How likely is it Britain will stagnate for the next decade?


10:42 am - November 21st 2011

by Sunny Hundal    


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At an event in central London today, the Resolution Foundation think-tank (which looks at the situation of middle to lower income worker), hosted President Obama’s advisor Jared Bernstein.

Along with other economists, they debated whether the UK can avoid the stagnation and economic decline of the US middle-class over the past decades.

In advance, the Resolution Foundation painted a ‘nightmare scenario’.

They release new figures today to show that there are broadly two possible scenarios for wage growth for ordinary workers in Britain over the next decade.

1. a return to better times, with wages resuming the growth seen in the UK in the 1980s and 1990s

2. a US style nightmare in which wages return to the stagnation seen in the UK from 2002 to 2008.

RF say that even under the better scenario, median wages would only reach their pre-recession levels by the end of the decade.

But under the ‘nightmare scenario’, British median wages would be no higher in 2020 than they were in 2001.

In the 2000s, median income for working age US households fell by more than $6,000, a 10% real terms loss.

Bernstein said: “For many US middle class families, the great recession was a problem on top of a problem. Their income was going nowhere in the 2000s expansion, even before taking a huge hit in the recession. The question for US policy makers is what must be done to address our long-term middle-class squeeze. The question for UK policy makers is what can be done to avoid it.”

As I’ve said repeatedly – this will be the key issue for both parties over the next decade.

And there’s only one way for the Labour party out of this – to admit their ideas didn’t work and only built a bubble of real estate and finance; show that right-wing ‘ideas’ on growth only involve attack workers wages; and coming up with big, bold policies to build a different kind of an economy.

If the economic narrative between the Conservatives and Labour isn’t different enough, and the latter has nothing new and bold to offer, they cannot hope to win in four years time.

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About the author
Sunny Hundal is editor of LC. Also: on Twitter, at Pickled Politics and Guardian CIF.
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Reader comments


Think tank says thing which fits what it always says.

Sycophants report it unquestioningly.

Cycle continues.

We don’t need growth, we need planned contraction. We need to import less, use less energy, spend less (as individuals & as a country) and recognise that
i) Our most important asset is our young people.
ii) Debt & borrowing is a curse to be avoided, not a valid way of financing university education, new businesses or ludicrous government expenditure on WMDs.

See Chris Dillow’s recent post Living with a weak economy

Joan Lawson:

We don’t need growth, we need planned contraction. We need to import less, (1) use less energy (2), spend less (as individuals & as a country) (3) […]

(1) Or export more?

(2) Green policies? Not from this government.

(3) Paradox of thrift much?

As for ‘Debt & borrowing is a curse to be avoided’, Polonius in Hamlet would agree with you, but it might make buying a house or planning to expand a business a bit difficult.

For the general population Britain is stagnant for as long as there is a Tory in Downing Street. Same as it ever was.

We don’t need growth, we need planned contraction. We need to import less, use less energy, spend less (as individuals & as a country) and recognise that
i) Our most important asset is our young people.
ii) Debt & borrowing is a curse to be avoided, not a valid way of financing university education, new businesses or ludicrous government expenditure on WMDs.

Agreed.

What are you going to do about it?

Are you in touch with like-minded people.

Are you planning to intervene in the London elections next year?

I know I am.

something for those who champion manufacturing to think about:

Manufacturing involves making a lot of stuff with few people. If you want to make a meaningful dent in unemployment by growing manufacturing, that means making a very large quantity of stuff, more than the domestic market can consume. Selling it abroad will mean depreciating the currency. In turn, that will increase the prices of imported commodities, and be felt as price inflation that will not be matched by wage inflation, i.e. decreasing real wages. If you try to make less stuff with more people, for the domestic market (to create “more jobs”) that translates into reduced productivity and again decreased real wages.

this doesn’t mean that investment in manufacturing and export is a bad idea, but it might mean that there are limits to what we can expect from that policy priority

“show that right-wing ‘ideas’ on growth only involve attack workers wages; ”

That’s pretty good. When you’ve just posed a graph showing that Thatcher and Major presided over pretty damn good growth in the workers’ wages.

