A deepening recession in the 17-nation eurozone sent shares lower on Thursday amid evidence that the problems of the single currency's crisis-hit periphery were spreading northwards to affect monetary union's core economies of Germany and France.
Despite an easing of financial tensions in the second half of the year, gross domestic product in the members of the monetary union dropped by 0.6% in the final three months of 2012, a heftier decline than the markets had been expecting.
An across-the-board fall in output that affected both large and small economies meant that the eurozone economy failed to register an increase in activity in a single quarter of 2012, with a flat first three months of the year followed by three successive drops in output. The combination of weakening activity and high budget deficits prompted a warning from the credit rating agency Standard & Poor that Spain, France, Italy and Portugal were at risk of a downgrade in 2013.
Although Britain also registered a fall in output in the final three of 2013 and is one quarter of contraction away from triple-dip recession, Moritz Kraemer, managing director of European sovereign ratings at S&P said it was not a foregone conclusion that the UK would be stripped of its coveted AAA rating.
Eurostat, the EU's statistics office, said seven eurozone countries – Greece, Spain, Italy, Cyprus, the Netherlands, Portugal and Finland – were already officially in recession after suffering two or more successive quarters of falling output.
The poor performance of the eurozone's two biggest economies meant the drop in GDP in the fourth quarter was worse than the 0.1% fall in the third quarter. Consensus among analysts polled by Reuters had been for a 0.4% drop.
Germany's main stock market index, the DAX, fell by 1% yesterday, with shares in Paris, Milan and Madrid also losing ground. The euro dropped against the dollar and the yen on the foreign exchanges amid speculation that the European Central Bank will cut interest rates in a response to the fall in output.
The US grew by 2.2% in 2012 and Japan by 1.9%, while GDP in the eurozone contracted by 0.5%.
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There may be good grounds to reform labour markets, to be sure. Workers and skills may have to be matched more closely with the demand for them. Some groups of workers may be exploiting their (near) monopoly in the labour market. Willing workers may not always know of and have access to the available jobs. And countries such as Spain (may) have a particularly nasty dual labour market – with well-protected insiders and weak, usually unemployed, outsiders – which requires adjustment so that more unstable work will lead to stable jobs.
But it is naive to think labour market reforms will lead to growth, or even to falling unemployment – except, perhaps, in a very narrow margin. Aggregate unemployment falls, all other things being equal, when economic growth outstrips productivity growth. And with productivity rising fast (possibly, or probably, as a result of the crisis, which may have weeded out the very weak companies, thus pushing up average productivity), and growth limping behind, that is not going to happen soon.
Labour market reforms of this sort do not do much more than redistribute the (possibly fewer) available jobs. For every job in the "competitive" Spanish car industry, read one job gone in the French, Italian, Belgian, Swedish or German car industry. Beggar-thy-neighbour policies of this kind never increase the number of jobs, as Keynes pointed out more than 75 years ago. We should not fall into that trap again.
An old spectre is returning. Last week, Tony Barber in the Financial Times – usually among the more sensible commentators – suggested, though carefully and with many caveats, that Spain's labour market reforms are the basis of the country's improved economic performance. By limiting possible wage claims and negotiating flexible working conditions, companies in the car industry and beyond have become more competitive and boosted their exports.
The data first. Spain's unemployment rate is 26%, and not falling particularly rapidly. The current account deficit is falling, less as a result of increased exports and more because imports fell dramatically as domestic demand collapsed in the wake of the housing and financial crisis. It is unclear if growth will pick up enough in the short run to avoid a rise in the debt-GDP ratio. So much for economic performance.
The key reason, of course, why even the tiniest shimmer of light has to be greeted with jubilation is that wages are always seen as the problem – even in a financial catastrophe-induced economic crisis. For policy-makers, austerity is ultimately self-defeating: current accounts are outcomes, not policy tools, and competitiveness is difficult to target, consisting, as it does, of price and quality relative to what others do. In this light, it follows that labour markets are possibly the only area where governments can be seen to be doing something about the economy. For many commentators, if Spain is doing better – and if the country has just reformed its labour markets, then the reform must explain the improvement (however small it might be).
