“Better enjoy Games while they last. Hangover coming with bad economic outlook truly worldwide.” I don’t usually quote Rupert Murdoch approvingly, but this tweet of his is spot on.
Thursday this week marks the fifth anniversary of the outbreak of the global economic and financial crisis. On 9 August 2007 the developing credit crunch forced the European Central Bank (ECB) to pump £75 billion into the eurozone’s banks.
And here we are five years later, with the spotlight still on the ECB. This follows a pledge a couple of weeks ago by its president, Mario Draghi, that “the ECB is ready to do whatever it takes to preserve the euro”.
The markets were delighted. They interpreted Draghi as promising that the ECB would buy Spain’s and Italy’s government bonds. Lack of confidence in the ability of these states to repay their debts had forced up the interest rates they pay on new loans to unsustainable levels.
But when the ECB bought eurozone government bonds at earlier stages in the crisis, this antagonised the German government and central bank, the Bundesbank.
They fear that propping up potentially bankrupt states might undermine the German model of capitalism, which is based on holding down domestic costs to keep exports competitive.
So the Bundesbank cut up nasty, publicly warning Draghi against any more bond purchases. At a press conference on Thursday last week he backtracked, announcing that the ECB “may consider” buying the debt of the Italian and Spanish governments.
But this would only happen once it had negotiated austerity programmes with the European Financial Stability Facility, one of the new eurozone bailout funds.
This latest episode in a tedious and interminable soap opera demonstrates how the eurozone crisis has spread from relavtively small countries such as Greece and Portugal to much bigger economies. And the only solution that the masters of the eurozone offer is austerity.
The attention focused on Draghi highlights a major feature of the crisis. Economist David Levy calls it a “contained depression” because the only thing preventing complete economic collapse is the ECB and other central banks pumping money into the financial system.
Even so, the figures are pretty bad. The Marxist blogger Michael Roberts quotes some calculations by the highly orthodox economist John Taylor. Looking at the US, Taylor describes the recovery from the 2008 slump as “at best a recovery in name only”. Taylor adds, “It’s now the worst in American history—a tragedy that should not be minimised.”
When an economy goes into recession it grows more slowly than the potential rate at which output can normally grow, thanks to productivity and so on. But usually the recovery involves a sharp burst of growth. This makes up for the output lost during the slump and returns the economy to its normal path.
This is a long established pattern. Basing himself on British experience, Marx in 1859 described it as a “law” that even in periods of crisis “the productive powers of the nation and the faculty of absorption on the market of the world” would continue to expand.
“They will only temporarily recede from the highest point reached,” Marx added. “After some oscillations, spread over some years, the scale of production which marked the highest point of prosperity in one period of the commercial cycle becomes the starting point of the subsequent period.”
Well in the case of the present crisis, this “law” has broken down. Taylor shows that the growth in real gross domestic product in the US is still well below its potential rate.
This differs markedly from earlier recessions, including those precipitated by a financial crisis, which some economists claim always produce severe slumps.
The picture is even grimmer in Britain. Output in the three months to June fell for the third successive quarter. It is now lower than when the coalition government took office. Roberts concludes: “We are in a Long Depression.”