You need to ewither change the graph of the line for it to make sense.

As posted several times before, the Danes are remarkably happy with government spending a larger percentage of national GDP than other EU countries and while paying more in tax revenues as a percentage of national GDP than other EU countries. And Denmark didn’t join the Eurozone. It seems that the Nordic model has a lot going for it.

“1. a return to better times, with wages resuming the growth seen in the UK in the 1980s and 1990s

2. a US style nightmare in which wages return to the stagnation seen in the UK from 2002 to 2008”

As many of us have said over and over again Brown really was the worst Chancellor this country has ever seen.

Twenty years of 2% wage growth suddenly comes to a shuddering halt the moment Brown becomes his own man at the Exchequer (rather than following Tory spending plans).

Sunny, I do not think this graph means what you think it means. Did you target your own foot deliberately?

GB is often accused of being a profligate chancellor.

In fact as opposed to spin, by 2007, before the financial crisis pushed the economy into recession, general government spending as a percentage of national GDP was little higher than in Germany and lower than in Denmark, Sweden, the Netherlands and France – according to OECD data. It’s difficult to complain about that. We’ve more solid reasons for complaining about Yvette Cooper screwing up the housing market when she was the minister responsible for housing and for all those wars that Blair entangled us in and which the Conservatives supported.

In the FT, Bob Diamond, head of Barclays Bank, is reported as saying in a BBC Today interview on the morning of 4 November that the Banks must accept responsibility for what went wrong. In the interview – which I listened to – he repeatedly said that banks must work towards a situation where banks could fail without taxpayer support and without causing systemic instability.

BobB:

“In fact as opposed to spin, by 2007, before the financial crisis pushed the economy into recession, general government spending as a percentage of national GDP was little higher than in Germany and lower than in Denmark, Sweden, the Netherlands and France – according to OECD data. It’s difficult to complain about that.”

There is a very easy complaint to make about that. The fact that the economy was in an unsustainable bubble driven by higher property prices, cheap credit and supernormal City profits.

Thus spending as a percentage of GDP wasn’t excessive, but that something like 5-10% of that GDP was either an illusion or, at best, merely temporary. That’s why there is such a high structural deficit. Those billions from stamp duty and City taxes that paid for schools and hospitals and EMA have disappeared.

In a bubble such as we saw from 2002-2007 a prudent chancellor would be running a budget SURPLUS not a 3% deficit. Clinton and the Tories both managed to run surpluses in the good times.

It’s the precautionary principle. It’s good Keynesian economics. It’s Pharaoh’s dream about seven fat cows followed by seven thin cows.

When in a boom you don’t borrow money on expectation that that boom will continue forever.

@10
(1) So which public industries should we sell?

Shinsei67: “There is a very easy complaint to make about that. The fact that the economy was in an unsustainable bubble driven by higher property prices, cheap credit and supernormal City profits.”

I keep saying that Yvette Cooper screwed up the housing market when she was the minister responsible for housing despite timely warnings about looming problems as the result of the inflating house-price bubble from Charles Goodhart, back in 2002, and Roger Bootle in 2003. Part of the trouble is that an influential group of Oxford economists were in denial about the bubble:

House price pessimists like the OECD are wrong, according to new research by Gavin Cameron, John Muellbauer and Anthony Murphy. Their study, presented at the Royal Economic Society’s 2006 Annual Conference at the University of Nottingham, shows that fundamentals adequately explain the current level of house prices and that there is no bubble.
http://www.nottingham.ac.uk/economics/res/media2006/muellbauer%20et%20al-bubbles.pdf

Another part of the problem was that in 2003, GB switched the BoE’s official inflation target from the RPI index – which included an element for housing costs – to the CPI index, which didn’t.