Berlusconi tried very hard to reform the Labour market in Italy, but didn't have much success due to the massive power wielded by the Trade Unions.
Inaccurate caricature.
The Italian elites' determination to retain control of their economy by curbing markets was theorised by Giulio Tremonti, Berlusconi's treasury minister, in his 2008 book, La Paura e la Speranza. For Tremonti and his allies on the Italian right, globalisation was always a threat rather than an opportunity. The Italian left, ironically, has increasingly embraced a "third way" that accepts many features of market liberalism – which targeted Italy's large underground economy and inflexible labour markets. But while Spain's unemployment rocketed, Italy's large protected core workforce, and its vibrant underground economy, provided a consumption buffer while smoothing the unemployment shock.
I demurred. Inflation might in the end be chosen, or it might just happen anyway,
I said, but the politicians and central bankers just weren’t ready for it yet. They had to try austerity for several years first.
If that looked like working, and especially if the economy revived, then the inflationary denouement would be avoided. It would be a repeat of what we have managed a few times before, working debt down gradually through a varying mixture of austerity, low interest rates, growth and mild inflation.
But if, after several years of austerity, the deficit was not appreciably lower and the economy showed scant sign of recovery, then higher inflation would seem attractive. Although I say it myself, that wasn’t a bad judgment. Has the inflationary moment now arrived?
Last week, the latest figure showed CPI inflation stuck at 2.7pc. It looks likely, though, that in coming months it will rise, peaking at 3pc or above. According to the Bank of England, the rate will continue above the 2pc target for more than two years. To those of a cynical disposition, this represents the authorities pursuing the inflation solution by stealth, which they have been doing for a few years already. Actually, I don’t think that they are quite right. True, the authorities have tolerated high inflation rather than seeking to bring it down by tightening policy because they have judged that this would have depressed the economy. But I don’t think that they have actually welcomed the higher inflation as alleviating our predicament.
I demurred. Inflation might in the end be chosen, or it might just happen anyway,
I said, but the politicians and central bankers just weren’t ready for it yet. They had to try austerity for several years first.
If that looked like working, and especially if the economy revived, then the inflationary denouement would be avoided. It would be a repeat of what we have managed a few times before, working debt down gradually through a varying mixture of austerity, low interest rates, growth and mild inflation.
But if, after several years of austerity, the deficit was not appreciably lower and the economy showed scant sign of recovery, then higher inflation would seem attractive. Although I say it myself, that wasn’t a bad judgment. Has the inflationary moment now arrived?
Last week, the latest figure showed CPI inflation stuck at 2.7pc. It looks likely, though, that in coming months it will rise, peaking at 3pc or above. According to the Bank of England, the rate will continue above the 2pc target for more than two years. To those of a cynical disposition, this represents the authorities pursuing the inflation solution by stealth, which they have been doing for a few years already. Actually, I don’t think that they are quite right. True, the authorities have tolerated high inflation rather than seeking to bring it down by tightening policy because they have judged that this would have depressed the economy. But I don’t think that they have actually welcomed the higher inflation as alleviating our predicament.
I demurred. Inflation might in the end be chosen, or it might just happen anyway,
I said, but the politicians and central bankers just weren’t ready for it yet. They had to try austerity for several years first.
If that looked like working, and especially if the economy revived, then the inflationary denouement would be avoided. It would be a repeat of what we have managed a few times before, working debt down gradually through a varying mixture of austerity, low interest rates, growth and mild inflation.
But if, after several years of austerity, the deficit was not appreciably lower and the economy showed scant sign of recovery, then higher inflation would seem attractive. Although I say it myself, that wasn’t a bad judgment. Has the inflationary moment now arrived?
Last week, the latest figure showed CPI inflation stuck at 2.7pc. It looks likely, though, that in coming months it will rise, peaking at 3pc or above. According to the Bank of England, the rate will continue above the 2pc target for more than two years. To those of a cynical disposition, this represents the authorities pursuing the inflation solution by stealth, which they have been doing for a few years already. Actually, I don’t think that they are quite right. True, the authorities have tolerated high inflation rather than seeking to bring it down by tightening policy because they have judged that this would have depressed the economy. But I don’t think that they have actually welcomed the higher inflation as alleviating our predicament.
