Opinion

Anatole Kaletsky

Britain is losing the economic Olympics

Anatole Kaletsky
Jul 25, 2012 20:55 UTC

As London prepares for another display of British pageantry and good humor to match the unlikely triumph of last month’s rain-sodden Royal Jubilee, a less impressive aspect of Britain’s stoical “stiff upper lip” may detract from the national pride associated with hosting the Olympics. In the global race out of recession, Britain has just been revealed as a prime contender for the wooden spoon.

Not only was the shocking drop of 0.7 percent in Britain’s second-quarter GDP reported on Wednesday much bigger than investors and independent economists had expected but it almost matched the 0.8 percent fall in Italy’s GDP the previous quarter. And that Italian drop holds the record for the biggest quarterly contraction suffered by any G7 country since the immediate aftermath of the Lehman crisis. Much more important than such statistical trivia is the fact that Britain’s economic output is still 4.5 percent below the peak level it reached in the first quarter of 2008, more than four years ago. The U.S. and German economies, by contrast, are now significantly bigger than they were before the crisis and, in this sense at least, have left the recession behind them. And even the euro zone as a whole, despite the severity of its financial crisis, has done much better than Britain, with GDP just 2 percent below its peak in 2008.

National economic performance is not, of course, a competitive Olympic sport, and there is more to economic success than GDP growth. Still, there is a good reason for connecting the Olympics with economics: International competitions and comparisons can teach useful lessons and create incentives to improve economic management.

The most instructive international comparison at present is between the British and American efforts to clamber out of recession and financial crisis. This race is about as close as economics can get to a controlled experiment of the kind favored by natural scientists, in which sharply different policies are applied to two countries with broadly similar structures and initial conditions, facing similar economic problems.

In 2008, the U.S. and Britain were two advanced economies with large financial sectors, dangerous housing bubbles, heavy consumer debt and similar government deficits and debt levels relative to GDP. Both suffered extremely severe banking crises that forced their governments to take on huge additional liabilities by guaranteeing their biggest banks. For two years after the Lehman crisis in September 2008, the two economies followed broadly similar policies: slashing interest rates to zero, allowing large expansions of their budget deficits and financing the resulting debt with newly printed money. The two economies moved closely in tandem, as economic theory would have predicted: both on the way down until mid-2009 and then on the way up until mid-2010.

Can a real central bank save Europe?

Anatole Kaletsky
Jul 19, 2012 16:17 UTC

Why is it that the U.S., Britain and Japan, despite their huge debts and other economic problems, have not succumbed to the financial crises that are threatening national bankruptcy for Greece, Spain and Italy – and perhaps soon for France?

After all, even the strongest British and American banks, such as HSBC and JPMorgan Chase, have now admitted that they were as accident-prone as their continental rivals. Borrowing by the U.S., British and Japanese governments is well above European levels relative to the size of the economy. These governments are not even considering fiscal consolidation as ambitious as the 3 percent deficit targets now being written into national constitutions across most of Europe – and Britain has missed by a wide margin the much less demanding targets David Cameron set himself in 2010.

Given that financial markets are supposed to be dispassionate arbiters of economic management, why are they punishing Mediterranean countries with cripplingly high interest rates, while the British, U.S. and Japanese governments are left free to borrow without any apparent limits at almost zero cost?

Why is the response to economic crisis not more serious?

Anatole Kaletsky
Jul 12, 2012 14:46 UTC

The state of the world economy these days reminds me of the famous telegram from an Austrian general, responding to his German counterpart toward the end of World War One. The German described the situation in his sector of the Eastern front as “serious but not catastrophic”.  In the Austrian sector, the reply came, “the situation is catastrophic but not serious”. In much of the world today the economic situation is verging on catastrophic, but “not serious” seems a perfect description of the political response.

Four years after the Lehman crisis, economic activity and employment in the OECD has not yet returned to its pre-crisis level. Unemployment is at postwar highs in every major European country apart from Germany and, while the U.S. jobless rate is now a little below its postwar record, it has been stuck above 8 percent for longer than at any time since the Great Depression. And in Britain, the long-term loss of output assumed by the government’s latest budget forecasts implies, according to Goldman Sachs calculations, that the six months of the post-Lehman crisis did greater permanent damage to the country’s productive capacity than the Great Depression or World War Two.

Now consider the response. In the U.S., the four years since Lehman have been dominated by economic debates among politicians, media commentators and business leaders on issues that are almost totally irrelevant to unemployment and the pace of economic recovery: how to reduce long-term budget deficits and whether to tweak the top rate of income tax from 36 percent to 39.6 percent. In Britain, the biggest economic controversy this year has been the extension of value added tax to hot pies. Europe’s response to the deepest economic depression in living memory – and an even more alarming xenophobic nationalism that threatens the literal disintegration of the euro and the European Union – has been to debate the bureaucratic “modalities” of bank regulations, fiscal treaties and pension reforms in the next decade.

Europe has lost its ability to surprise

Anatole Kaletsky
Jul 4, 2012 19:31 UTC

Last Friday global stock markets and the euro enjoyed their biggest one-day gains of the year. The S&P 500 jumped by 2.5 percent and the euro by 1.8 percent against the dollar. This Friday we will find out whether these moves were just a blip. Why this Friday? Because that is when the U.S. government publishes its monthly employment statistics – and these figures have more influence on global markets than anything that European leaders may or may not decide.

There are four reasons to believe this. The first is the very fact that Europe so dominates the news. Financial markets are not moved by events; they are moved by unexpected events. Once a story has appeared on newspaper front pages around the world every day for months, what are the chances that it will radically surprise? At this time last year, there was still widespread misunderstanding and complacency about the European crisis. The European Central Bank, for example, was so complacent that it was raising interest rates when it should have been cutting them. But today, investors and policymakers are obsessed with Europe’s grim prospects. A genuine surprise would have to be something much worse, or much better, than the scenarios market participants already know.

This observation leads to the second reason for shifting attention from Europe. For Europe to generate a favorable surprise that lasts for more than a few days or weeks is literally impossible. The market is too aware that for the euro to survive it has to go through a  lengthy and uncertain process of political federation. But Europe’s capacity for negative surprise is quite limited too. Everybody knows that Europe is in deep recession, that Greece will never repay its debts, that Spanish banks are insolvent, that debtor countries will all miss their budget targets and that German-imposed austerity will prolong the recession for years. The only news from Europe that would shock the markets would be a total breakup of the euro and Lehman-style financial meltdown. Such a breakup is possible, but it isn’t yet the most likely scenario. Unless a breakup happens, Europe will create lots of volatility, but the trend in financial markets will be set by events elsewhere.

  •