By Nicholas Wapshott
Nov 8 There have been a lot of sighs of relief
in Europe lately, where countries like Britain and Spain, long
in recession, have finally started to grow. Not by much, nor for
long. But such is the political imperative to suggest that all
the misery of fiscally tight economic policies was worth the
pain that there are tentative claims the worst is now over and,
ipso facto, austerity worked.
Hold on a minute. Growth is good. Growth is what allows
countries to pay down their national debt by increasing economic
activity, putting the unemployed to work and making people
prosperous enough to pay taxes. But gross domestic product
growth alone is not enough to provide adequate sustained
prosperity if it does not also lead to significant job growth.
Take Spain, which has just emerged from two years of
recession by posting a third quarter growth rate of 0.1 percent.
Technically the Spanish slump is over. But a glance at their job
figures shows the country has a long way to go before it can
genuinely say it has escaped the diminishing effects of
austerity - in the form of tight fiscal policies, public
spending cuts and labor and entitlement reforms - imposed
indirectly by Germany through the European Union.
In Spain, unemployment remains stubbornly high at 26
percent; half of those age 25 and under are still without jobs.
More than half those age 25 and under in Greece and Croatia are
also unemployed. In Europe, only in Germany and Austria is youth
unemployment under 10 percent. Greece and Spain lead the sorry
list of European countries with more than 25 percent unemployed,
and 13 more are enduring joblessness at more than 10 percent.
In Spain, where economic growth is occurring only in the
export sector, there is little suggestion the economy has been
genuinely fixed by this protracted austerity regime. As one
analyst put it, "Domestic demand is still contracting and
against that backdrop it's hard to see a strong and sustained
Feeble growth is not enough to create jobs and the labor
regulation reforms that have accompanied austerity mean growth
now has to be at somewhere between 1 and 1.5 percent before new
jobs are created. To spur on job growth, labor-intensive
industries like construction need to expand. Yet there is little
sign of that happening.
In Britain, where the Conservative government imposed
austerity measures ostensibly to ward off a sovereign debt
crisis and a run on the pound - while shrinking the state
sector, in accord with its neo-Thatcherite beliefs - they are
popping champagne to celebrate achieving a quarterly growth rate
of 0.8 percent. As late as this spring, Britain expected to fall
back into recession again - a triple-dip it appears to have
But Britain's annual growth rate of 1.5 percent has been
achieved because strict austerity has been surreptitiously
loosened. In a change of policy by the new bold governor of the
Bank of England, Mark Carney, interest rates are being kept
artificially low until unemployment falls below 7 percent.
The lackluster recovery is also being fueled by a sly
government mortgage subsidy to help first-time home buyers, and
encourage house builders. Yet this courts the sort of artificial
boom in home prices that brought the world economy to its knees
Overall, after five years of austerity, the euro zone,
driven by Germany's fierce adherence to fiscal continence that
it has inflicted on the rest of the European Union, still leaves
11 countries in negative growth, including Italy, Portugal,
Netherlands, Spain and Ireland. The only nations who enjoy more
than 2 percent growth are special-case small countries: Latvia
(which has the advantage of being outside the euro), Lithuania,
Malta and Luxembourg. Even Germany, the traditional powerhouse
of European growth and the champion of worldwide austerity, can
only muster growth of 0.5 percent per annum this year.
The claims that austerity has worked seem extravagant in
light of the hard figures. Some politicians facing elections are
talking up signs of life in their national economies to boost
business confidence - in the belief that the wish is the father
of the deed.
There is a sense, too, that it is impossible for European
consumers to hold their breath for so long without respite.
Patience is running out with an economic experiment that, so
far, has failed to provide a sound remedy. Even if an economy is
persistently punished, it comes up for air eventually.
In Europe, however, five years of austerity show little
signs of reward for all the punishment inflicted. Back in the
aftermath of the 2008 crash, it was widely suggested that two
things were likely: there would be an L-shaped recovery; and
that partial recovery would be jobless. There was talk of "a new
normal" where national economies would revert to an earlier,
lower size and resume growth in a different and shallower
Surely, it was thought in the spring of 2009, the world's
leaders wouldn't be so foolhardy as to institutionalize low
growth and high unemployment by applying deflationary policies
as if we were suffering not from a collapse in business
confidence but from too fast growth and rising prices. Yet what
appeared then as unnecessary pessimism appears now to be
The figures again bear out that gloomy prognostication. The
European Commission says the euro zone as a whole will decline
by 0.4 percent this year, year on year, though they predict 1.1
percent next year. Output in the euro zone, however, is still
about 3 percent lower than in 2008.
According to the International Monetary Fund, Britain's
economy will grow 1.4 percent this year and 1.9 the next -
though it is still 2.5 percent smaller than it was in early
2008. The British employers' organization, the Confederation of
British Industry, is even more bullish. It is saying Britain's
economy will soar to 2.4 percent growth next year.
But even if the modest European recovery is sustained, it
remains fickle, capable of being blown off course by temporary
setbacks such as an American federal government shutdown. As the
U.S. Treasury has pointed out, even the slender European
recovery has taken place on the back of America's by comparison
expansive - not to say it is expansive - economic policies.
Germany's postwar economic model has always been export-led.
In the last five years Berlin has defended the very existence of
the euro because it allows German exports to be priced
comparatively cheaply, far cheaper than if they had continued to
use the deutsche mark - which reflected the true strength of the
Added to this, in the last five years Germany has browbeaten
its European partners into adopting austerity rather than
allowing them to borrow and grow their way out of the Great
Recession. Only Britain, outside the euro, has largely evaded
Germany's beggar-thy-neighbor policies.
It is impossible to predict the outcome of a road not taken.
So it is unknown whether, if the Europeans had not reneged on
the deal struck after the 2008 crash at the hurriedly convened
Washington G20 summit to ensure "the action of one country does
not come at the expense of others or the stability of the system
as a whole," we would now be in a more prosperous world with
millions more in work.
It does, however, seem likely.
It is not hard, however, to deduce where we would be now if
America had not elected Barack Obama and instead had President
John McCain, and later President Mitt Romney. These Republicans
- goaded by their Tea Party friends - might have imposed harsh
austerity measures on America to pay down the national debt more
quickly and sharply reduce the size of government.
We would still be in a deep, perhaps deepening recession.
And instead of the glimmer of light the Europeans now see on the
horizon, they, too, would be struggling in a slump not seen
since 85 years ago - when President Herbert Hoover blithely
looked on as the world economy suddenly slid into a 10-year