Tweet
After so many years of plenty, the global recession has come as a profound shock. It should not have done. The tranquillity of the past decade and a half masks the fact that between 1870 and 2006 there were 255 recessions in a sample of 17 western economies.
The good news is that recessions tend not to last long. According to Paul Ormerod, the author of a new study, Recessions and the resilience of the capitalist economies, two thirds of the downturns were over within a year, and only 33 lasted longer than two years. Apart from the recessions associated with the world wars and the Great Depression, there was a tendency for economies to show resilience and bounce back quickly.
But there is a sting in the tail. Ormerod found that the bigger the recession and the longer it lasted, the less likely recovery seemed to become. This finding goes to the heart of the spat between Britain and Germany last week, because it suggests that preventing the downturn from becoming embedded is important.
Gordon Brown's frustration with Berlin is, to an extent, justified. The speed with which the financial contagion has spread to all corners of the world demands urgent and coordinated action. Germany is the world's fourth biggest economy and, with its healthy public finances, should put its shoulder to the wheel by boosting demand. The Germans bridle at the suggestion they are not doing their bit. Since October, the Merkel coalition has announced a package of measures worth €31bn, (£28bn) or about 1.3% of GDP. That's bigger than the stimulus recommended by the European commission - and greater than Alistair Darling's stimulus in the pre-budget report.
Germany is in a position to do more. Unlike the UK, it has taken some tough decisions to restore the public finances to good health in recent years with a budget deficit of just 0.2% of GDP last year. Its national debt, at 65% of GDP, is higher than Britain's, but that is hardly surprising given the enormous cost of reunifying the two halves of Germany in the early 1990s.
Clearly, though, Germany has a problem with the go-for-broke policies favoured by Washington and London. These involve expanding the balance sheets of central banks so that they can buy up government bonds, thereby pushing down long-term interest rates and making borrowing cheaper for businesses. To the Germans, this so-called quantitative easing is really just printing money by another means and it stirs up deep-rooted memories of the hyper-inflation of 1923. Brown can browbeat Merkel until he is blue in the face - the fact is that fear of inflation is part of the German DNA. Psychologically, the Germans would rather brave a period of slow, even negative, growth than risk pushing wheelbarrows full of cash for a second time in less than a century.
Flimsy edifice
The mood music hasn't helped either. the Germans have endured more than a decade of Brown lecturing them about their stick-in-the-mud economy; now that there is evidence that the much-vaunted British model was a flimsy edifice built on a mountain of debt they think Brown should have the grace to shut up.
These are quite complex issues. On the one hand, there is the view that the Germans are blinded by their history to the real threats - an intensifying global credit crunch that will lead to a deflationary spiral and the loss of the export markets on which their economy depends as global trade dries up. On the other, the salvo launched at Brown by Peer Steinbrück, coming as it did when the pound was reaching record lows against the euro, has reignited the debate about whether Brown was right to keep Britain out of the euro. The run on the pound in recent months has been caused by a wholly accurate assessment on the foreign exchanges that the UK economy is far too dependent on the housing market and the City, the two sectors suffering most from the global recession. Britain would be less vulnerable, so the argument goes, were it protected by membership of the euro.
This is curious, for three reasons. The first is that the eurozone is not exactly thriving. It went into recession before the UK did and parts of it - Italy, Greece, Spain and Ireland - are in serious trouble. The second is that membership of the euro would have made the UK's boom-bust cycle even more pronounced. Interest rates would have been lower when the housing bubble was being inflated and they would have been higher when the bubble was deflating. That is precisely the problem Spain has had.
Conversely, being outside the euro should help the UK to adjust - provided the Bank of England gets its act together, setting interest rates at levels appropriate for the domestic economy - while the lower pound will help rebalance growth away from consumption towards production.
The final point is a structural one. There are signs that the European market is changing Europe's economic contours, with countries specialising in the sectors where they have a comparative advantage. The UK's comparative advantage is in financial services, so joining the euro would make that advantage even greater. We would end up with the City much more powerful and a still more lopsided economy.
But if Brown was right to keep Britain out of the euro and is right to be concerned about the risks of a global slump, his approach is still flawed. Tactically he is right to urge the banks to boost their lending. German tactics, by contrast, are highly questionable when seen through the prism of conventional economics - where growth is the only yardstick of success. At a strategic level, however, it is quite a different matter.
Germany's stimulus is not about boosting short-term consumption - it included higher child benefits, lower contribution rates for unemployment insurance, investment in transport infrastructure, and measures to promote energy efficiency and the production of environmentally friendly vehicles.
This may not be as eye-catching as a VAT holiday, but in terms of where the global economy will be in 10 or even five years' time, it makes far more sense. The Germans see little benefit in responding to an economic crisis caused by unfettered borrowing, consumption and speculation by encouraging a revival in debt-financed consumption. And they are right. What's at stake here is not whether the Germans act as Europe's consumer of last resort or whether Britain joins the euro, but which is the better model for a world affected by energy depletion and climate change.
Seen in those terms, it's a no-brainer.
larry.elliott@guardian.co.uk
- European monetary union
- Economic policy
- Economics
- Recession
- Gordon Brown
- Germany
- Euro
- Currencies
- European Union
- Credit crunch
- Global recession
guardian.co.uk © Guardian News & Media Limited 2008 | Use of this content is subject to our Terms & Conditions | More Feeds
More...
