The choir of “it’s over, folks!” is getting weaker by the day. I do not take joy in this – half a billion Europeans are affected one way or the other by the perennial economic crisis – but I do find it satisfying that more analysts actually realize the realities on the ground in the European economy. The latest awakening happened in the OECD headquarters where economists have scaled back their GDP growth forecasts for this year. From CNBC:
Complacency by policymakers and a “crisis of trust” in politicians, banks and multinationals are the biggest risks to the global economy this year, the head of the Organisation for Economic Co-operation and Development (OECD) told CNBC. The warning from OECD Secretary-General Angel Gurria came as the 34-country organization released its annual economic outlook, trimming expectations for global growth for this year and predicting “moderate” economic and trade expansion. It also forecast a slowdown in the Chinese economy, warned of only modest declines in unemployment and stressed that tighter financial and credit conditions would weigh on emerging economies.
There is no lack of access to liquidity in either the European or the American financial systems. Both the Federal Reserve and the ECB have been printing money like their lives depended on it. The growth in M1 money supply in the euro zone is currently at about four times the GDP growth rate. China has also over-liquified its economy, but for somewhat different reasons: while the U.S. and euro-zone central banks have printed money to finance major government deficits, the Chinese money-supply expansion is part of a currency sterilization operation to keep its export currency artificially low vs. major export markets. The end result, though, is essentially the same: artificially depressed interest rates. With the historically strong growth numbers in China this has led to an over-expansion of many forms of productive capital, primarily in real estate.
A slowdown in China could easily bring about a wave of credit losses similar to what Europe and the United States experienced at the beginning of the Great Recession. However, due to the relative institutional isolation of the Chinese financial industry, a credit crisis would probably not have any significant repercussions beyond China’s borders.
The problems would be more traditionally macroeconomic, such as a sharp decline in imports. This in turn would affect, e.g., the German economy which, due to lackluster domestic spending, is currently critically dependent on exports for any growth at all to happen.
It is important to see the differences between economic downturns on different continents. China’s growth problems are different than Europe’s. The Chinese economy has over-expanded due to a combination of government regulatory interference with private industries – such as the joint-venture mandates – and the aforementioned currency sterilization policy. They are now going to have to deal with a hard landing, but if they stick to their long-term path of relying increasingly on free markets and capitalism they will rebound soon.
Europe, on the other hand, is drifting farther and farther away from those two pillars of freedom and prosperity. The EU elections on May 22 could put socialists and statist nationalists in control of large blocks of seats in the European Parliament. This in turn would drive the EU’s economic policies even further into government intervention and bring about more measures to try to save the welfare state.
Back to CNBC, which reports an insightful comment by OECD chief Gurria:
The U.S economy is expected to grow by 2.6 percent in 2014 and 3.5 percent in 2015, while the euro zone is forecast to notch up growth of 1.2 percent this year, and 1.7 percent next year. … Gurria added that policymakers were hampered by their belief that the global financial crisis of 2007-08 was behind them. “People thing we’re out of the woods—we’re not out of the woods. In fact the legacy of the crisis is weighing very heavily on us. There is still very slow or sluggish growth,” Gurria told CNBC at an OECD gathering in Paris.
U.S. growth numbers are contingent on two things: the fate of Obamacare and the extent to which the Obama administration is going to follow up on its highly irresponsible climate-disruption proclamations. Obamacare is slowly falling apart, allowing businesses to slowly recover from the cost shock. If Republicans win the Senate in November they will be able to further “reform” Obamcare to remove its most destructive parts, piece by piece.
As for the administration’s new climate rhetoric, it is likely that this is a lot of hot air that is mostly there to give the impression of a still-successful presidency. If this turns out to be the case, and if the November election goes as most analysts predict, the U.S. economy will continue to grow at reasonable rates and slowly move toward a real recovery.
Ironically, if Obama fails he will leave office with a better legacy than if he succeeds.
This, however, will not be enough to help the rest of the world. The U.S. economy simply cannot compensate for Europe’s destructive desire to keep the welfare state. CNBC again:
The OECD’s annual forecast … estimated that an extra 11.25 million extra people would be jobless by the end of next year, marking only a modest decline in unemployment. Emerging market economies will only see modest growth, according to the OECD, thanks to tightening financial and credit controls around the world as well as “policy-tightening” such as the winding-down of the U.S. Federal Reserve’s bond buying program. Furthermore it said that the “extent of the slowdown and the fragility of the banking system in China are uncertain.” Gurria stressed that trust in institutions had been “destroyed” and that this lack of faith in politicians, large corporations and pan-national organizations made it difficult for policymakers to succeed with reforms. “There is a generalized crisis of trust that makes it impossible to succeed with policies, if people are always pushing back proposals,” he said.
This is nonsense. The only institutional problem in the world economy is the welfare state. It is keeping half-a-billion Europeans under a wet blanket of high taxes, intrusive regulations, work-discouraging entitlements and heavy government dependency that stretches deep into the layers of the middle class.
That is the problem Europe needs to address. If they don’t they will be stuck with both feet deeply cemented into the quagmire of an economic wasteland, raising their children to live in the static, depressive, grey-skies reality of industrial poverty.
Again: if the Chinese rely on Capitalism and free markets they will rebound; if the United States slowly rolls back the overreach of the Obama era our economy will continue to grow. The result will be a better world- a world that will leave behind a Europe that is gradually converting itself into a museum over the statist experiments of the 20th century.