Europe's economic crisis: Light at the end of the tunnel?

Source: Antonio Fatas, based on IMF data.

Is that a faint glimmer light at the end of the European economic tunnel? Or is it just a bunch of conservative politicians brandishing torches and yelling: “Look, a light at the end of the tunnel”?

The “Light-At-The-End-Of-The-Tunnel” mantra is a vital part of conservative government strategy in depressed Portugal, Greece, Ireland and Spain (the European “periphery”).

Every skerrick of non-disastrous economic news gets boosted as proof of a coming resurrection ― and one more reason why people should forget about revolt in the streets or ballot box.

However, it’s still touch-and-go, especially in Greece and the Spanish state.

In Spain, the faintest flicker of light ― like the 0.1% rise in Gross Domestic Product in the third quarter ― gets portrayed as the new dawn. Only malevolent spoilsports point out that this result was largely due to people bringing forward consumption spending to beat a coming sales tax rise.

In the “periphery” (as opposed to “core” economies like Germany and Austria), the “good news” consists of three trends: the stability of the banking sector has risen, as shown by rising debt repayment and decreased borrowing from the European Central Bank; there’s growing “market confidence” that governments will not default on their debt; and the profits of the biggest companies have grown (in Spain up 13% in the year to September).

In the Spanish state, unemployment growth is slowing and the current account (difference between export income and spending on imports) has registered its first surplus in 20 years.

Portugal and Ireland are also running current account surpluses, as exports rise on the back of growing “competitiveness” (basically, falling real wages).

“Exports” also include a vast fire sale of domestic real estate to foreign residents. Along Spain’s Mediterranean coast, desirable property has been flogged off to the Russian, Chinese and Latin American rich.

But we’ve seen this before. During the 2010-11 upturn, which sputtered out into the 2012-13 downturn, GDP growth nudged briefly above zero (except for Greece, which has been in recession for five years straight). Will today’s “positive indicators” also fizzle out?

The latest European Economic Forecast for the European Union and the euro zone is cautious. It indicates a “slow and still vulnerable expansion of economic activity” has set in, and “next year, economic activity is projected to expand by 1.5% in the EU and 1% in the euro area before accelerating to 2% and 1.75%, respectively”.

Given that 2% growth is needed to cut back unemployment, the forecast also expects “only a very modest improvement of the labour market situation”.

‘Business upturn’

Both private and public investment ― with a rise in at least one is required to create an economic upswing ― remains in very bad shape in the “periphery”.

With very few exceptions (such as hedge funds investing in ultra-luxurious tourism projects in Spain), private capital is waiting for evidence that it is worthwhile risking money on new production capacity instead of on financial assets (that is, on claims to already created wealth).

In Spain, total investment fell from 30.7% of GDP in 2007 to 19.2% last year. It is forecast by Eurostat to sink to 16% in 2015.

In Greece, it halved from 26.6% of GDP to 13% from 2007 to this year (forecast to rise to 14.7% by 2015).

In Ireland, the investment slump over the same period was 25.6% to 10.7% (forecast to “recover” to 11.8%), while for Portugal the numbers are 22.2%, 15% and 16%.

It’s not that “purchasing power” for private investment is lacking ― profit share in national income has been steadily expanding (in Spain it now matches that of labour income at 45%). Since 2008, annual Spanish dividend payments have ranged between 2% and 4% of GDP, five times as much as in 2000.

As for public investment, it “cannot” rise because of the “need” to meet government budget deficit targets imposed by the European Commission. Already in retreat before 30 years of attack from neoliberalism, public investment has been cut to the bone (in Spain from 4.5% of GDP in 2009 to 1.7% last year.

So, barring a major left shift in European politics, with governments funding a New Deal-style upswing by taxing the rich, any recovery can only take place in accordance with the “natural” rhythm of private investment.


What are the chances that some of those billions in dividends and holdings of Spanish government debt will make their way into productive investment? The disincentives are strong.