The Financial Services Authority has already admitted to falling down on the job of effectively regulating and constraining high-risk mortgage lending, such 100pc and better loan-to-value mortages – see the: FSA Turner Review 2009. From the news today, I see we are back to 95pc mortgages with government-backed guarantees this time.

Too often, politics gets in the way of robust analysis of issues.

If you do not want the British economy and workers wages to stagnate, come out in support of a nominal GDP growth path targeting policy. It is because the economy is some way below the former path that you feel the stagnation.

http://monetaryfreedom-billwoolsey.blogspot.com/2011/10/targeting-growth-path-vs-growth-rate.html

http://en.wikipedia.org/wiki/Nominal_income_target

a return to better times, with wages resuming the growth seen in the UK in the 1980s and 1990s

Sunny, your nostalgia for the Thatcher & Major governments, while not unwelcome, is certainly a surprise.

We shouldn’t blame GB and exonerate the banks for installing incentive systems which promoted risk-taking by bankers regardless of downstream consequences. As Greenspan put it in testimony to Congress:

“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”
http://online.wsj.com/article/SB122476545437862295.html

But that wasn’t illegal even if insider trading and defrauding customers by selling them Payment Protection Insurance they didn’t need were.

Bob B…who installed the system of regulating banks and the finance indistry which failed to take any effective action on these scams? Perhaps the previous regime would have done no better…but who changed the system and then boasted continually about how the model he had created was the best that the world had ever seen?

20. So Much For Subtlety

12. Bob B

GB is often accused of being a profligate chancellor. In fact as opposed to spin, by 2007, before the financial crisis pushed the economy into recession, general government spending as a percentage of national GDP was little higher than in Germany and lower than in Denmark, Sweden, the Netherlands and France – according to OECD data. It’s difficult to complain about that.

No it isn’t. The fact that Brown was in a pissing contest with a bunch of drunks does not make him sober. Just not very good at holding his beer. Now that all those nice Europeans are waking up with hang overs it is more or less obvious that this was a contest we did not want to be in. We should have been working on staying sober.

Comparisons with the Europeans are just stupid. We need to look at what these levels of spending actually do to the economy – reduce growth for one thing.

We’ve more solid reasons for complaining about Yvette Cooper screwing up the housing market when she was the minister responsible for housing and for all those wars that Blair entangled us in and which the Conservatives supported.

Name three reasons for being sorry about Blair’s wars. Was Sierra Leone that bad?

In the interview – which I listened to – he repeatedly said that banks must work towards a situation where banks could fail without taxpayer support and without causing systemic instability.

So basically he says it was Brown’s fault? We have such a system. Brown chose not to follow it. Ireland even more disastrously.

21. So Much For Subtlety

5. Monglor

For the general population Britain is stagnant for as long as there is a Tory in Downing Street. Same as it ever was.

I could be wrong but it seems to me that graph shows that average incomes in Britain went from some £15,500 under an Old Labour Government to nearly twice that after a couple of years of Tory (Thatcherite even) and quasi-Tory (ie Blair) government.

By all means, tell us how Britain stagnated under the Tories.

22. Chaise Guevara

@ 21

To be honest, I think you’re replying to a soundbite rather than a considered opinion.

@20 SMFS: “Now that all those nice Europeans are waking up with hang overs it is more or less obvious that this was a contest we did not want to be in.”

That’s your usual ignorant sillyness.

Denmark is not in trouble despite this: “Denmark is confirmed as the OECD’s highest-tax country, followed by Sweden.” But then Denmark, like Sweden, isn’t in the Eurozone and subject to the whims of the German government which plainly doesn’t understand the systemic pressures of monetary unions without fiscal unions and the challenging adjustment problems when a country can’t devalue its currency to restore competitiveness and can’t set interest rates to suit national conditions. The only policy option left to maintain employment when faced with the depressing effects of a rising trade deficit is a fiscal stimulus.

The German government really does need to read a standard academic text like Rudi Dornbusch et al: Macroeconomics (McGraw-Hill 2011) for enlightenment.

