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Echoes of Greece in Britain's growing reliance on debt-fuelled growth
Greece's predicament was caused by the madness of the euro, which pumped up the economy with debt only to crush it down again. Worryingly, Britain's recovery is based largely on rising levels of debt, too
Fireworks over the Acropolis after Greece joins the euro Photo: EPA
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By Jeremy Warner
7:13PM BST 30 Jun 2015
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Like many of my generation, I managed to idle away several glorious summers of my misspent youth backpacking around Greece and its islands. Frozen in time, it was back then a country unspoilt and substantially untouched by many of the afflictions and concerns of the modern world. And it was, of course, relatively poor.
Just before the crisis, I returned to find seemingly everyone driving around in BMWs and Porsches, air-conditioning was commonplace, and most people seemed well off, confident in their “Europeanism”, and prosperous. In some respects, it was an impressive advance, but it did leave me somewhat incredulous. How was it possible to cram so much development into such a short space of time?
The answer is now obvious. It was not possible at all; this was a transformation built largely on debt, not genuine progress. The route causes of Greece’s boom, together with its subsequent devastating bust, are moreover now equally manifest; it was the wretched euro. Europe’s experiment with monetary union first pumped things up, then by denying Greece and others the fiscal and monetary tools to smooth the inevitable adjustment, thumped them down again.
It is also now obvious why the single currency has failed in this way. The cart was put before the horse, with the euro launched before any of the defining characteristics of a successful monetary union had been put in place.
There is no banking union, allowing financial liabilities to be mutualised between states, and there is no fiscal union, so that depressed regions can be supported by more prosperous ones through commonly applied government spending. In economic terms, the euro is little more than a glorified fixed exchange rate system. All such arrangements are ultimately doomed.
Unfortunately, it is proving extraordinarily difficult and troublesome to admit these truths, which is why whatever is eventually cobbled together to prevent Greece from leaving can never be a lasting solution. If a deal is done, Syriza will no doubt claim some sort of a victory, and the eurozone will congratulate itself on saving the single currency, but for Greece and others the underlying reality will be that of the same old penury as before.
Brussels does admittedly have a reasonably good grasp of what needs to be done to make Europe’s monetary union “complete”, as it quaintly puts it. But as things stand, these ambitions are just fantasy. There is no chance of common deposit insurance, a common Treasury and of common social insurance arrangements, nor are there the political institutions to give these functions democratic legitimacy even if they could be agreed.
Disintegration between nations, the very reverse of what the euro needs to succeed, is the order of the day. All over the shop, not least in its negotiations with Britain, the EU is being forced to cede ground. The rallying cry of “more Europe” is becoming one of “less Europe”.
Genuine federalism is, at best, decades away, and in the meantime, what is Europe to do; simply stagger from one economically debilitating crisis to the next? This is the all too likely prospect.
Now turn to Britain, whose escape has been a lucky one. Britain’s good fortune was to have had early experience of the economic damage a fixed exchange rate with Germany is capable of inflicting. The debacle of the European Exchange Rate Mechanism so poisoned the British political psyche against Europe that there was, from then on, no prospect of ever signing up to the madness of the single currency.
This has stood the nation in good stead. Despite a banking crisis that was initially much worse than anything experienced on the Continent, Britain has weathered the storm far better than any other major European economy bar Germany.
Part of the reason is simply that of size, rule of law and free and open markets – characteristics not enjoyed by the likes of Greece.
But it is also to do with use of fiscal and monetary policy to stretch and mitigate the adjustment, policy tools denied to much of the eurozone. The dividend is evident in Tuesday’s GDP figures. UK growth for last year has been revised up to 3pc, and for the first quarter to 0.4pc, putting Britain on track to again be the fastest growing economy in the G7 this year.
The downside of the British approach is that even after five years of fiscal consolidation, there is still more left to do in eradicating the deficit, and in the meantime, public debt continues to accumulate. This has led many on the Continent to dismiss the British recovery as little more than a mirage, bought at the expense of the long-term future – pain delayed, or at least extended, rather than eradicated altogether.
Support for this view is found in a number of worrying aspects to the latest data. Consumption growth is once again running ahead of income, while the first quarter current account deficit is a shocking 5.8pc of output.
Ever more insistently, the statistics point to a return to the old, unbalanced form of pre-crisis growth - highly reliant as it was on debt-fuelled consumer and government demand - and of a country that continues to live substantially beyond its means.
The irony is that as long as the eurozone continues to starve itself of growth, this may be the only form of economic advance available to Britain. It is one of the basic truths of economics that one man's saving is another man's income.
The more that is saved in an economy, the more it crimps growth. Britain gets it, possibly a little too much; the eurozone is still struggling with first principles. In any case, the eurozone's paralysis forces the UK to stimulate domestic demand through fiscal and monetary means in order to keep unemployment low. Eventually, this will result in a new financial crisis.
Forecasts by the Office for Budget Responsibility back this worrying view of the future, with the savings rate expected to continue falling, and household debt relative to income returning to the heightened levels that existed before the Lehman crisis. There is no comparison with Greece, whose membership of the euro turbo-charged both the boom and the bust. Also true, however, is that Britain cannot forever keep living on rising levels of debt.
Whereas the eurozone has forced the pace of fiscal adjustment, disastrously it should be said, Britain has responded with what may prove to be an unsustainable degree of policy accommodation.
In its annual report this week, the Bank for International Settlements made the following observation: That economies must “rely less on demand management policies and more on structural ones, so as to abandon the debt-fuelled model that have acted as a political and social substitute for productivity-enhancing reforms. Short-term gain risks being bought at the cost of long term pain."
Quite so.
