Wednesday, March 17, 2010

Economics 17/03/2010: Stuck in the Euroland

The silver lining to the ongoing PIIGS crisis in the Euroland is that finally, courtesy of the severe pain inflicted by the bonds markets, Brussels (and more importantly the core nation states) is forced to face the music of its own making.

I wrote for years about the sick nature of the European economy - at the aggregate levels and individual countries cases. Today's FT Alphaville article by Lombard Street Research’s Charles Dumas (here) offers another great x-ray of the issue:

Dumas' chart clearly shows just how sick the core Euro area economies are and how structural this sickness is. With exception of the bubble-driven catch-up kids, like Spain, the Euro area has manged to miss the growth boat since the beginning of the last expansion cycle.

"The chart above shows real GDP growth from the end of the last recession… Germany is placed evenly between the Sick Man of Europe, Italy (with no growth at all – the very fact of EMU membership has been enough to crush Italy), and the Sick man of the World, Japan (which at least managed nearly 1% annual growth). Germany’s pathetic advance over eight years was 3½%, less than ½% a year, and one third of the growth of Britain and France…" But France, and the UK, have managed roughly 0.975% annualized growth over the same time. Comparing this to the US at 1.27% puts the picture in clearer perspective.

The problem, of course, is much greater. I wrote before that the real global divergence - over the last 10 years - has been happening not via the emerging economies decoupling from the US, but via Europe's decoupling from the rest of the world. The chart above clearly shows that this significant in economic terms (as the gap between European 'social' economies wealth and income and the US/UK is still growing). But the chart also shows that Europe is also having a much more pronounced recession than the US.

Europe's failure to keep up with the US during the last cycle is made even more spectacular by the political realities of the block. Unlike any other developed country or block, EU has manged to produce numerous centralized plans for growth. Since the late 1990s, aping Nikita Khruschev's 'We will bury you!' address to the US, Brussels has managed to publish a number of lofty programmes - all explicitly aimed at overtaking the US in economic performance. All promised some new 'alternative' way to growth nirvana: Lisbon Agenda was followed by Social Economy, which was displaced by the Knowledge Economy. The latest installment - this year's Agenda 2020 is a mash of all three - the strategies that failed individually are now being mixed up in a noxious cocktail of economic policy confusion, apathy and sloganeering.

But numbers do not lie. The real source of Euro area's crisis is a deeply rooted structural collapse of growth. No amount of waterboarding of the real economy with cheap ECB cash, state bailouts and public deficits financing will get us out of this corner. Tax cuts paid for through fiscal spending reductions could have helped in the long run by deleveraging Europe's economy out of the state control bubble. But this opportunity is now firmly wasted through unprecedented amounts of deficit financing deployed in 2009-2010.

Never mind Greece and the rest of PIIGS, EU has no growth engine to get ourselves out of the Japan-styled (or shall we call it Italy-styled) long term stagnation.
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