As for Spain, stock prices dropped and the cost of borrowing rose after the landslide victory of the centre-right party in Sunday’s election. Why? Try this BBC report on: What’s wrong with Spain?

Spain’s descent into the financial abyss is important for more than the fact that it is – like Italy – an enormous economy that may be too big to rescue.

It is because Spain does not fit the narrative.

Indeed, Spain’s story lays bare the fact that the eurozone’s problems run far deeper than the issue of excessive borrowing by ill-disciplined governments, which most politicians have focused on.

Until now it has been easy to blame southern Europeans for their economic woes.

Greece couldn’t control its spending, and lied about its borrowing statistics.

Portugal also borrowed and spent too much.

Italy, while more frugal, simply has way too much debt – a legacy of government profligacy from way back in the 1970s and 1980s.

But Spain has been a model European. Unlike, say, Germany. . . .
http://www.bbc.co.uk/news/business-15734280

Wars? Wars cost lives and cost taxpayers’ money. There is nothing in the stars requiring Britain to meddle in the internal affairs of other countries, especially without the sanction of the United Nations.

Billions were spent on wars in Iraq and Afghanistan but we couldn’t spend taxpayers’ money to support manufacturing in Britain to reduce dependence on financial services because that would have distorted the market. What a sick joke. House building last year was the lowest since the 1920s apart from the war years. Well done Yvette Cooper.

Bob B
As for Spain, stock prices dropped and the cost of borrowing rose after the landslide victory of the centre-right party in Sunday’s election. Why? Try this BBC report on: What’s wrong with Spain?

MAYBE THE COUNTRY WOKE UP! unlike you they stopped listening to Des Lynam and the ghost of Harry Carpenter and did something positive.

Yes, the incoming Conservative People’s Party, which won a landslide victory in Spain’s elections on Sunday, has a definite solution for the country’s crisis. That hallmark Conservative solution is: Austerity.

“Rajoy will inherit a country in crisis. Growth is zero and unemployment has hit 23%. In Cádiz province, one in three is jobless. In Benalup 1,500 adults are without work. In a country where 46% of the under-25s cannot find employment, Benalup’s unqualified youngsters are getting desperate.”
http://www.guardian.co.uk/world/2011/nov/20/spain-benalup-unemployment-euro-crisis?newsfeed=true

Perhaps someone can explain how cutting public spending is going to create jobs in a country where unemployment has already hit 23pc? And note that by OECD figures, government spending in Spain as a percentage of national GDP was modest compared with many other EU countries. As that BBC assessment reported, Spain was a model European country. If anything, its daunting problems owe more to under-regulation of the private sector besides the drawback of being part of the Eurozone where Germany is prescribing the austerity as the universal panacea.

As one of the unemployed youth in Spain suggested in that Guardian piece, their solution to finding a job is to emigrate. Naturally, the better educated and qualified among Spain’s youth will find it easier to get and hold jobs abroad, perhaps in Britain – which is going to do marvels for the competitiveness of Spain’s economy.

26. So Much For Subtlety

23. Bob B

Denmark is not in trouble despite this

Not in trouble yet. Nor is Germany. Nor is the Netherlands. Nor are a lot of people. That doesn’t mean they won’t be soon.

The German government really does need to read a standard academic text like Rudi Dornbusch et al: Macroeconomics (McGraw-Hill 2011) for enlightenment.

I would think the one group of people who comprehensively understand this problem are the Germans.

As for Spain, stock prices dropped and the cost of borrowing rose after the landslide victory of the centre-right party in Sunday’s election. Why?

Because everyone knows the country is boned and that now something will be done about it?

Indeed, Spain’s story lays bare the fact that the eurozone’s problems run far deeper than the issue of excessive borrowing by ill-disciplined governments, which most politicians have focused on.