Greece's predicament was caused by the madness of the euro, which pumped up the economy with debt only to crush it down again. Worryingly, Britain's recovery is based largely on rising levels of debt, too
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Fireworks over the Acropolis after Greece joins the euro Photo: EPA Get a free trial subscription to Telegraph Dating Join Telegraph Dating and get a free seven-day trial subscription. Offer ends Sunday 5th July.Sponsored by Telegraph Dating
By Jeremy Warner
7:13PM BST 30 Jun 2015
Follow
Comment Like many of my generation, I managed to idle away several glorious summers of my misspent youth backpacking around Greece and its islands. Frozen in time, it was back then a country unspoilt and substantially untouched by many of the afflictions and concerns of the modern world. And it was, of course, relatively poor.
Just before the crisis, I returned to find seemingly everyone driving around in BMWs and Porsches, air-conditioning was commonplace, and most people seemed well off, confident in their “Europeanism”, and prosperous. In some respects, it was an impressive advance, but it did leave me somewhat incredulous. How was it possible to cram so much development into such a short space of time?
The answer is now obvious. It was not possible at all; this was a transformation built largely on debt, not genuine progress. The route causes of Greece’s boom, together with its subsequent devastating bust, are moreover now equally manifest; it was the wretched euro. Europe’s experiment with monetary union first pumped things up, then by denying Greece and others the fiscal and monetary tools to smooth the inevitable adjustment, thumped them down again.
It is also now obvious why the single currency has failed in this way. The cart was put before the horse, with the euro launched before any of the defining characteristics of a successful monetary union had been put in place.
There is no banking union, allowing financial liabilities to be mutualised between states, and there is no fiscal union, so that depressed regions can be supported by more prosperous ones through commonly applied government spending. In economic terms, the euro is little more than a glorified fixed exchange rate system. All such arrangements are ultimately doomed.
Unfortunately, it is proving extraordinarily difficult and troublesome to admit these truths, which is why whatever is eventually cobbled together to prevent Greece from leaving can never be a lasting solution. If a deal is done, Syriza will no doubt claim some sort of a victory, and the eurozone will congratulate itself on saving the single currency, but for Greece and others the underlying reality will be that of the same old penury as before.
Brussels does admittedly have a reasonably good grasp of what needs to be done to make Europe’s monetary union “complete”, as it quaintly puts it. But as things stand, these ambitions are just fantasy. There is no chance of common deposit insurance, a common Treasury and of common social insurance arrangements, nor are there the political institutions to give these functions democratic legitimacy even if they could be agreed.
Disintegration between nations, the very reverse of what the euro needs to succeed, is the order of the day. All over the shop, not least in its negotiations with Britain, the EU is being forced to cede ground. The rallying cry of “more Europe” is becoming one of “less Europe”.
Genuine federalism is, at best, decades away, and in the meantime, what is Europe to do; simply stagger from one economically debilitating crisis to the next? This is the all too likely prospect.
Now turn to Britain, whose escape has been a lucky one. Britain’s good fortune was to have had early experience of the economic damage a fixed exchange rate with Germany is capable of inflicting. The debacle of the European Exchange Rate Mechanism so poisoned the British political psyche against Europe that there was, from then on, no prospect of ever signing up to the madness of the single currency.
This has stood the nation in good stead. Despite a banking crisis that was initially much worse than anything experienced on the Continent, Britain has weathered the storm far better than any other major European economy bar Germany.
Part of the reason is simply that of size, rule of law and free and open markets – characteristics not enjoyed by the likes of Greece.
But it is also to do with use of fiscal and monetary policy to stretch and mitigate the adjustment, policy tools denied to much of the eurozone. The dividend is evident in Tuesday’s GDP figures. UK growth for last year has been revised up to 3pc, and for the first quarter to 0.4pc, putting Britain on track to again be the fastest growing economy in the G7 this year.
The downside of the British approach is that even after five years of fiscal consolidation, there is still more left to do in eradicating the deficit, and in the meantime, public debt continues to accumulate. This has led many on the Continent to dismiss the British recovery as little more than a mirage, bought at the expense of the long-term future – pain delayed, or at least extended, rather than eradicated altogether.
Support for this view is found in a number of worrying aspects to the latest data. Consumption growth is once again running ahead of income, while the first quarter current account deficit is a shocking 5.8pc of output.
Ever more insistently, the statistics point to a return to the old, unbalanced form of pre-crisis growth - highly reliant as it was on debt-fuelled consumer and government demand - and of a country that continues to live substantially beyond its means.
The irony is that as long as the eurozone continues to starve itself of growth, this may be the only form of economic advance available to Britain. It is one of the basic truths of economics that one man's saving is another man's income.
The more that is saved in an economy, the more it crimps growth. Britain gets it, possibly a little too much; the eurozone is still struggling with first principles. In any case, the eurozone's paralysis forces the UK to stimulate domestic demand through fiscal and monetary means in order to keep unemployment low. Eventually, this will result in a new financial crisis.
Forecasts by the Office for Budget Responsibility back this worrying view of the future, with the savings rate expected to continue falling, and household debt relative to income returning to the heightened levels that existed before the Lehman crisis. There is no comparison with Greece, whose membership of the euro turbo-charged both the boom and the bust. Also true, however, is that Britain cannot forever keep living on rising levels of debt.
Whereas the eurozone has forced the pace of fiscal adjustment, disastrously it should be said, Britain has responded with what may prove to be an unsustainable degree of policy accommodation.
In its annual report this week, the Bank for International Settlements made the following observation: That economies must “rely less on demand management policies and more on structural ones, so as to abandon the debt-fuelled model that have acted as a political and social substitute for productivity-enhancing reforms. Short-term gain risks being bought at the cost of long term pain."
Quite so.
Comment