Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries. It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.
Nor is Britain unique. Italy is also doing worse [ http://krugman.blogs.nytimes.com/2012/01/28/the-worse-than-club/?scp=1&sq=krugman%20italy&st=cse ] — and with Spain clearly headed for a double-dip recession, that makes three of Europe’s big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.
And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.
O.K., about those caveats: On one side, British unemployment was much higher in the 1930s than it is now, because the British economy was depressed — mainly thanks to an ill-advised return to the gold standard — even before the Depression struck. On the other side, Britain had a notably mild Depression compared with the United States.
Even so, surpassing the track record of the 1930s shouldn’t be a tough challenge. Haven’t we learned a lot about economic management over the last 80 years? Yes, we have — but in Britain and elsewhere, the policy elite decided to throw that hard-won knowledge out the window, and rely on ideologically convenient wishful thinking instead.
Britain, in particular, was supposed to be a showcase for “expansionary austerity,”the notion that instead of increasing government spending to fight recessions, you should slash spending instead — and that this would lead to faster economic growth. “Those who argue that dealing with our deficit and promoting growth are somehow alternatives are wrong,” declared David Cameron, Britain’s prime minister. “You cannot put off the first in order to promote the second.”
How could the economy thrive when unemployment was already high, and government policies were directly reducing employment even further? Confidence!“I firmly believe,” declared Jean-Claude Trichet — at the time the president of the European Central Bank, and a strong advocate of the doctrine of expansionary austerity — “that in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”
Such invocations of the confidence fairy were never plausible; researchers at the International Monetary Fund [ http://www.imf.org/external/pubs/ft/fandd/2011/09/ball.htm ] and elsewhere quickly debunked the supposed evidence that spending cuts create jobs. Yet influential people on both sides of the Atlantic heaped praise on the prophets of austerity, Mr. Cameron in particular, because the doctrine of expansionary austerity dovetailed with their ideological agendas.
Thus in October 2010 David Broder, who virtually embodied conventional wisdom, praised Mr. Cameron [ http://www.washingtonpost.com/wp-dyn/content/article/2010/10/22/AR2010102204205.html ] for his boldness, and in particular for “brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.”He then called on President Obama to “do a Cameron” and pursue “a radical rollback of the welfare state now.”
Strange to say, however, those warnings from economists proved all too accurate. And we’re quite fortunate that Mr. Obama did not, in fact, do a Cameron.
Which is not to say that all is well with U.S. policy. True, the federal government has avoided all-out austerity. But state and local governments, which must run more or less balanced budgets, have slashed spending and employment as federal aid runs out — and this has been a major drag on the overall economy. Without those spending cuts, we might already have been on the road to self-sustaining growth; as it is, recovery still hangs in the balance.
And we may get tipped in the wrong direction by Continental Europe, where austerity policies are having the same effect as in Britain, with many signs pointing to recession this year.
The infuriating thing about this tragedy is that it was completely unnecessary. Half a century ago, any economist — or for that matter any undergraduate who had read Paul Samuelson’s textbook “Economics” — could have told you that austerity in the face of depression was a very bad idea. But policy makers, pundits and, I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia.
Germany's Chancellor Angela Merkel meets with France's President Nicolas Sarkozy and Italy's Prime Minister Mario Monti shortly before an informal meeting of the European Council ahead of the European Union leaders summit in Brussels January 30, 2012. REUTERS/Bundesregierung/Jesco Denzel/Pool
By Julien Toyer and Paul Taylor
[NOTE: the COUNTRY links are not directly related, just general country links.]
BRUSSELS | Mon Jan 30, 2012 6:41pm EST
(Reuters) - Chancellor Angela Merkel cemented her political ascendancy in Europe on Monday when 25 out of 27 EU states agreed to a German-inspired pact for stricter budget discipline, even as they struggled to rekindle growth from the ashes of austerity.
Only Britain and the Czech Republic refused to sign a fiscal compact in March that will impose quasi-automatic sanctions on countries that breach European Union budget deficit limits and will enshrine balanced budget rules in national law.
The accord was eagerly greeted by the European Central Bank which has long pressed euro zone .. http://www.reuters.com/subjects/euro-zone .. governments to put their houses in order.
"It is the first step towards a fiscal union. It certainly will strengthen confidence in the euro area," ECB President Mario Draghi said.
Officially, the half-day summit focused mainly on a strategy to revive growth and create jobs at a time when governments across Europe are having to cut public spending and raise taxes to tackle mountains of debt.
But differences over the limits of austerity, and Greece's unfinished debt restructuring negotiations, hampered efforts to convey a more optimistic message that Europe is getting on top of its debt crisis.
Merkel told a news conference the agreements on the fiscal pact and a permanent rescue fund for the euro zone were a "small but fine step on the path to restoring confidence."
French President Nicolas Sarkozy said he expected a deal on reducing Greece's debt to private bondholders within days and he believed independent European institutions - a clear reference to the ECB - would help meet a funding gap.