Sorry but how does that not apply to Spain? There is a bigger problem with Spain too. How is it that Iceland became a major banking centre? Was there something about Icelanders that made them good bankers? Did Icelanders save a lot more than other people? Obviously it was a bubble. But the Spanish have been buying Latin American and British banks. OK, the Spanish are probably better bankers than the Brazilians, but the British? The Spanish banking sector is probably not far off Iceland’s.

But Spain has been a model European. Unlike, say, Germany. . . .
http://www.bbc.co.uk/news/business-15734280

Are you counting central Spanish government debt or Spanish government – central, regional and local – debt?

Wars? Wars cost lives and cost taxpayers’ money. There is nothing in the stars requiring Britain to meddle in the internal affairs of other countries, especially without the sanction of the United Nations.

The costs of all these wars is trivial compared with the needless and pointless waste that is welfare. As tax payer money saving issues, they simply do not rank as remotely important.

Billions were spent on wars in Iraq and Afghanistan but we couldn’t spend taxpayers’ money to support manufacturing in Britain to reduce dependence on financial services because that would have distorted the market. What a sick joke. House building last year was the lowest since the 1920s apart from the war years. Well done Yvette Cooper.

We would not wanted to have pissed away billions supporting manufacturing anyway. So a good thing. Islamism was defeated and thousands of African lives were saved. A good use of our money.

SMFS: “I would think the one group of people who comprehensively understand this problem are the Germans.”

Nuff said. That rather confirms my earlier assessment that you simply don’t begin to comprehend the systemic pressures in monetary unions without fiscal unions and the challenging adjustment problems when a country can’t devalue its currency to restore competitiveness and also can’t set interest rates to suit national conditions. The only policy option left to prevent persistently rising unemployment, when faced with the depressing effects of a rising trade deficit, is a fiscal stimulus and that leads to a punishing rise in borrowing costs if continued.

It’s not just my peculiar, eccentric take that Germany’s stance of blocking urgently needed reforms of the Eurozone while prescribing more and more austerity will have a depressing effect across European economies.

A recent Krugman interview in the FT is very pessimistic about prospects: No one is safe in this crisis:
http://www.ft.com/cms/s/0/7bbcfba0-1060-11e1-8211-00144feabdc0.html#axzz1eOBW9GfY

In tonight’s news: China fears lasting worldwide recession.

Increasing numbers of mainstream economists are worried about the possibility of entrenched economic stagnation which inflicts the very real costs of lost GDP and persisting unemployment.

Try Sam Brittan in Friday’s FT: Five simple steps to curing Britain’s new depression
http://www.ft.com/cms/s/0/74e5b240-1114-11e1-ad22-00144feabdc0.html#axzz1eOFLMFb6

29. So Much For Subtlety

27. Bob B

Nuff said. That rather confirms my earlier assessment that you simply don’t begin to comprehend the systemic pressures in monetary unions without fiscal unions and the challenging adjustment problems when a country can’t devalue its currency to restore competitiveness and also can’t set interest rates to suit national conditions. The only policy option left to prevent persistently rising unemployment, when faced with the depressing effects of a rising trade deficit, is a fiscal stimulus and that leads to a punishing rise in borrowing costs if continued.

Actually no. There is another option – which is fiscal union. Or at least fiscal convergence. And this seems to be Germany’s preferred option. There will be no bail out until the countries of southern Europe bind themselves to German-style fiscal rectitude. Which would be good for everyone concerned really.

Still, given I was pointing out the problems with a monetary but not fiscal union about a decade ago, I don’t feel your continuing lack of understanding helps.

It’s not just my peculiar, eccentric take that Germany’s stance of blocking urgently needed reforms of the Eurozone while prescribing more and more austerity will have a depressing effect across European economies.

Germany is not blocking urgently needed reform. They are demanding it. What you mean is that they are blocking the dissolution of the Euro. What Germany wants is the power to supervise the economies of the south. That is a reform.

But I agree, it is likely that austerity will have the short term impact of depressing demand in the south of Europe. But that will force them to reform. Which will be in everyone’s interests, especially theirs, in the long run.

You did notice that the periods of growth were all Tory periods and the periods of decline all Labour ones, didn’t you?

