Much of the political chit-chat in the UK and across Europe is of economic recovery. If we were to believe the politicians, central bankers and other assorted bureaucrats, the worst is over and growth is returning. For some, like Osborne, the recovery has been down to the success of his policies, and for others like European Commissioner Ollie Rehn it has been the EU that has saved the economy. The ECB claims that its bond purchase scheme has been the key to the turn around, and the Bank of England pats itself on the back every time Quantitative Easing is mentioned.
However, they are all wrong. There is no recovery, and the problem has got so much bigger that the imminent collapse is going to be deeper, longer and more terrifying.
The economies of the EU have barely grown in absolute terms since the crisis began in 2008, when the combined GDPs stood at around €12.5 trillion, and now have reached about €12.9 trillion, this despite the injection of cash from the central banks. If one includes the effects of inflation, in real terms the economies of the EU have actually shrunk.
The problem is that during this period the Governments have been fooled into believing that they can borrow their way out of debt, despite the fact that they were faced with falling tax revenues and increasing social payments, and were already encumbered with large public debts. From 2008 the gross EU public debt rose from €7.7 trillion to €11 trillion in 2012, or from 62% of GDP to 85% and forecasted to have risen higher in 2013. The repayments of these debts are also increasing as long term interest rates push up compounding the funding gap. The UK’s interest payments are predicted almost double and rise from £47 billion per annum to over £80 billion by 2018. With unemployment stubbornly staying high, and birth rates declining, additional pressures are mounting on the management of this unwieldy debt, and the options are limited. More problematically still is the fact that new rules governing the capitalization of banks, the largest owners of Government debt, will significantly reduce their ability to lend more.
Governments have 4 methods of dealing with debt:
- Returning to economic growth
- Asset seizure.
However, the favoured option (1) is now unlikely ever to materialise at sufficient rates to catch up with the exponential growth of the sovereign debt pile.
(2) is highly unlikely as the Governments cannot afford to be frozen out of the international capital markets, although they may consider soft-default schemes with individual banks, but given the full size of the obligations this method is unlikely to make significant enough inroads.
(3) Is not an option for the Eurozone members, but is something that the UK can consider, but with interest rates in a race to the bottom and the failure of QE to achieve a lower Sterling rate its impact is limited.
(4) Risks widespread social unrest, and while small scale measures, such as fiscal drag, can be implemented with political ease, wholesale asset seizures will be a last resort.
So, with a mounting problem, and no solutions, all that is left is hope.
Here are a few statistics that I have collated over the last few months to demonstrate that despite protestations of returning growth things are crumbling fast:
- Fewer cars sold in Europe in 2013 than any other year since records began in 1990.
- Italian industrial production fell below 1970s level
- Spain’s retail sales fell 40 months in a row
- UK Investment fell to the lowest level since the 1950s
- In 2013 Greece’s industrial production fell 7.2%
- European Banks face a capital shortfall of €1.3 trillion
- Greece has youth unemployment of 60%, Spain over 50%, Portugal and Italy 40%
- Italian poverty levels hit a record high
- Deutsche Bank has nominal exposure to $70 trillion worth of derivatives
- Mortgage applications in Spain have dropped 90% from 2008 levels
- A record number of Belgian companies filed for bankruptcy in 2013
- Investment in France dropped 77% in 2013
- More than 850,000 Romanians have been declared bankrupt
- 17% of office space in the Netherlands is vacant, up by 6% year on year
Of course, the EU method to ‘fix’ things is to tax more (i.e. punish success) and introduce more rules (cost), and throw the poorly accounted proceeds at ‘projects’ whose success cannot ever be qualified nor its costs accounted for. Far from being sceptical of this approach the UK under the Coalition is a more than willing disciple. It may well be too late to recover from the death dive that we are in, but one hopes that we will be able to learn from these horrific mistakes.