The UK’s economy may be dismal, but the bloc is crashing into austerity and recession
Source - Daily Telegraph - 30/09/23
The Italian budget deficit is spiralling upwards again. France is about to have to make perhaps its first serious cuts of the free-spending Macron presidency. And Germany is facing a round of cuts to every form of government spending with the sole exception of defence.
In the background, the bond markets are increasingly staging the kind of revolt against wild spending that the UK endured a year ago. The British economy may well be in dismal shape, but the eurozone is heading straight back into austerity and recession, and as it does so all the flaws in the single currency will be painfully exposed all over again.
The latest round of upgrades to the UK’s growth figures published on Friday revealed that our performance has been middling compared to the rest of the G7 since the start of the pandemic. We have done significantly worse than the US or Canada, but, despite three years of propaganda from hardcore Remainers, better than Germany or France.
It turns out – surprise, surprise – that leaving the EU hasn’t made much difference to the economy one way or another. But it is about to become increasingly obvious to everyone that, while we have plenty of challenges to contend with, we were lucky to escape the mess across the rest of Europe.
Over the last week, the economic outlook on the other side of the Channel has taken a decisive turn for the worse. Italy has just published forecasts that its deficit will rise to 5.3pc of GDP, from earlier projections of 4.3pc, while its growth estimates have been cut to less than 1pc.
It turns out that the billions of euros of funds from other member states under the Coronavirus Recovery Fund, with the EU borrowing on its own account for the first time, that were designed to reboot the Italian economy have essentially been wasted. Italy is in a worse mess than ever, with its debt set to rise forever.
France’s President Macron may present himself as a centrist reformer, but he has also been quietly spending money on a scale that even Boris Johnson might have felt queasy about, and this week the bills started to fall due. Its budget for next year includes cuts to welfare payments – usually a touchy subject in riot-prone France – and postpones corporate tax breaks as it struggles to bring a debt to GDP ratio of 112pc under control.
Earlier this month, Germany published budget plans with cuts to everything except defence even though its infrastructure is creaking and public services are so old-fashioned that many still use fax machines.
It is probably no surprise that the bond markets have turned as jittery as they were during Liz Truss’s ill-fated premiership. Over the course of the week, the yield on 10-year Italian bonds rose to 4.89pc, the highest level since 2013. Everyone already assumes Italy is a basket case, but the rise in French yields was far more worrying, with rates spiking to 3.5pc, the highest level since 2011.
Under Macron, France’s debts have ballooned to the third largest in the world in absolute terms, behind only the US and Japan, while the size of the state is still enormous. If traders start to have doubts about France, that will be far more serious than anything that happens in Italy. It owes more money, and the debt is far more widely held globally.
Add it all up and one point is clear. At a point when the eurozone risks crashing back into a recession, governments are being forced into austerity programmes that will crush the life out of the economy. The flaws in the single currency are about to be exposed all over again.
First, its bizarre rules demand cuts to government spending at the time when it will do most damage. No one with a basic acquaintance with an economic textbook would argue that Italy or Germany require an austerity programme right now, but the rules of the euro require it so there is no other choice.
Next, the eurozone prevents countries from devaluing when they need to. Italy’s currency has been consistently too high since it replaced the lira with the euro and the country has barely grown in the 23-year-old experiment of sharing a currency with its neighbours.
Germany’s currency was too weak for most of the last two decades, but now, with no more cheap Russian gas, and with its prized auto industry getting destroyed by the Chinese, it is probably too high. Even so, it can’t devalue its way through a restructuring of its business model.
Finally, countries have lost the ability to control their own finances. The markets are quite rightly getting worried about the French state’s addiction to spending, and the refusal of its truculent workforce to accept changes to generous pension and welfare schemes.
But if it still had the franc, the central bank could always print the money to pay for it all even if it had to accept a weakening currency. That option has now been closed, with consequences that are becoming painfully obvious.
Two years ago the massive transfers within the zone in the Coronavirus Recovery Fund were meant to fix all the fault-lines in the single currency, while a massive blast of quantitative easing from the European Central Bank papered over the cracks and just about kept the show on the road.
The ECB’s balance sheet, a rough measure of the amount of money printed, hit 82pc of GDP at the peak, compared with 36pc for the US Federal Reserve, and 39pc for the Bank of England.
Over the next year it will become disturbingly clear that the zone is crashing right back into austerity and recession. And that, whatever its other challenges, the UK is at least well out of the mess on the other side of the Channel.
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