15 August, 2014


We have all seen the latest figures from Europe. Italy registered a second quarter of negative growth, putting it officially in recession, although effectively it has been in recession since 2011. France is stagnant and no one would be surprised if its high tax-high spend model tipped it into recession quite soon. Germany has now recorded negative growth, In fact it was only some surprising figures from Portugal which stopped the entire Eurozone from going into the red.

While Britain and America surge ahead, Europe is stagnant, and doesn't appear to have a policy to emerge from stagnation.

I don't want to bore everyone by saying that I predicted exactly this. Others will write the history of the Eurozone but it seems to me that Germany awoke late to the fact that rather than bringing the constituent economies together the euro kept them apart.

Germany perceived, correctly, serious flaws in several, mainly Southern economies, flaws which its own economy didn't appear to have, and then wrongly perceived this as the root of the problem. They would have to get efficient, rein back the trade unions, cut the barriers to work, the bureaucracy and so on, OR recognise they couldn't afford the public services they were giving their people and cut them.

What they failed to realise is firstly that these flaws had resulted in a breakdown of the money transmission systems. Banks lent to their friends, and in any case were stuffed with public debt instruments and had no money to lend.

The second thing they failed to realise was that these flaws and indeed the public service levels were institutionalised. I remember a Greek Trade Unionist saying that he had spent his professional life getting public services to a European level, and he wasn't going to have them taken away by Germany. It was not long before he remembered the war.

And in these countries - Italy is a good example, with France not far behind - the government spending had produced personal fifedoms which had hooked up with politicians. Politicians had relatives and friends on the boards of public and semi-public companies, private companies had political 'friends' which smoothed their passage, trade unions were in on the act. It was never going to be easy to change and if you take a look at Italy you'll find that it scarcely has.

But the financial woes remained and credit is too tight to allow growth. Some bright spark in the IMF said Italy should embark on a programme of public investment, in railways and roads and so on. And where would it get the money to do that, while it is up against its 3% budget ceiling (France is way over it)? And you can pretty well name the families in Calabria, Campania and Sicily who are going to do well out of that.

Europe needs a commitment to reform but right now, more urgently, it needs an easing of credit conditions. It needs to be flooded with money.

The only bright spot on the horizon is that if the Germans think they are going into recession, they might start to take the project seriously.

Europe was set up to be self suifficient: a vast area which traded largely with itself and was surrounded (they thought protected) by tariff barriers. They should have realised that in a crowded room, if one person has a cold, they all get it.

If you have a child or grandchild, send them to America or the Far East. Europe is dying and will be so for another generation.

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