The result of the election in Greece is likely to lead to
a period of renegotiation of the bailout deal. The electorate have implicitly
backed the single currency and now they are having to pay for that. But it will not be all one way as Greece as
some leverage with the rest of Europe – what might be called Drach-mail. It was suggested there might be a long period
of negotiation before Greece finally leaves.
To stand a hope of this being prevented and to keep the
Eurozone together there will have to be a move towards a fiscal transfer union but
there needs to be a credible roadmap with dates and milestones. If this had been attempted some time ago it
might have been enough, but now more needs to be done and there will probably
need to be a banking union as well.
(Interestingly, Mr Monti, the Italian PM was reported as saying
something similar in the media on Friday morning). It will be difficult to get this to happen in
the timeframe needed and past experience suggest the EU leaders will
continually get to the precipice each time there is a crisis and look a long
way over before doing just enough not to go over the edge.
Some countries may still leave the Euro – nobody
knows. But we should be under no
illusions about the effect of this.
Greece and Italy’s currencies steadily lost value before they joined the
Euro, which enabled them to remain competitive, but this points up the
disparities with stronger economies.
When Argentina (the most commonly quoted example of a country defaulting
on its debts) left the currency peg with the dollar that had maintained the
value of the currency there was a pent up drop in the value of its currency
that was cataclysmic and for several years the economy was reduced to barter. It would be better to sort out the Euro, and
perhaps in some year’s time when things are more settled and stronger, for
countries to leave if cultural differences and staying within the rules make it
too difficult.
We are, though, in a situation where the southern
European states are getting all sticks and no carrots. Austerity is pushing their economies into
deep recession and we need to allow them the opportunity to grow their way out
of this, otherwise their debt will not be paid down. There are a number of ways to enable this
growth to happen: inflation which erodes the value of the debt; a default on
the debt or forgiveness, but Italy is probably too big for this and most of its
debts are held by Italian banks and pension funds; or fiscal transfers from the
north for growth.
Turning to the UK, we are in a technical recession but Mr
Berrisford-Smith does not believe the recent GDP figures. The various Purchasing Manager’s Indexes
(PMI) are all above 50, which indicates growth, although manufacturing is now
suffering. What is true is that overall
the economy hasn’t grown since 2010 (though in the past couple of quarters the
West Midlands has out-performed the rest of the UK) and the debt crisis has
undermined the rebalancing of the economy, especially in manufacturing – export
demand is weakening and domestic stock levels are being run down.
The biggest factor, though, is consumer confidence. If we are to get the economy to grow investing
in infrastructure is too slow (with the planning system by the time anything is
built it will be too late) but consumer spending makes up 60% of the economy
(GDP). It is difficult to get growth if
that is flat or falling. The Euro-crisis
is affecting confidence but the other factor is inflation. We are suffering the most severe incomes
squeeze since the 1970s with low earnings growth compared with inflation. This means spending power is down – final
consumer spending by households has fallen.
(I would comment, though, that we might question whether increased
consumer spending is desirable, particularly at the time of the Rio+20 Earth Summit. It is not a value-free proposition either,
even if it may seem that it is what much of our western society is based on).
However, the Euro debt crisis has caused oil prices to
fall and inflation is coming down more generally. On the CPI measure it is now 2.8%, which is
more in line with earnings. There will
be no return to the pre-2007 situation, we still have too much debt – it was
easy to run it up but is much harder to reduce it, and if it took us a decade
to get in this mess it will take us at least a decade to get out of it (this is
our individual Greece – we are reducing debt with no increase in income). Debt stood at 161% of household income in
2007and is 144% now so we still have a way to go, but where will it end up? House prices are very important in this
because of the effect on mortgage levels.
There were 120,000 mortgages per month approved in 2007 compared with
50,000 now – at what point will this change, and how?
Unemployment is a problem with a lot of part-time
employment amongst people who would like to be full-time. This means that if work picks up many people
will be employed for longer hours rather than new people taken on – in the jargon,
unemployment is sticky. But the number
employed grew by 160,000 last month which also casts doubt on the negative GDP
figures (though not all commentators would agree with this).
The Chancellor still aims to balance the structural
budget by 2017/18 and shows no sign of changing his mind about this seeming
cornerstone of his economic policy. This
will still, though, be 80% of GDP if he hits his target, which is twice what is
was in 2008. The question is, ‘where do
we want this to be?’. At 80% there is no
room for manoeuvre if hard times return.
We could aim for 60%, which is the EU benchmark, or return to 40%. How much do we want to pay off and how much
do we expect our children to pay off? – but one day they will be in charge and
we will be old (and concerned about care for the elderly)! There is an issue about the inter-generational
contract (which in the past has been that we handed on at least as good, if not
better, prospects to our children) and that doesn’t include all the un-funded
pension plans.
Turning to exports, we are now, finally, exporting more
to the BRICs than to Ireland and also to the ‘PIGS’ (Portugal, Italy, Greece,
Spain) and especially Spain, which is worrying considering their economic
difficulties. Demand is falling in
Europe with the debt crisis, affecting our exports alongside increasing
imports. This is affecting the
rebalancing of the economy. We are now
exporting more cars (£2bn pa) to China than scrap metal ((£1bn pa), which is
clearly helping companies like Jaguar, Land-Rover and the West Midlands
economy.
We should hopefully inch our way to recovery in the third
quarter, helped by the Olympic effect, and then inflation will be more in line
with income growth and we may possibly see a revival in the economy. In the mean-time, we will probably see more quantitative
easing in the next few months (Mervyn King’s £80bn credit scheme is QE by
another name). Lending to businesses is
still very weak and the debate continues about whether it is due to lack of
supply from the banks or demand in the economy but the BoE credit scheme should
give the answer to that debate.
Finally, it will take until 2015 for GDP to return to
2008 levels, which is twice as long as most other recessions but whatever the
GDP figures say what matters is lost jobs, homes, and businesses, and despite
the length of this recession it has not hurt as much as the 1930s without the
social security net or the 1970s with high inflation. Its greatest effect will be on the public
finances and between the generations. We
think we can keep growing and that along with that we can grow the capacity to
supply the public services that we expect.
We haven’t woken up to the fact that we are in a different place and
whilst the politicians keep giving way on small things like the pasty tax and
the conservatory tax what chance is there of sorting out the really big things? (This, of course, begs the question that we
can agree on what are the big things).
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