Greece and the return of the economic ‘death spiral’
The lesson of 2008 was that stimulus prevented a new Great Depression. Without similar drastic help, Greece will now default.
During the latter part of 2008, central bankers around the world worried secretly that the death spiral was approaching. The concern was that it was too late to stop economies crashing. In the event, concerted international action on both monetary and fiscal policy prevented collapse – although they did get pretty darn close to the precipice.
Interest rates were cut to zero. Banks and even car companies were rescued. Massive amounts of liquidity were made available. There were tax cuts, cash for clunkers and even fridges, along with schemes to help the young unemployed. Plus the collapse came very quickly.
In the UK, then Chancellor Alistair Darling had only a few hours notice that the Royal Bank of Scotland was about to fail. The fear was that cash machines around the world would close, banks would fold and stock markets would tank within hours. This was a once-in-100-year shock: in my view, without such unprecedented intervention, unemployment rates in the US and Europe could well have risen to over 24% – which is where they are already in Greece and Spain.
Stimulus worked, simple as that.
Germany threw wads of cash at the problem, notably through its short-work (or Kurzarbeit) programme, by which companies could temporarily move employees onto shorter work schedules when demand was weak. Companies paid only for the hours worked, while the government provided up to two thirds of the workers’ remaining wages. As a result, German unemployment fell, whereas the percentage of jobless in the US reached double digits in October 2009 in the United States.
Other European countries, such as the UK, saw much smaller increases in unemployment than I had expected, given the scale of the shock. But this thing is not over, not by a long way. Unemployment is now falling in the US and rising in many eurozone countries including France, the Netherlands, as well as all the PIIG countries of Portugal, Ireland, Italyand Greece; plus the UK.
Even with all that loosening of macroeconomic policy, output still fell sharply in most countries during 2008 and 2009; and even today, many have not returned to pre-recession levels of output. If we take the first quarter of 2008 as the start of the recession, output is still markedly lower in Denmark (-5.4%); Finland (-2.2%); Greece (-9.4%); Ireland (-12.1%); Italy (-4.4%); Spain (-3.2%) and the UK (-3.8%). Data presented by NIESR last week showed that the current recession in the UK, for example, has lasted longer and is of comparable depth, than the Great Depression and after four years of what JM Keynes called “the long, dragging conditions of semi-slump”, not even half of the loss has been recovered. The main countries that have more than recovered their lost output are Canada (+2.9%); Germany (+1.8%); Sweden (+3.7%) and the United States (+0.8%).
That brings us to Greece, whose government is trying to negotiate the umpteenth and final package to solve the problem. Output is down, as I noted above, and still falling. The Greek government faces a €14.5bn bond payment on 20 March that it looks extremely unlikely to be able to make. Ten-year bond yields have reached 29.8% in Greece – and they are now 11.6% in Portugal, which is also going to have to be rescued. Germany has taken away any hope Greece had of recovery.
On 9 February, the Hellenic statistical authority, which is Greece’s central statistical office, published data on the labor market and industrial production (pdf), which suggests the Greek economy is headed over the cliff. This is a Great Depression for Greece and its 11 million inhabitants.
In the latest month for which we have data, the number of unemployed for November 2011 increased by a massive 126,000, compared with October 2011, to stand at over 1 million. The unemployment rate in November 2011 is now 20.9%, compared to 18.2% in October 2011. The youth unemployment rate is 48%, and the unemployment rate for females (24.5%) is higher than for males (18.3%). Evidence from other measures of labour market slack are equally horrendous: the number of employed decreased by 406,000, compared with November 2010 (a 9.4% rate of decrease), and by 165,00 persons compared with October 2011 (a 4.0% rate of decrease).
Industrial production in Greece is falling through the floor. The Production Index in Industry (IPI) in December 2011 (pdf), compared with December 2010, was down 11.3%, while manufacturing production decreased by 15.5%. As might be expected, consumer confidence in Greece has also collapsed, as can be seen from the chart that plots the EU Commission’s survey of consumer confidence.
Source: EU Commission
So, don’t expect the consumer to start spending any time ever. Portugal and Italy don’t look far behind.
The major problems in Greece that are constraining growth have still not been addressed. According to the United Nations, Greece ranks 100th in the world in terms of the ease of doing business, just beaten out by Yemen, in 99th place, and Vietnam, in 98th place. It ranks 135th in terms of the ease of starting a business and 158th in terms of paying taxes, below Uzbekistan in 157th place. Without reforms to its product and labor markets, alongside the introduction of a fully-functioning tax system with enforced compliance, Greece has no future and is headed to inevitable default.
The only issue is, how disorderly will it be? It’s not so much that the Greeks won’t pay, it’s that they can’t. Greece remains uncompetitive.
For all the deals being signed in Athens and Brussels, the Greek people have worked out that they have no hope; protest and social unrest now looks a rational option to the ordinary people who are bearing the cost to bail out European banks. Cuts in the minimum wage right now are probably not very smart politics.
Greece does still have a card to play – which is “one down, all down”. An exit from the euro would result in a depreciated drachma, which would potentially give a much needed boost to tourism. And that sounds better than all other alternatives currently on offer. There is still time for Germany’s Angela Merkel to get out her cheque book; but otherwise, it’s all over – and quite possibly very quickly.
This really is what a death spiral looks like.