I demurred. Inflation might in the end be chosen, or it might just happen anyway,
I said, but the politicians and central bankers just weren’t ready for it yet. They had to try austerity for several years first.
If that looked like working, and especially if the economy revived, then the inflationary denouement would be avoided. It would be a repeat of what we have managed a few times before, working debt down gradually through a varying mixture of austerity, low interest rates, growth and mild inflation.
But if, after several years of austerity, the deficit was not appreciably lower and the economy showed scant sign of recovery, then higher inflation would seem attractive. Although I say it myself, that wasn’t a bad judgment. Has the inflationary moment now arrived?
Last week, the latest figure showed CPI inflation stuck at 2.7pc. It looks likely, though, that in coming months it will rise, peaking at 3pc or above. According to the Bank of England, the rate will continue above the 2pc target for more than two years. To those of a cynical disposition, this represents the authorities pursuing the inflation solution by stealth, which they have been doing for a few years already. Actually, I don’t think that they are quite right. True, the authorities have tolerated high inflation rather than seeking to bring it down by tightening policy because they have judged that this would have depressed the economy. But I don’t think that they have actually welcomed the higher inflation as alleviating our predicament.
I demurred. Inflation might in the end be chosen, or it might just happen anyway,
I said, but the politicians and central bankers just weren’t ready for it yet. They had to try austerity for several years first.
If that looked like working, and especially if the economy revived, then the inflationary denouement would be avoided. It would be a repeat of what we have managed a few times before, working debt down gradually through a varying mixture of austerity, low interest rates, growth and mild inflation.
But if, after several years of austerity, the deficit was not appreciably lower and the economy showed scant sign of recovery, then higher inflation would seem attractive. Although I say it myself, that wasn’t a bad judgment. Has the inflationary moment now arrived?
Last week, the latest figure showed CPI inflation stuck at 2.7pc. It looks likely, though, that in coming months it will rise, peaking at 3pc or above. According to the Bank of England, the rate will continue above the 2pc target for more than two years. To those of a cynical disposition, this represents the authorities pursuing the inflation solution by stealth, which they have been doing for a few years already. Actually, I don’t think that they are quite right. True, the authorities have tolerated high inflation rather than seeking to bring it down by tightening policy because they have judged that this would have depressed the economy. But I don’t think that they have actually welcomed the higher inflation as alleviating our predicament.
I demurred. Inflation might in the end be chosen, or it might just happen anyway,
I said, but the politicians and central bankers just weren’t ready for it yet. They had to try austerity for several years first.
If that looked like working, and especially if the economy revived, then the inflationary denouement would be avoided. It would be a repeat of what we have managed a few times before, working debt down gradually through a varying mixture of austerity, low interest rates, growth and mild inflation.
But if, after several years of austerity, the deficit was not appreciably lower and the economy showed scant sign of recovery, then higher inflation would seem attractive. Although I say it myself, that wasn’t a bad judgment. Has the inflationary moment now arrived?
Last week, the latest figure showed CPI inflation stuck at 2.7pc. It looks likely, though, that in coming months it will rise, peaking at 3pc or above. According to the Bank of England, the rate will continue above the 2pc target for more than two years. To those of a cynical disposition, this represents the authorities pursuing the inflation solution by stealth, which they have been doing for a few years already. Actually, I don’t think that they are quite right. True, the authorities have tolerated high inflation rather than seeking to bring it down by tightening policy because they have judged that this would have depressed the economy. But I don’t think that they have actually welcomed the higher inflation as alleviating our predicament.
I demurred. Inflation might in the end be chosen, or it might just happen anyway,
I said, but the politicians and central bankers just weren’t ready for it yet. They had to try austerity for several years first.
If that looked like working, and especially if the economy revived, then the inflationary denouement would be avoided. It would be a repeat of what we have managed a few times before, working debt down gradually through a varying mixture of austerity, low interest rates, growth and mild inflation.
