Every time one of his doomed money-making schemes collapsed in ignominy, a deluded Derek Trotter in the BBC’s marvellous Only Fools and Horses would insist that despite this latest setback, ‘this time next year we will be millionaires’. Few Brussels apparatchiks have ever ventured to Peckham, but they seem to have learnt a trick or two from David Jason’s character, as can be seen by their touching conviction that an economic renaissance in the eurozone is always just around the corner.
In the same way that the Trotters’ luck sometimes turned and profits briefly flowed in, only to be lost again in richly comic circumstances, the eurozone occasionally enjoys an uptick in growth by piggybacking on strong global trade. The good days never last, however, and there has been no real boom since the dotcom days at the turn of the decade. But that hasn’t stopped some of the City’s more naive economists becoming ludicrously overexcited by the latest batch of economic statistics.
They should grow up and take a closer look at Germany, which looks likely to expand by only 1.7 per cent this year. Despite this being its strongest result for years, almost every other rich country in the world will do better this year. Even more depressingly, thanks to Angela Merkel’s economically illiterate decision to hike value added tax from 16 to 19 per cent next year to plug her gaping budget deficit, growth is expected to slump back to a pathetic 1.1 per cent in 2007. The long-trumpeted German ‘recovery’ is little more than a mirage, a strong performance by the country’s exporters that is more than offset by desperately weak consumer and construction spending.
Meanwhile the eurozone as a whole is on course for growth of 2.1 per cent this year, falling to 1.8 per cent next year. That such lacklustre numbers have been greeted with whoops of joy by Britain’s remaining Europhiles, as well as by the perennial optimists of the City and the financial media, shows just how low standards have fallen. There was a time when the pro-euro crowd was predicting a new era of wealth and prosperity; now they seem to crack open the bubbly whenever there is any growth at all. The sorry reality is that what is celebrated as a great year for European economic progress would be decried as a catastrophic near-recession in the US.
The core eurozone countries of France, Germany and Italy have seen their annual productivity growth gradually slow over the past 30 years, finally plummeting to below 1 per cent over the past decade — despite (or because of) the introduction of the single market, the euro and the supposedly radical Lisbon reform agenda. In stark contrast, the US has seen productivity growth average 2.5 per cent a year over the past 10 years. Remarkably, national income per person in France, Italy and Germany has fallen back to a mere 70 per cent of that in America, the largest gap since the late 1960s, thanks to lower levels of employment, falling working hours and Europe’s failure to harness technology to boost productivity.
It should by now be clear that, in the absence of radical reform, even semi-decent levels of growth will remain unobtainable in the eurozone. The present lacklustre recovery is only due to the Continent riding the global growth cycle; as soon as the global economy slows again, so will Europe’s. Severe structural problems continue to throttle the eurozone, demanding urgent resolution. Excessive levels of tax, public spending and red tape have sapped the strength of most Continental countries, contributing to high unemployment which excludes the young, the unskilled and immigrants from the jobs market — and promoting an inward-looking culture and opposition to globalisation.
In the longer term, some of Europe’s weakest economies will be hit by the loss of up to a third of their working-age population. Combined with the disastrous consequences of unfunded retirement systems, which will require higher taxes on a shrinking workforce to pay for ever greater numbers of pensioners, economic contraction is set to replace economic growth as the new norm in parts of Europe for the first time since the Industrial Revolution.
None of these structural problems is unique to the eurozone, though it suffers especially acutely from them. The ailment that is unique, however, is the single currency. Its impact since its launch in 1999 has been even more disastrous than even its opponents predicted. Its one-size-fits-all interest rates have forced some countries, including Germany and Portugal, into quasi-deflation, triggered unsustainable property price bubbles in others, and failed to increase trade.
When it comes to inflation, economic growth, house prices and trade and budget deficits, the various eurozone economies have moved further apart since the launch of the single currency, exactly the opposite of the gradual harmonisation the Europhiles so confidently predicted. This increasing heterogeneity of the eurozone is making it even less amenable to centralised monetary policy. Under the single currency, a single interest rate is imposed across 15 very different economies, satisfying none except by chance.
For some countries, interest rates are too high; for others, they are too low. The Spanish economy falls into the second camp. It desperately needs higher interest rates to stave off excessive demand which has propelled its house prices into the stratosphere and seen its current account deficit overtake America’s as a share of national income, a sure sign of overheating.
Italy and Portugal are now firmly caught in what Thomas Mayer of Deutsche Bank calls the ‘euro trap’, and Spain and Greece are about to join them in a vicious circle of declining competitiveness, weak growth, higher budget deficits, increased tax, even weaker growth and, eventually, surging bond yields and a financial crisis when the markets realise that these countries are in danger of defaulting on their national debt. To escape, a eurozone member can either cut its wages and production costs to regain competitiveness, which is what Germany has been attempting; or it can start negotiating to leave the euro.
In an unforgettable episode of Only Fools and Horses, the Trotter brothers smash a priceless chandelier they were trying to restore after conning its owners into believing that they knew what they were doing. With the eurozone emerging from yet another false dawn, now may be the right time for supporters of the single currency finally to confess that they too had no clue, and to beg the rest of us for forgiveness.