"I'm All Right, Jack" In The Eurozone

“I’m All Right, Jack” In The Eurozone


by John Weeks
False Dawn: Those of my generation will remember well 1959’s hilarious and biting satire on the British class system, “I’m all right, Jack”, which included several of the country’s most famous and best-loved comedy actors (Ian Carmichael, Peter Sellers, Terry Thomas and Margaret Rutherford, plus the future president of the Royal Academy of Dramatic Art, Richard Attenborough).

EU quarterly rates of economic growth weeks_graph01b

EU quarterly rates of economic growth weeks_graph01b

The film so successfully portrayed a deeply corrupt business culture in which all participants colluded for mutual self-interest that the title entered dictionaries meaning smug and complacent mediocrity. As I read and listened to the delighted comments of EU leaders after Emmanuel Macron defeated Marine Le Pen, it was like a chorus of “Je suis OK, Jacques” across the continent.
Triumpalist rhetoric reigned as various EU presidents (there are no less than five as shown in their 2015 report) told us that within in a year, the forces of reason had defeated ‘populism’ in country after country, Austria, Netherlands and, in the biggest prize of all, France.
What no EU leader seemed to notice, or failed to mention, was that in all these triumphs the ‘populists’ did far better than anticipated. The centre’s various ‘triumphs’ demonstrated across Europe the unprecedented strength of the far right. The elections may have momentarily held off anti-EU and anti-democratic demagogues, but the poor economic performance that nurtures them remains.
What recovery?
Earlier in this year the media carried reports of a ‘broadening recovery’ in the eurozone as ‘France out-paced Germany’. These reports usually failed to mention that by any standard measure or reasonable assessment, growth in the eurozone remains sluggishly slow.
The chart below demonstrates how slowly. During the twelve months ending with the first quarter of this year, the eurozone countries grew at an annual rate well below 2 percent(1.7 to be exact), slower than during the previous 12 months (when the average rate was 1.9 percent). The French economy may have ‘out-paced’ the German, but at an annual rate near 1 percent and, as for the eurozone as a whole, slightly lower than for the previous 12 months.
Perhaps more worrisome, the average for five non-euro economies (see notes to chart) substantially exceeded that of the eurozone, 2.5 to 1.7 percent. Growth in only one of the four largest eurozone economies was impressive: Spain at 3.1% percent with the other three below 2. The legend of the chart reports average growth rates since the pre-crisis peak and no eurozone country exceeds 1 percent.
When transformed into levels as in the second chart, these growth rates tell a dismal tale. In the first quarter of this year, the GDP of the five non-euro countries averaged 58 percent above the pre-crisis peak. The average for the 19 eurozone countries was a bare 11 percent. Among the large countries Germany (+36) and France (+20) are above the eurozone average.
But Italy remains a shocking 25 percent below its pre-crisis peak, virtually unchanged for four years. So severe was the austerity-induced stagnation of Spain’s economy that after two years of strong growth in excess of 3 percent it has yet to reach its 2008 level.
For supporters of austerity policies, exports rather than a fiscal stimulus point the way out of slow growth. A recommendation that all eurozone countries pursue this solution has a decided mercantilist flavour, e.g., ‘a nation should increase its wealth by selling more than it buys from other nations’. Over the last ten years three of the four major eurozone countries have achieved substantial current account surpluses (France is the exception), as shown in the chart below.
European Union rules nominally set a limit of +6% of GDP for current account balances, above which the Commission might apply financial sanctions. The words ‘nominally’ and ‘might’ are well-advised, because the German government’s current account has exceeded 6 percent for 21 consecutive quarters and in 31 of the 40 since 2007Q1.
As previous charts demonstrated, these surpluses have not stimulated strong growth performances. It was well after the switch from deficit to surplus that growth turned positive in Spain, and four consecutive years of trade and current account surpluses in Italy have gone along with output stagnation.
The line for the non-euro countries (black and dashed) shows that trade and current account surpluses can be associated with moderate to rapid growth. That a current account surplus combines with improved growth outside theeuro zone but not within it suggests another influence at work. The obvious inference is that fiscal austerity, more aggressively pursued by eurozone governments, has tended to out-weigh the stimulating effect of export growth.
Slow growth and current account surpluses together deal a double blow to living standards. The former means slow or stagnant income growth except for the wealthy few, and an export surplus by definition means that domestic investment plus consumption is less than total output. Low growth and a current account surplus is a combination that only a confirmed mercantilist could love.
Need for a New Policy Approach
Emmanuel Macron became President of France by defeating a far right opponent with a dangerously authoritarian rhetoric and doing so with the promise of enforcing pro-market reforms on the French economy. The defeat of Le Pen was a vital victory for democracy and human rights.
Yet the ‘modernizing’ of French society is a recipe for the inequality, citizen cynicism and political ennui that breeds the forces that Macron temporarily defeated. With the eurozone economy not delivering prosperity for the majority of citizens, EU leaders rightly celebrate Le Pen’s defeat, but ‘we’re not all right, Jack’. – Social Europe


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