But if, after several years of austerity, the deficit was not appreciably lower and the economy showed scant sign of recovery, then higher inflation would seem attractive. Although I say it myself, that wasn’t a bad judgment. Has the inflationary moment now arrived?
Last week, the latest figure showed CPI inflation stuck at 2.7pc. It looks likely, though, that in coming months it will rise, peaking at 3pc or above. According to the Bank of England, the rate will continue above the 2pc target for more than two years. To those of a cynical disposition, this represents the authorities pursuing the inflation solution by stealth, which they have been doing for a few years already. Actually, I don’t think that they are quite right. True, the authorities have tolerated high inflation rather than seeking to bring it down by tightening policy because they have judged that this would have depressed the economy. But I don’t think that they have actually welcomed the higher inflation as alleviating our predicament.
I demurred. Inflation might in the end be chosen, or it might just happen anyway,
I said, but the politicians and central bankers just weren’t ready for it yet. They had to try austerity for several years first.
If that looked like working, and especially if the economy revived, then the inflationary denouement would be avoided. It would be a repeat of what we have managed a few times before, working debt down gradually through a varying mixture of austerity, low interest rates, growth and mild inflation.
But if, after several years of austerity, the deficit was not appreciably lower and the economy showed scant sign of recovery, then higher inflation would seem attractive. Although I say it myself, that wasn’t a bad judgment. Has the inflationary moment now arrived?
Last week, the latest figure showed CPI inflation stuck at 2.7pc. It looks likely, though, that in coming months it will rise, peaking at 3pc or above. According to the Bank of England, the rate will continue above the 2pc target for more than two years. To those of a cynical disposition, this represents the authorities pursuing the inflation solution by stealth, which they have been doing for a few years already. Actually, I don’t think that they are quite right. True, the authorities have tolerated high inflation rather than seeking to bring it down by tightening policy because they have judged that this would have depressed the economy. But I don’t think that they have actually welcomed the higher inflation as alleviating our predicament.
I demurred. Inflation might in the end be chosen, or it might just happen anyway,
I said, but the politicians and central bankers just weren’t ready for it yet. They had to try austerity for several years first.
If that looked like working, and especially if the economy revived, then the inflationary denouement would be avoided. It would be a repeat of what we have managed a few times before, working debt down gradually through a varying mixture of austerity, low interest rates, growth and mild inflation.
But if, after several years of austerity, the deficit was not appreciably lower and the economy showed scant sign of recovery, then higher inflation would seem attractive. Although I say it myself, that wasn’t a bad judgment. Has the inflationary moment now arrived?
Last week, the latest figure showed CPI inflation stuck at 2.7pc. It looks likely, though, that in coming months it will rise, peaking at 3pc or above. According to the Bank of England, the rate will continue above the 2pc target for more than two years. To those of a cynical disposition, this represents the authorities pursuing the inflation solution by stealth, which they have been doing for a few years already. Actually, I don’t think that they are quite right. True, the authorities have tolerated high inflation rather than seeking to bring it down by tightening policy because they have judged that this would have depressed the economy. But I don’t think that they have actually welcomed the higher inflation as alleviating our predicament.
Italian political expert Alberto Nardelli has also published his latest predictions on the general election - he reckons that Pier Luigi Bersani's Democratic Party should win the lower house of parliament by around 5%, and could sweep the Senate (upper house) too -- if support for the far-left really crumbles.
He also predicts:
• Monti will get less than 15% of votes
• Beppe Grillo (of the Five Star Movement) will get more than 15%
• The far-left seriously risks not hitting the 4% threshold required to enter parliament
• The centre-left is within touching distance of winning in Lombardy, and consequently having a majority in the senate too. Bersani’s coalition is on course to win 145-168 seats (majority is 158).
Lombardy, along with Veneto, Sicily and Campania, holds the key to the Senate race -- they're the four swing states. Under Italian voting rules the winner in each region picks up 55% of the seats on offer, with the other parties sharing the rest.
If the far-left does falter, Bersani should pick up some of their support.
And Grillo's popularity means fewer seats for the other parties who fail to win a region -- which could benefit Bersani if he wins those swing states, but harm him where he doesn't.
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