I love the way the media say that Britain is in a “technical” recession. Statisticians say that when an economy shrinks for six months it’s in recession. The British economy shrank during the last quarter of 2011 and the first quarter of 2012. So it’s in recession—there’s nothing technical about it.
In reality the situation is much worse. In 2008–9 the British economy experienced its worst slump since the early 1920s. Since then, as the Keynesian economist Paul Krugman and the Marxist Michael Roberts have both pointed out, it has recovered more sluggishly than it did even during the Great Depression of the 1930s.
Nor is Britain atypical. Nearly one in four people in the Spanish state are unemployed. Foreign minister Jose Manuel Garcia-Margallo has admitted, “Spain is undergoing a crisis of enormous proportions.”
In mid-April the Tiger index in the Financial Times, which tracks the 20 biggest economies, concluded that the world economy “remains on life support”. What economic growth there is depends on the money that the main central banks have pumped into their financial systems.
Economists define a depression as an extended period during which an economy grows more slowly than its long‑run potential. This is what the advanced economies are struggling with.
There are three reasons for this. First, the boom that preceded the bust of 2007–8 floated on a flood of cheap credit. Heavily indebted banks and households are focusing on paying off the loans they accumulated then—or “deleveraging”. This presses down on consumer spending and investment.
Secondly, governments—especially in the European Union—are making the situation much worse through their austerity policies. Cutting public spending further reduces demand for goods and services, trapping economies such as those of Greece and Spain in vicious downward spirals.
Thirdly, companies have made huge profits by taking advantage of the crisis to squeeze their workers, but they are not investing them. According to the Financial Times, “Four years after the financial crisis, companies globally are awash with cash: $1.7 trillion among US companies, €2 trillion in the eurozone, and £750 billion in the UK.” Roberts argues this is because the rate of profit—profits compared to investments—has fallen since 2010.
In recent weeks a political reaction against the economics of depression has begun to become visible. The most obvious example is provided by the French presidential elections.
It was appalling that Marine Le Pen did so well in the first round. But the fact remains that 30 percent of the vote went to her and Jean-Luc Melenchon, both candidates opposed to the austerity policies imposed on the eurozone by the governments in France and Germany.
The same weekend the Dutch government fell. This was precipitated by the Islamophobic reactionary Geert Wilders’ opposition to the latest austerity package. Wilders is hoping to pick up votes in the resulting general election, but the polls suggest the radical-left Socialist Party should also do well. We are likely to see the same polarisation further to the left and right in the Greek parliamentary elections this week.
More mainstream policymakers are beginning to react. Francois Hollande, the Socialist Party frontrunner in France, says he wants to renegotiate the eurozone fiscal treaty that would institutionalise austerity. The two Marios—Draghi, president of the European Central Bank, and Monti, Italy’s prime minister—have also said they want more emphasis on economic growth.
It’s important to look at the fine print. The disgraced Thatcherite Liam Fox is trying to revive his career by exploiting the coalition’s difficulties and calling for a shift to growth policies. By this he means “reforms” of the labour market that would force workers to accept lower wages.
The German government is campaigning for similar “reforms” right across the eurozone. This is idiotic economically—cutting wages would simply make the depression worse. But the reality is that the destructive social and economic effects of imposing austerity are causing a backlash. The crisis is entering a new political phase.