31. Frances_coppola

29 SMFS

To quote a certain eminent economist – “in the long run, we are all dead”. How long do you consider “long run”? How short is “short-term”? The austerity measures being forced on the Club Med countries are virtually certain to create deep recession and even depression which seems likely to last for at least a decade. Whether there will be prosperity after that is a matter of faith, frankly.

30
Yes, it’s funny how selling off public industries (paid for by the taxpayer) kick-started the economy, I wonder which ones this government are going to sell?

@29 SMFS: “Actually no. There is another option – which is fiscal union.”

I’ve kept saying – along with the mainstream economics literature – that monetary unions aren’t stable without fiscal unions to transfer funds from countries (and regions) with trade surpluses to countries (and regions) with trade deficits. That’s what happens in Britain with the London and South East regions making net fiscal contributions to the national exchequer while identifiable public spending in other regions is greater than the tax revenues which the regions contribute to the national exchequer. There are similar fiscal transfer mechanisms in many other advanced economies.

Two fairly obvious remarks about introducing a Eurozone fiscal union:

(a) will the electorate in Germany tolerate a new Eurozone constitution in which Germany is permanently committed to paying bail-out money to chronic trade deficit countries in the Eurozone?

(b) if national budgets in Eurozone countries are to be centrally controlled by the EU Commission – or, more likely, the German government in Berlin – that will put the Commission or the German government directly in the firing line for grievances of national electorates about rising unemployment from austerity measures, welfare benefits and income redistribution aggravated by complaints that the Commission is unelected and that national electorates have no influence over the colour of the Bundestag and the German government.

This seems to me to be a sure recipe for trouble downstream. In a paper for Foreign Affairs back in 1997, Martin Feldman (who was the first chair of President Reagan’s council of economic advisers) suggested that those political grievances could simmer and then boil over into open conflict.

“Germany is not blocking urgently needed reform. They are demanding it. What you mean is that they are blocking the dissolution of the Euro.”

Germany is blocking the ECB acting as lender of last resort – which many economists have advocated to stabilise bond markets in the Eurozone, notably Prof Paul De Grauwe: The governance of a frail Eurozone (March 2011):
http://www.econ.kuleuven.be/ew/academic/intecon/Degrauwe/PDG-papers/Discussion_papers/Governance-fragile-eurozone_s.pdf

Of course, Germany wants to resist the dissolution of the Eurozone because it does very well in the Eurozone from the rigid exhange rates. Were the Eurozone to disintegrate with a reversion to national currencies, Germany’s national currency would appreciate and swathes of Germany manufacturers would be much less competitive.

“What Germany wants is the power to supervise the economies of the south. That is a reform.”

Sure. It looks as though the late Nicholas Ridley was absolutely correct in that interview with the Spectator in 1990 when he described the then proposed Economic and Monetary Union in Europe as “a German racket designed to take over the whole of Europe.” He was obliged to resign as DTI minister as a result.

If Eurozone countries become depressed by continuing austerity measures, all sort of businesses and business assets would become cheap to acquire.

34. Leon Wolfson

@33 – Oh yes, the poorer countries who use the US Dollar…oh, wait…

You’re also overlooking the fact we have a crisis in the UK which has NO possible resolution at this time, and nobody is going to do ANYTHING to bail us out.

35. Leon Wolfson

@16 – You mean spiking inflation then being unable to control it? We’re already there.

@9 – And neither are the other nordic countries, some of them in the Euro, a disaster. The currency isn’t the deciding factor.

@8 – They are direct attacks on wages. It’s ignoring the fact that much of the “growth” was taken from pensions rather than actual wage growth…the chart’s nonsense, in other words. *Real* growth in wages has been at the same low level.

@34: “You’re also overlooking the fact we have a crisis in the UK which has NO possible resolution at this time, and nobody is going to do ANYTHING to bail us out.”

C’mon. Britain is not part of the Eurozone and retains national fiscal and monetary autonomy.

