this has had on youth unemployment, which has climbed far above the EU and OECD averages (although nothing like as badly as Spain or Portugal):

o-UK-YOUTH-UNEMPLOYMENT-570

This is not just a failure of government austerity, although that in itself has totally failed to ignite any kind of growth or recovery. The fiscal trajectory is important (not least for business expectations) — and trying to cut public spending and raise taxes during a severe depression in private activity has been shown repeatedly to just exacerbate the private slump — but it’s just one aspect of a greater problem — the failure to create a favourable business environment that can attract capital and growth to the UK.

Lending to UK business remains severely depressed:

LendingtoUKbusiness

Given that the British government owns the bailed-out commercial banks, it’s a shock that they haven’t leveraged this power to reignite lending to business, and particularly to business startups. So long as businesses are allowed to either succeed or fail on their own merits, it would not be a malinvestment of time, energy or capital to use publicly-owned bailed-out banks to break through the lending freeze.

It is something of a chicken-or-egg problem to say exactly how much of the problem is austerity, and how much of it is a weak business environment. But either way, we are on the wrong track. Business confidence levels are still deeply depressed — lower than they were when Cameron and Osborne came to power:

uk-pmi-services-buisness-confidence-feb-2013

We’re now half of the way to a Japanese-style lost decade. If we carry on on the same track, we may end up with exactly that.

If British businesses don’t have confidence in Cameron and Osborne’s policies, if their policies don’t lower unemployment, don’t create growth, don’t boost imports and exports, don’t result in recovery, and don’t even result in less borrowing  (their stated aim), why do they continue to pursue them?

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Catastrophe or Liberation?

Kevin O’Rourke contributes an intriguing article on the shape of the new fiscal union emerging in Europe:

The most obvious point about the recent summit is that the “fiscal stability union” that it proposed is nothing of the sort. Rather than creating an inter-regional insurance mechanism involving counter-cyclical transfers, the version on offer would constitutionalize pro-cyclical adjustment in recession-hit countries, with no countervailing measures to boost demand elsewhere in the eurozone. Describing this as a “fiscal union,” as some have done, constitutes a near-Orwellian abuse of language.

Many will argue that such arrangements are needed to save the eurozone, but what is needed to save the eurozone in the immediate future is a European Central Bank that acts like a proper monetary authority. True, Germany is insisting on a “fiscal stability union” as a condition of allowing the ECB to do even the minimum needed to keep the euro afloat; but this is a political argument, not an economic one. Economically, the proposal would make an already terrible institutional design worse.

This is essentially a variation on the idea that while pro-cyclical measures might have solved the problems from being created (a la Keynes’ idea that austerity should be undertaken during booms, not busts), it won’t do anything to fix the problem now that the horse is out of the stable.

Of course, while I cannot see why anyone buys the pro-austerity view, the pro-printing view is merely a means of kicking the can down to the end of the pier. Boosting demand, creating inflation, and re-expanding bubbles does not really address any of the underlying structural problems, most significantly systemic fragility, and high residual debt. At very best O’Rourke’s “solution” buys more time to address those problems. As we have seen (and as I keep pointing out) policy makers and markets believe that bouncing back in a fluster of newly printed money is recovery, and then continue to ignore the problems, which means broken systems just continue to be broken, and old problems jump back out of the swamp to rear their ugly heads.

This brings me to the most intriguing aspect of O’Rourke’s view:

A eurozone collapse in the immediate future would be widely perceived as a catastrophe, which should at least serve as a source of hope for the future. But if it collapses after several years of perverse macroeconomic policies required by countries’ treaty obligations, the end, when it comes, will be regarded not as a calamity, but as a liberation.

When viewed from my perspective — that boosting demand is essentially just another perverse macro policy that will kick the can for a few more years — this really shines a light. The choice for European countries is a painful unwinding now, or years of crushing teutonic austerity (or Japanese-style zombification) unwinding in something far, far worse: riots, revolutions, international breakdown, perhaps even war.

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Big Change For Europe?

I am sure the Euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created.

— Romano Prodi, EU Commission President, December 2001

So the intent for Europe was always that a future crisis would bring about the justification for a resolution to European financial disharmony — namely, that while countries in the Euro control their own budgets, they don’t control their own currency. This mismatch means that with countries pulling in different directions, the European Central Bank is posed with an unmanageable task — create one policy to fit a group of very different economies. At the time of the Euro’s creation, Europe adopted a cross-that-bridge-when-we-come-to-it approach: a crisis would produce the circumstances required to justify unifying fiscal policy, a policy that at the time of the Euro’s introduction seemed unnecessary (and now is deeply unpopular).

But what if disharmony — both in terms of the forces producing the crisis, and disagreement over how to handle the problems — has created such a huge turmoil that instead of crossing the bridge, Europe falls into the water beneath?

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