17 November 2014

World economy leaves Europe behind


I love the idea that prosperity can be decreed by a G20 communiqué. World leaders in Brisbane have airily committed themselves to two per cent growth. (Why only two per cent? Why not 20 per cent? Or 200 per cent? Who knew it was so easy?) Meanwhile, in the real world, the divergence between Continental Europe and the rest of the planet accelerates.

The Eurozone has technically avoided its third recession in six years. Having contracted sharply in the second quarter of this year, it managed 0.2 per cent growth in the third. But it seems unable to shake off its debilitating condition.

Six years after the credit crunch, every other continent has recovered robustly. Europe alone appears to have contracted a chronic disease.

That infection has spread right across the continent. By far its three largest economies are France, Italy and Germany, accounting among them for two thirds of the Eurozone. All three are experiencing recurring bouts of illness.

France managed to return to growth largely because of a massive injection of government cash in healthcare. This, though, is hardly a solution. Au contraire, it is more of the medicine that sickened the patient. France last ran a balanced budget in 1974. This can’t carry on.

Italy has now contracted for 12 consecutive quarters. Indeed, to a single approximation, it has not grown since the euro was launched.

But if the malaise in France and Italy was predictable, Germany’s slowdown is a shock. Until now, the EU’s largest state had been carrying the single currency. It acted partly from a sense of historical responsibility – a sincere if incorrect belief that European integration made war less likely – and partly because, so far, the euro has brought advantages to Germany.

It’s true that the meltdown in the Mediterranean forced German taxpayers to write out IOUs to more profligate governments. But it also pushed down the value of the single currency, thus allowing German exporters to benefit from an artificially cheap exchange rate.

So far, like Atlas, Germany has been able to bear the weight of the euro on its shoulders. But it’s starting to sweat and sway. German exports, hitherto the Eurozone’s great success story, are now falling faster than at any time since the global crisis began.

Some blame the tit-for-tat economic sanctions with Russia, imposed because of the war in Ukraine. Others argue that a weak euro disguised the effect of years of underinvestment. Whatever the explanation, German analysts have slashed their growth forecasts. A report by the country’s five leading economic institutes, the so-called Wise Men, says that the economy has “stagnated”, and predicts a rise in unemployment.

We can’t console ourselves with the thought that the Eurozone has been failing to recover because it has been concentrating on paying off its debts. On the contrary, borrowing continues to grow. Bad debt at Eurozone banks is now estimated to be 18.9 per cent higher than previously thought, at about 880 billion euros – equivalent to nine per cent of the entire Eurozone economy. Italy’s national has grown to 133 per cent of GDP; Belgium’s to 107 per cent.

It’s no longer credible to keep blaming the sub-prime crisis. Every other continent has bounced back convincingly. So, indeed, has Britain, which is now the fastest-growing economy in the G7. The EU’s problems are older and deeper than the credit crunch.

The long-term indicators for Europe are dire. While the single currency has certainly accelerated the EU’s economic decline, it did not cause it. The underlying problem may be simply stated. Too few people are generating wealth and too many are consuming it. Europeans are spending more and more time in education, and living longer and longer after they retire. Many of them spend the few years in between working for the government.

Europe’s working age population peaked in 2012 at 308 million, and will fall to 265 million by 2060. The ratio of pensioners to workers will, according to The Economist, rise from 28 per cent to 58 per cent – and even these statistics assume the arrival of a million immigrants every year.

Emmanuel Todd, arguably France’s leading demographer, has observed that these figures disguise big variations within Europe: Britain and Scandinavia have much younger populations than the Continent. He points out that the Anglosphere – the United States, Canada, Australia, New Zealand and Britain – will soon be more populous than mainland Europe, and concedes that Britain would be better off with the other English-speaking democracies.

He’s right. We are now members of the only trade bloc on the planet that is shrinking. The calculation we made when we joined what was then the EEC in 1973 turned out to be wrong.

Back then, we looked across the Channel and saw what looked like a thundering success story. We noticed that our pounds were worth less and less each time we visited Germany, and read clever articles about how the “Rhineland model” of economics was better than our own. We decided to hitch our carriage to what seemed the most powerful locomotive on the planet.

In retrospect, our timing could hardly have been worse. Western Europe had indeed spectacularly outperformed the UK between 1945 and 1973, as it bounced back from the artificial low of the Second World War. Britain, in contrast to most Continental states, had amassed a colossal debt in the struggle against Hitler, and spent the next three decades inflating it away, with calamitous effects on our economy.

But the picture changed with the oil shock of 1974. Suddenly, Western Europe was no longer the runaway success we thought. Far from hitching our carriage to a locomotive, we had shackled ourselves to a corpse.

Worse, we had done so at precisely the moment when common-law and English-speaking economies around the world were beginning a growth spurt that endures to this day. In 2013, the Commonwealth’s economy overtook the Eurozone’s.

All the core Anglosphere countries are projected to grow next year by between 2.5 and 3.1 per cent. India, according to the IMF, will grow at 6.4 per cent. But we can’t sign a bilateral free trade agreement with any of these countries. We surrendered our trade policy to Brussels on 1 January 1973.

The case for being in the EU has been overtaken by technology. You could just about make the argument, in the early 1970s, that regional trade blocs were the way forward. But no one seriously believes that in the Internet age. Geographical proximity has never mattered less.

Perhaps, decades from now, the past 40 years, during which we sundered ourselves from our hinterland and artificially redirected our trade to Europe, will be seen as an aberration. When Charles de Gaulle vetoed our entry into the EEC, he gave a very good reason. Britain, he explained was “insular, maritime and linked by her exchanges, her markets and her supply routes to the most diverse and often farthest-flung of nations.”

Indeed. And those far-flung nations would make a far more natural trade bloc than the EU, bound as they are by language and law, habit and history. After all, the whole purpose of commerce is to swap on the back of differences. It never made much sense to abandon a diverse market, which comprised agricultural, industrial and service economies, in favour of a union of similar Western European states.

David Cameron can hardly have failed to notice, as he looked around the G20 table, that his European colleagues are the ones with the worst problems. Britain is in the wrong place.

Daniel Hannan is a Conservative Member of the European Parliament and blogs at www.hannan.co.uk. His other CapX articles can be found here.