The Bank of England has the autonomy to set interest rates to meet the statutory obligation imposed by Parliament to meet an inflation target and the Bank can undertake Quantitative Easing to increase the base money of the financial system to promote lending. The Bank’s new Financial Stability Committee is deliberating on policies to maintain systemic financial stability. The individual central banks of Eurozone countries have no powers to do any of that.

The British government has control over national fiscal affairs and can change the pace at which it is paying down the budget deficit. Darling’s plan was to pay down the budget deficit over two Parliaments.

The exchange rate of the Pound is not pegged to another currency and floats in the foreign exchange market in response to the prevailing balance between supply and demand. London is the leading global foreign exchange market by a margin:

“The worldwide volume of foreign exchange trading is enormous, and it has ballooned in recent years. In April 1989 the average total value of foreign exchange trading was close to $600 billion per day, of which $184 billion were traded in London, $115 billion in New York, and $111 billion in Tokyo. Twenty-one years later, in April 2010, the daily global value of foreign exchange trading had jumped to around $4.0 trillion, of which $1.85 trillion was traded daily in London, $904 billion in New York, and $312 billion in Tokyo.”
Krugman and Obstfeld: International Economics (Financial Times 9th ed.) p.355

The exchange rate of the Pound is not pegged to another currency.

If appropriate, the British government could apply to borrow from the IMF – as it famously did in 1976 – to augment foreign exchange reserves should the government wish to stabilise the exchange rate of the Pound in the foreign exchange market.

37. So Much For Subtlety

31. Frances_coppola

To quote a certain eminent economist – “in the long run, we are all dead”. How long do you consider “long run”? How short is “short-term”? The austerity measures being forced on the Club Med countries are virtually certain to create deep recession and even depression which seems likely to last for at least a decade. Whether there will be prosperity after that is a matter of faith, frankly.

We have performed this experiment so we know what will happen if they do not carry out the necessary reforms – Argentina was once the richest country in the world. A similar problem with irresponsible politicians, out of control spending, a welfare state that could not be contained, repeated devaluations and there they are now – jailing anyone who points out that inflation is higher than the state is willing to admit.

And Argentina has been poor for a lot longer than ten years.

The Club Med countries have a choice – they can suffer for as long as they refuse to do what is necessary. They can suffer a lot of pain in a short time or they can slowly slide into the sea and suffer at least the same pain but over a longer period. With no end sight in view. Their choice.

38. So Much For Subtlety

33. Bob B

I’ve kept saying – along with the mainstream economics literature – that monetary unions aren’t stable without fiscal unions to transfer funds from countries (and regions) with trade surpluses to countries (and regions) with trade deficits.

There is another solution as well – population transfer. America does a lot of fiscal transfer, but it used not to. Which meant wholesale movement of people to places with jobs. Notably one of the largest movements of peasants in the world – comparable to Scotland’s Clearances – when Blacks moved to the North.

(a) will the electorate in Germany tolerate a new Eurozone constitution in which Germany is permanently committed to paying bail-out money to chronic trade deficit countries in the Eurozone?

Well no, I think not. Nor could they. The cost of East Germany screwed them for a decade. Spain is a lot larger. But what they want is fiscal convergence so that the Germans will not have to bail them out all the time.

(b) if national budgets in Eurozone countries are to be centrally controlled by the EU Commission – or, more likely, the German government in Berlin – that will put the Commission or the German government directly in the firing line for grievances of national electorates about rising unemployment from austerity measures, welfare benefits and income redistribution aggravated by complaints that the Commission is unelected and that national electorates have no influence over the colour of the Bundestag and the German government. This seems to me to be a sure recipe for trouble downstream.

Indeed. I wonder if the Germans will be happy with that.

Germany is blocking the ECB acting as lender of last resort – which many economists have advocated to stabilise bond markets in the Eurozone, notably Prof Paul De Grauwe

The law is doing more to block that than Germany. Besides, this is a bandaide, it is not a solution.

