IMF supremo Christine Lagarde has been making the headlines. The week started with her shivering, and ended with her sounding like your mother (when she was being really annoying).
Just imagine if the UK had carried on in the way it was going during 2008/09; Just imagine if it had carried on spending that way. “It makes me shiver,” said Ms Lagarde. And somehow both the Tories and Labour claimed that her words showed she agreed with them.
Here is the oddity. During that post Lehman collapse period, the UK government came up with a cunning plan to get us out of difficulty. It cut VAT. For a while it led to modest growth, but quelle surprise, we ran up even bigger debts. The big snag with the VAT cut is that it was implemented by politicians who believed all we needed was more of what we used to have; that there was nothing fundamentally wrong with the economy, nothing that needed fixing. And so no fix occurred, and when the VAT cut was reversed, we went back to economic anaemia. But now – and witness the irony – the IMF has suggested that if things carry on as they are, another VAT cut might be required.
Sticking with the IMF, but turning to Greece Ms Lagarde did not mince her words the other day. When you were a kid, struggling with dinner, trying to hide that sprout under your fork, did your mother say: “Eat your meal, think of all the starving millions?” It was annoying. How would finishing the meal you didn’t like help people on the other side of planet who didn’t have enough? Well, Mother Lagarde has now said something similar to the Greeks. At least, the ‘Guardian’ reported her as saying that she has more sympathy for the poor children of Africa than she does for the Greeks. It is hard to understand why she said those words. Literally speaking she is right, of course. Frankly we should all have more sympathy for the children of Africa, we all know that. But her comments do seem a tad tactless.
But then, Greece and the so-called TROIKA – that’s the three parties (the European Commission, ECB and IMF) that are providing Greece with its funds – are playing a game of chicken. And it all boils down to who is most afraid of Greece leaving the Euro. The danger is that if we get the so-called Grexit, others will follow. Germany does not like that idea. After all, it is perhaps the biggest beneficiary of the euro. It is enjoying an export boom on the back of a currency, made cheap because it shares this currency with the more troubled countries of Europe. So Greece can make the threat: you give us more money or you risk the break-up of the euro.
But then Greece does not want to leave the euro, either. So Germany can say to Greece: you accept our austerity, or you are out on your ear, mate.
Who will blink first?
It is hard to know whether a recent opinion poll helped or harmed the Greek case. The anti-austerity party – the Syriza party – is gaining popularity, with 30 per cent of Greeks polled saying they support the party compared to 28 per cent a week or so earlier. The same poll found that 85 per cent of Greeks want to stay in the euro, but 62 per cent are against austerity. It appears the Greeks really do want to have their baklava and eat it.
Meanwhile, Spain is experiencing what the UK went through in late 2008 and 2009. It is the midst of a massive banking bail-out. Bankia is leading the way, but the credit ratings agencies fear others will follow. But beneath it all, Spain’s problem is the same as the one faced in Ireland – the one that caused the US to crash in 2008 and the one that threatens to derail the UK. It’s house prices. Spanish property prices have fallen, but they have further to fall. Falling house prices is bad for household balance sheets, and they are bad for Spanish jobs. Spain became too reliant on a construction boom. Too high a proportion of its labour force only has experience in working in construction. And as house prices tumble, its banks run up more debts, the indebted government is forced to throw more money at the banks, while in parallel unemployment rises, and tax receipts fall.
As will be shown later, it is too glib, and far too simplistic to say Spain’s problems can be fixed by leaving the euro.
But across Europe, the latest dollop of economic news was worrying. Last week saw the latest Purchasing Managers’ Indices (PMIs), covering manufacturing and services, or composite PMIs as they are called. The data released was what is known as flash PMIs – that is a kind of early estimate of what the full PMIs will say next week. But they were bad, falling to a three year low for the entire euro area, and even suggest that Germany is now contracting.
As for Blighty, our official compiler of statistics decided that its data released last month showing the UK was in recession was too positive. It revised GDP for Q1 this year down from 0.2 per cent contraction to 0.3 per cent contraction. Many analysts, and indeed this column, were surprised by this; after all the PMIs for Q1 painted a more optimistic picture. But then again, the more recent PMIs suggest Q2 is looking worse. Q1 may or may not have seen the UK enter recession, but it is clear that Q2 will be nasty.
Looking east, even China has problems. Its government is now pushing to get investment up. Plans to re-adjust from investment to consumer led growth have been put on hold. It looks as though China has opted to buy short-term security by building up a bubble.
Japan too has had its fair share of problems. Some say Japan is at last on the road to recovery. Paradoxically, the earthquake may have helped the economy, forcing the necessity of a Keynesian stimulus that would have been considered politically unacceptable under normal conditions. But even so, Fitch has downgraded Japan’s credit rating.
In the US, the talk is that the economy will hit a brick wall at the end of this year, as all the various stimulus packages come to an end.
Alas, it seems that the global story in May 2012 points to an economic depression. What is to be done?
For other articles in this series: read in this order:
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