European Council President Herman Van Rompuy said a deal was needed this week to be finalized in time to avert a chaotic Greek default in mid-March when it faces huge bond repayments.
Leaders agreed that a 500-billion-euro European Stability Mechanism will enter into force in July, a year earlier than planned, to back heavily indebted states.
Europe is already under pressure from the United States, China, .. http://www.reuters.com/places/china .. the International Monetary Fund and some of its own members to increase the size of the financial firewall, but Merkel has refused to consider the issue before March.
EURO "MESS"
Many economists doubt the wisdom of so severely restricting deficit spending, and EU diplomats say the fiscal compact was mostly a political gesture to calm German voters angry at repeated euro zone bailouts and to restore market confidence.
"To write into law a Germanic view of how one should run an economy and that essentially makes Keynesianism illegal is not something we would do," a British official said.
There was no repetition of last month's confrontation between British Prime Minister David Cameron and Sarkozy when Cameron vetoed efforts to amend the EU treaty to tighten euro zone budget discipline.
But the British and French leaders sniped at each other at separate news conferences while professing mutual respect.
Cameron told reporters: "Our national interest is that these countries get on and sort out the mess that is the euro."
German Chancellor Angela Merkel said that although Cameron had shown no sign of relenting in his opposition to treaty change, the new pact could be easily slotted into EU law at a later date and she expected it would be within five years.
Financial markets fretted over the lack of tangible progress in the Greek debt talks and gloom about Europe's economic outlook. The risk premium on southern European government bonds rose while the euro and stocks fell.
Highlighting those fears, Spain's economy contracted in the last quarter of 2011 for the first time in two years and looks set to slip into a long recession.
France .. http://www.reuters.com/places/france .. halved its 2012 growth forecast to a mere 0.5 percent in a potentially ominous sign for Sarkozy's troubled bid for re-election in May. But the president said Paris could achieve its deficit reduction target without further savings.
Italy, .. http://www.reuters.com/places/italy .. rushing through sweeping economic reforms under new Prime Minister Mario Monti, was rewarded with a significant fall in its borrowing costs at an auction of 10- and 5-year bonds, despite two-notch downgrades of its credit rating by Standard & Poor's and Fitch this month.
But Portugal's slide towards becoming the next Greece .. http://www.reuters.com/places/greece .. - needing a second bailout to avoid chaotic bankruptcy - gathered pace as banks raised the cost of insuring government bonds against default and insisted the money be paid up front instead of over several years.
The yield spread on 10-year Portuguese bonds over safe haven German Bunds topped 15 percentage points for the first time in the euro era.
GREEK UNCERTAINTY
Negotiations between Greece and private bondholders over restructuring 200 billion euros of debt made progress over the weekend, but were not concluded before the summit.
Until there is a deal, EU leaders cannot move forward with a second, 130-billion-euro rescue program for Athens, which they originally pledged at a summit last October.
Prime Minister Lucas Papademos and his finance .. http://www.reuters.com/finance .. minister met the heads of EU institutions right after the summit to discuss conditions for the rescue package, officials said.
The ESM was meant to replace the European Financial Stability Facility, a temporary fund that has been used to bail out Ireland .. http://www.reuters.com/article/2012/01/30/places/ireland .. and Portugal. But pressure is mounting to combine the resources of the two funds to create a super-firewall of 750 billion euros ($1 trillion).
The IMF says if Europe puts up more of its own money, that will convince others to give more resources to the IMF, boosting its crisis-fighting abilities and improving market sentiment.
Merkel has said she will not discuss the issue of the ESM/EFSF's ceiling until the next EU summit in March. Meanwhile, financial markets will continue to worry that there may not be sufficient rescue funds available to help the likes of Italy and Spain if they run into renewed debt funding problems.
The EU will consider how to deploy 82 billion euros of unspent funds from the EU's 2007-2013 budget. Some will be recycled towards job creation, especially among the young.
But with no new public money available for a stimulus, they focused mainly on promoting structural reforms such as loosening labor market regulation, cutting red tape for business and promoting innovation.
($1 = 0.7615 euros)
(Additional reporting by Julien Toyer, Harry Papachristou and Robin Emmott in Brussels, Marius Zaharia, William James, Chris Wickham and Jeremy Gaunt in London,; Roberta Cowan in Amsterdam,; Writing by Paul Taylor; Editing by Mike Peacock)
Just heard that fund managers are moving into cash, which maybe in their own best interests, but seems to me by taking money out of equities would only contribute negatively to the problem. What would i know on all that though. Why? Concerns of European structural issues. You article says they are talking about that, but that it is a long a painfully slow process.
Appears the woods are still relatively dark and dangerous.
A Morgan Stanley guy said that their normal proportion in whatever fund(s) (missed that) is down from a usual 30-40% to a low 10.8%.
Aside: couldn't copy, it took over an hour to make this post!
Then just i decided to to take the mouse to the shop, it worked.
Lucky friggin' mouse!
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