Sure. It looks as though the late Nicholas Ridley was absolutely correct in that interview with the Spectator in 1990 when he described the then proposed Economic and Monetary Union in Europe as “a German racket designed to take over the whole of Europe.” He was obliged to resign as DTI minister as a result.</i.

Well I thought Ridley was done over at the time – totally unfairly. Perhaps some of the Left would like to apologise for that? No? Didn't think so. But to be honest I don't think the Germans are plotting to take over Europe. I think they just see the problem in a different way to everyone else. They want to be part of the Euro so that they are constrained, but they want Europe's economy to be healthy. They want fiscal responsibility. I am actually quite sympathetic although I don't think this is the way to go.

Either way, we fought two World Wars to prevent Germany taking the place in Europe that their numbers, economy and skills entitled them to. I am not sure that we should continue to do that.

39. Leon Wolfson

@37 – “Argentina was once the richest country in the world.”

Cite. Those delusions are NASTY…

“They can suffer a lot of pain in a short time”

And a lot of pain in the medium and long term with no solution. As the UK is facing. That’s what austerity does, after all.

@38 SMFS: “There is another solution as well – population transfer.”

That’s true – there is a long tradition of internal labour migration in America’s flexible labour market but European labour markets aren’t as flexible as that – because of language barriers, home-loving inertia, housing availability and portability of welfare and healthcare benefits. Even so, try this about Britain from the ONS in May:

“In the first quarter of 2011, around 1 in 5 workers, or 20.6 per cent, in low-skill occupations were born outside the UK. This figure has increased from around 1 in 11 workers, or 9.0 per cent, in the first quarter of 2002.”

“Most of the 367,000 increase in non-UK workers in low-skill jobs came from those born in EU A8 countries, up 235,000 (from 4,000 to 239,000), while there was an increase of 142,000 (212,000 to 353,000) in those born in rest of the world countries. There was a marginal fall of 10,000 (83,000 to 73,000) in those from EU 14 countries.”

“There were also increases in the percentage of non-UK born workers in each of the three higher-skill groups, although the increases there were not as large as that in low-skill jobs.”
http://www.ons.gov.uk/ons/dcp171776_234559.pdf?format=contrast

EU A8 countries = Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic, Slovenia

Consider the social consequences here of adding inward migration from Spain, Greece, Italy and Portugal by job-seekers who can’t find work in their home countries because of continuing fiscal austerity programmes. Why Britain especially? The English language is a powerful lubricant.

Those with higher education and scarce skills will find it easier to get jobs abroad. That brain drain isn’t going to help the industries of austerity afflicted countries to improve trading competitiveness.

“Well I thought Ridley was done over at the time – totally unfairly.”

The political context is important here: Geoffrey Howe, as chancellor and then foreign secretary, and Nigel Lawson, as chancellor, had been setting up the Pound to join the European Exchange Rate Mechanism (ERM).

It fell to John Major, as Lawson’s successor, to actually put the Pound into the ERM in October 1990. Nicholas Ridley gives that disruptive interview to the Spectator in September 1990 and Alan Walters, Mrs Thatcher’s “personal” economic adviser, had being saying that joining the ERM was not a good idea. Something had to give. First Walters and then Ridley resigned their respective positions. Virtually beyond dispute, events have proved that the assessments of Walters and Ridley were correct.

Ridley had long been an odd-ball but he was worth listening to. As Transport minister (1983/86) he had concluded that privatising British Rail was not a good idea because the railways would always have to be subsidised for social reasons and that was better managed in the public sector – the upshot was that the railways were not privatised during Mrs Thatcher’s time as PM.

News update:

Euro zone unlikely to survive intact, say top economists poll Reuters
http://www.reuters.com/article/2011/11/23/us-eurozone-economists-poll-idUSTRE7AM1NT20111123

42. Leon Wolfson

@41 – Well, yes, keep pushing for your goal of devastating the UK Bob. The level of hatred you have for this country is shocking.


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