Firstly, the backlog of unsold real estate from the 2002-2007 housing bubble is far from cleared, and the sell-off is slowing.

The latest report on Spain’s “financial sector reform” by the International Monetary Fund notes: “The very limited amount of new housing starts and completion ― now about 15,000 per quarter, a record low and fraction of the 170,000 units per quarter during the 2004-2007 boom ― suggests that a significant overhang of supply remains.”

Actually, the overhang is around three million units. In many banks stuck with depreciating housing stock, discussion has turned to whether demolition wouldn’t be the most rational course!

The restabilisation of the financial system therefore remains fragile. Spanish bank profits are up because of transfusions from the European Central Bank and government rescue packages that now total 2600 euro for every inhabitant.

The mortgage default rate for November hit its highest level in 50 years (12.7% of all loans). Spanish banks are also lumbered with 71 billion euros of low-quality “assets” that will soon be excluded from calculations of bank capital, further lowering their ability to lend (credit to non-finance business already fell 6.75% in the year to October).

Household consumption in Spain, which has already fallen 9% since 2009, is predicted to stagnate next year. This is not surprising, as average household income fell by 10.5% from 2008 to last year.

At the same time, with 6 million unemployed, household income has shrunk so much that, despite vast efforts to pay off household debt, it has barely fallen as a proportion of income.

In Greece, the consumption collapse is even more dramatic, driven by a 40% fall in average real income since 2008.

Other flashing red lights include falling business activity, stubbornly high corporate debt (for Spain the highest in the EU, more than 150% of GDP), and bankruptcies of major firms.

Given these trends, it is no surprise that EU targets for government deficit cuts are not being met. In Spain, despite a brutal onslaught on spending on health, education and social welfare, the budget deficit target for this year was passed in October, while public-sector debt just keeps climbing (to 92.6% of GDP compared with 35% in 2007).

Finally, both the European Commission and the IMF continue to insist the only way to guarantee an upturn in private investment is to keep improving “competitiveness”: hence we see changed rules in Greece to facilitate mass layoffs and EU pressure for a second round of labour market “reform” in Spain.

A planned Spanish “pension reform” will slice at least 33 billion euros from retirement income by 2022. The IMF even floated a proposal for a general 10% wage cut for Spain, a proposal so extreme that the Spanish employer confederation CEOE opposed it as “inappropriate”.

External salvation?

The obsession with competitiveness partly arises from the export growth achieved during the slump through “internal devaluation” (again, cuts to real wages) by the “periphery”.

Why not keep slicing away at wages and create more successes ― more wine to the “new middle classes” of India and China, more frigates to Australia, more high-speed trains to the Arab world?

The problem is the price of export success won through wage cuts becomes increasingly high in terms of reduced internal demand. Can extra income created in export industries offset that lost to industries producing for a stagnating internal market?

Moreover, the more economies try to export their way out of stagnation on the back of wage restraint, the more this dynamic spreads internationally. In the Spanish case, there’s also no export sector that can take the place of the once-bloated building sector.

“Salvation-through-exports” doesn’t take us out of the European tunnel but to the reality that it’s a branch of an even bigger tunnel, that of stagnation across the advanced capitalist world.

The crash in investment in the European periphery is just the extreme of a general fall (see above graphic), producing what former US treasury secretary Larry Summers called “secular stagnation” at a November 8 IMF research conference.

Daniel Gros of the Centre for European Policy Studies said: “The recovery will be as slow as it is long: you have to remember Germany and its crisis, which began in 1995 and only ended in 2005.”

According to the IMF’s “men in black” in Spain, growth for next year will be somewhere between a “best case” scenario of 0.3% and an “adverse case” scenario of -0.3%. Unemployment could fall to 23.4% or rise to 27.2%.

Given this, a serious rise in public investment is the only way to achieve lasting “upswing” in Europe. This depends on the arrival of left governments that believe in it ― nationally, and at European level.

[Dick Nichols is Green Left Weekly’s European correspondent. A more detailed version of this article will appear online at Links International Journal of Socialist Renewal.]

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