On the Official Worry List

In the world​ of money, there is always an Official Worry List, containing the next big things which are likely to go wrong or blow up. The items on the list are sometimes problems we’ve all heard of, with obvious political and human ramifications, such as the Ukraine crisis, or the rise of Isis. The macro-economic take on both of these has less to do with widespread suffering and death, and more to do with accurately pricing energy risks. Still, we know roughly what the money people are talking about when they say they’re worried about Putin. At other times, the Official Worry List features topics that civilians have barely heard of and certainly don’t spend much time worrying about. Recent examples such as US student loans or the Chinese property bubble may well be on your mind if you’ve just graduated from Tufts or bought a flat in Shenzhen, but otherwise they’re probably not keeping you awake at night.

The condition of the Eurozone, and of the European Union more generally, was once on the list in a way we all knew about. This period began in 2010 with the Greek economic crisis, and lasted for about two years. The fear was of a chaotic default on the part of the Greek government. As anxiety spread, a concern grew of ‘contagion’, meaning a growing doubt about the health and solvency of much bigger European economies, especially Spain and Italy. Interest rates for the affected government debt went up sharply, a sign that people were less willing to lend to these countries because they looked at risk of default. Since Eurozone default was supposed to be impossible, the zone had (and has) no mechanism for managing it, or the exit of a member state which would likely follow. The prospect was one of total chaos. These fears were all over the airwaves and led to a series of panicky and irresolute European summits until, in July 2012, Mario Draghi, the freshly appointed head of the European Central Bank – the body which is supposed to preside over the running of the euro – said that he would do ‘whatever it takes’ to support it.

To an amazing extent, those three words alone ended the crisis. Financial markets see the banker Draghi as an insider, fluent in the codes of finance, so ‘whatever it takes’ was taken to mean two things in particular: first, that ‘he gets it,’ meaning that the ECB now understood the scale of the currency’s predicament and the measures likely to be needed to avert a default and subsequent system-wide collapse. Second, since Draghi wouldn’t have uttered the three magic words without getting the all-clear from the relevant Chancelleries, his declaration was a sign of political will: the rich countries, in particular Germany, would if necessary get their cheque-books out and underwrite the defaulters. As calm spread, the Eurozone agreed a Stability and Growth Pact, which established a bailout mechanism, the ESM or European Stability Mechanism, in return for countries agreeing to reform their economies and hit budgetary targets.

Thus ended the first phase of the euro’s tenure on the Official Worry List. Today, though, it’s right back on there, not with the lurid, we-all-know-about-it affect of the first go, but with a slower, quieter, though equally sinister insistence. The new worry isn’t about imminent apocalypse; it’s about slow, lingering, irreversible decline.

The latest set of numbers for European GDP are a perfect example of what’s causing the worry. The whole 18-country zone registered growth of a big fat 0 per cent. That’s bad enough, but more concerning is that the three biggest economies in the zone, Germany and France and Italy, respectively shrank by 0.2 per cent, stayed at zero (for the second quarter in a row) and shrank by 0.2 per cent. Since the Eurozone trades predominantly inside itself, the fact that its big economies are stalling means that the prospective motor of growth is making horrible coughing and grinding noises, but failing to catch.

What the worriers see resembles the Mexican stand-off at the climax of a Western, in which everyone stands around glowering and then simultaneously shoots each other. The indebted countries of Southern Europe want the ECB to print more money, probably by means of the technique of quantitative easing used in the UK and US. This, they believe, would get the supply of credit, and therefore the economy, moving again. The creditor countries of Northern Europe don’t want to do that unless the Southern European countries are balancing their budgets and making their labour markets more flexible. You first. No, you first. It is this stand-off which has just caused the French government to resign, sack its more vociferous left-wing members, and reboot. The minister who voiced the problem most tactlessly, Arnaud Montebourg, had criticised the government’s spending cuts. ‘The priority must be exiting the crisis and dogmatic reduction of deficits should come second,’ he said, adding that ‘Germany is caught in the trap of austerity that it is imposing across Europe.’

Both parts of that are probably true. The counter-critique is also true: French labour market regulations are a brake on growth, and the country has spent more money than it has raised in taxes – has been running deficits – every year since 1974. You can see why the Germans want to see some reform before they hit the Print button at the ECB. In the meantime, France has raised its taxes as high as they can probably go, in an attempt to raise government revenue, and is nonetheless certain to miss its Stability Pact deficit target of 3.8 per cent, which has already been postponed and adjusted twice from the agreed figure of 3 per cent.

For many observers, it looks as if Europe is on course to repeat the series of mistakes made by Japan, a very rich country (the third or fourth richest in the world, depending on who’s counting) which has nonetheless had more than two decades of minimal growth, flat and falling property prices, an ageing population and deflation. Eurozone inflation is down to 0.4 per cent, the lowest since the darkest days of the Great Recession, and a clear indication that deflation may be next. In a deflationary economy, unspent money gains value over time. This might sound good, but it means that everything else is losing value, including labour, and that it makes no sense for anybody to spend money that they can save; so everyone stops spending. This is not a formula for growth: it is a formula for decades of stagnation.

To which quite a few people may well be tempted to say, growth smowth. GDP is, as Diane Coyle points out in her entertaining and informative GDP: A Brief but Affectionate History, a bodge, an ongoing argument.* It’s an apparently hard-edged piece of information whose components are contentious, whose utility is debated, and whose initial inaccuracy is more or less guaranteed. Besides, it isn’t obvious to everyone, especially not everyone on the left, that open-ended growth is the solution to everything, and the prospect of moving towards a no-growth model might seem like a form of growing up, a reluctant acknowledgement of demographic and economic realities. Japan might seem a terrible warning to some economists, but it is a perfectly pleasant country, a civilised and well-functioning society and not a textbook example of apocalyptic meltdown. You can’t just say ‘it’ll be like Japan’ and assume you’ve won the argument.

Fair enough. The trouble, however, lies in those forces of demographics and economics. European welfare states have significant and steadily rising bills, as their ageing populations live for longer than ever before. With a modest degree of economic growth, it might just be possible to pay those bills without a huge rewriting of already made promises and a brutally uneven distribution of resources between the generations. The calculation has been made that an Italian citizen of sixty, by the time of retirement, will have paid half as much to the state as one of thirty, in return for twice the benefits. The maths elsewhere is similar. And things will get worse, as further cuts and tax rises kick in.

The money people worry about Europe mainly because of the consequences a prolonged European slowdown would have for the rest of the world. Europeans, though, should worry about it also for the consequences it will have on our welfare states, and on the balance of rights and responsibilities between generations. A continent which offered good jobs with good rights and good pensions will, without some growth, offer the next generation none of those things. This isn’t scary in the way a full default was scary, and it will take a lot longer to play out; but it is, in slow motion, scary enough. Switching on the printing presses in Frankfurt may not avert this future, but it will buy some time for the other politically difficult but necessary actions. ECB, start your engines.