The sick men of Europe

Of all the threats to a strong and lasting global recovery, few are as worrying at the ailing Italy, France and Germany

It was President Truman who begged his staff to find him a one-armed economist, so frustrated had he become with his economic advisers answering his questions “on the one hand… but on the other hand”.

Perhaps President Obama feels the same way about his chair of the Federal Reserve, Janet Yellen. Her keynote speech at the Jackson Hole symposium was a model of even-handedness. If there was much of a message to discern, it was that, across the West, wages are in no danger of taking off, and that, therefore, interest rates need not go higher sooner than thought. Well, we knew that.

Her sentiments echo those recently voiced by the Governor of the Bank of England, Mark Carney, and confirm the view that, at least in the US and the UK, monetary policy need not be loosened any further, and that rates will rise in “baby steps” sometime towards the end of this year or early 2015. Wage inflation, despite the strength of the apparent recovery in the labour market, is subdued. That, in turn, is because there may be more slack in the labour market than some suppose and, more fundamentally, because of a sluggish growth in productivity, itself a consequence of depressed industrial investment. Newer computers, machine tools, vehicles, buildings and rolling stock tend to be more efficient than older kit.

Comforting, to a degree, as such observations may be, the world needs to be much more concerned about the failure of the eurozone to emerge from what will soon be a whole wasted decade of stagnation. The daily headlines about the crisis in the eurozone are no longer there, but the disappearance of inflation across much of continental Europe is no cause for celebration, as it is a symptom of chronically depressed demand rather than economies radically driving down their cost bases, and makes it harder for households, firms and governments to inflate their way out of their debts.

Alongside such deflation, we see unemployment at levels that threaten social stability as well as economic progress. Two failing economies stand out: Italy, now falling into a triple-dip recession; and France, where François Hollande is following a policy path previously, and painfully, trodden by François Mitterrand in the 1980s – a short-lived experiment in socialist expansion followed by bitter disappointment, retrenchment and despair. As the second and third largest economies in the eurozone, and some of the largest in the world, their frailties threaten us all.

Still more disturbing is the slowdown in Germany. In part this is an illusion; such was the recent clip of growth, driven by demand for her manufactures and capital goods from east Asia, that any slowdown will seem much more grievous than it in fact is. On the other hand, to fall into the economists’ bad habit for a moment, it is still a serious concern if the main locomotive of growth in the eurozone – and source of all those bailout funds – is not motoring as quickly.

This leads us to the slowdown in emerging markets, especially China. It seems only yesterday that the Brics were the darlings of the global investment community. They are not now. Brazil is a tragic disappointment, symbolised by its flop in the World Cup; Russia is a pariah; and China’s opaque and overextended banks add to longer-term problems of unbalanced growth. While inflation is a mere memory, almost an aspiration, in Europe, in India it remains a potent threat to growth. On those bigger issues Ms Yellen had little novel to impart. Harry Truman would not have been impressed.