For 48 hours, it looked as if Thursday, October 16, 2014 might join similar October Thursdays in 1907, 1929 and 1979 as another dramatic moment when sharemarket panic triggered economic downturn.
However, it was not to be. The US$3 trillion slump in world sharemarket values in the first two-and-half-weeks of October had, by October 24, been partially reversed by a coordinated effort of “calm engineering” by central bankers.
But how long can that treatment ― whose message to the gambling fund managers is that interest rates will stay low ― succeed?
Europe is the weakest link in the global economic chain. Within Europe, the weakest links are the stagnating economies of its southern “periphery”.
No surprise, then, that in the first two weeks of this month the Madrid stock exchange’s Ibex 35 lost 10.7%. The yield on Spanish public debt jumped from 2.05% to 2.3%.
In Greece, the Athens stock exchange, which had lost 11.9% over the year to September 30, surrendered a further 16% in the first two weeks of this month. It partially recovered to be 17.5% down on October 22.
Speculator jumpiness was particularly marked because of Greece's conservative government's talk of early exit from the European Union (EU), International Monetary Fund (IMF) and European Central Bank (ECB) “bailout” ― and because of the rising lead of left party Syriza in opinion polls.
The underlying cause of the sell-offs across Europe's finance markets has been the region’s very sluggish and uneven economic recovery and a recent run of “negative data”.
Is the EU about to topple into its third recession since 2008? This would not only torpedo company profits, but also revive the euro crisis that ECB action has appeared to contain.
For the fund managers, the thought that their zillions of “peripheral” European government debt might again have to be “restructured” provoked a semi-stampede from risk. This flight led the Greek 10-year bond rate to jump from 5.57% to 8.96% between September 8 and October 16. It fell to 7.53% on October 22, as some “players” tip toed back into the market.
Monetary policy impotent
The speculators are right to be jumpy. Not only has evidence of economic slowdown been growing, so too have the entrenched differences among European economic policymakers over how to respond.
For its part, the IMF assigns a 40% probability to recession striking Europe within a year.
At the heart of the malaise lies the ongoing collapse in private investment. So far, this slump has almost totally failed to respond to treatments applied by the ECB. Real demand in the eurozone in mid-2014 was still 5% lower than at the start of 2008.
Since 2011, the ECB has cut its base lending rate to a record low 0.05%, essentially handing private banks trillions of euros. However, this extremely easy money has not flowed through into lending to businesses at low rates.
Rather, banks have bought government debt and used the guaranteed taxpayer-funded proceeds to pay off their own debts. Today, for example, Spanish banks who access ECB funds at 0.5% still charge business customers about 5% for a €1 million loan.
In July, once it had become undeniable that the banks were mainly using cheap ECB funds to repair their own balance sheets, the ECB launched its Targeted Longer-Term Refinancing Operations. This is an incentive scheme to induce lending to “non-finance sector” customers at low rates of interest.
However, when the first offer of €400 billion under the scheme was launched on September 17, the banks borrowed only €82.7 billion. This confirmed that lack of access to credit, while certainly damaging small and medium business in southern Europe, was not the main factor stopping investment and employment from recovering.
Sources of stagnation
The root cause is the lack of profitable investment opportunities in production, even as big capital is nearly drowning in retained earnings.
The Europe-wide shortfall in demand arising from the investment slump is also confirmed by the continuing decline in the annual EU inflation rate. It fell to a new low of 0.4% in September and was zero or negative in four of the crisis-hit countries of the “periphery” ― Greece, Portugal, Spain and Italy.
In this context, even if ECB president Mario Draghi were to override the German Bundesbank's resistance to the ECB conducting “unconventional” monetary easing along the lines of the US Federal Reserve, it is hard to imagine how any purely monetary manoeuvres could kick-start enough private investment to definitely ward off recession.
Since the economic crisis struck in 2008, the main component of demand, final consumption, has stagnated across the EU. It rose by only 0.2% a year, to last year. In the “periphery”, consumption has fallen by 1.9% a year on average over the same period. Household savings declined at a similar rate.
As for “net exports” (the surplus of exports over imports) ― the motor of German growth and the supposed economic hope for the countries that have increased “competitiveness” through wage cuts ―its growth averaged 8.8% for the whole EU in 2011-2012, but fell to 2% for 2012-2013.
For Germany the respective numbers were 11.6% and 2.1% and for the “peripheral” five economies 7.1% and 2%.
In August, seasonally adjusted German exports fell by 5.8% over July, their biggest fall since January, as foreign demand for German production declined, both inside the EU but also in the US and Asia.
Also in August, industrial production for the whole EU was down 0.8% over the previous year. The biggest falls were in the sectors most closely related to investment ― capital goods (2.3%) and energy (3.3%).
For the eurozone, the numbers were even worse, with respective falls of 1.9%, 3.7% and 3.5%.
Public investment
The evidence of the costs of stagnant investment has now become so strong that IMF chief economist Oliver Blanchard has called on Germany to take advantage of its very low borrowing costs to raise its deficit and fund public investment in infrastructure.
According to Blanchard, this would increase demand across the EU and help growth in the “periphery”.
However, Bundesbank president Jens Weidmann gave Blanchard's suggestion a frosty response in an October 17 speech to a Bank of Latvia conference. Claiming that “the boost to the peripheral countries from an increase in German public investment is … likely to be negligible”, Weidmann added: “Germany is not in need of stimulus either.”
So what are Greece and Spain, with their 25% plus unemployment, and France and Italy, where a third recession looms, supposed to do?
Lamenting the emergence of a French-Italian bloc in favour of disregarding the rules of the EU fiscal pact, the Bundesbank president’s response was predictable: more business-friendly deregulation, labour market reform and fiscal discipline ― and tougher penalties for countries violating the rules.
If such measures had enabled Germany to build export-led growth after 2004, everyone else should follow suit.
Weidmann concluded: “The biggest bottleneck for growth in the euro area is … the structural barriers that impede competition, innovation and productivity.”
Given these views, mostly supported by German Chancellor Angela Merkel, it was hard to see how the October 23 Franco-German meeting of economic ministers, supposedly targeted at kick-starting growth, would be anything other than one more EU talkfest.
Greece's triple insolvency
But the Bundesbank position not only threatens to guarantee a third European recession in seven years; it does so when rising popular anger is raising the chances of EU-disobedient governments coming to power, most immediately in Greece, but also, given the rise of Podemos, in Spain.
This is not lost on more acute ruling-class observers. These include private equity executive Charles Dallara, former head of the Institute of International Finance, which helped orchestrate Greece’s 2012 debt restructuring.
Dallara not only supports Germany adopting expansionary policies, but also proposes a one-to-two-year moratorium on cutting public debt. On October 16, he told Bloomberg that “it goes to a recognition that we are in extremis again”.
Financial Times commentator Martin Wolf gave a similar message on October 21, saying: “Germany should both refinance its debt at such rates and borrow to finance additional public investment ... The markets are screaming: borrow.”
Unfortunately, the European economic malaise is so entrenched that a two-year debt reduction moratorium and some increased public investment by Germany, while positive, will not change much ― especially in Greece.
That’s because, in the words of economist Yanis Varoufakis, “The euro crisis never went away. What happened was that Mr Draghi’s skillful interventions in the summer of 2012 suppressed the crisis in the bond markets but, at the same time, pushed it deeper into the foundations of the real economy…
“It was inevitable that, as the crisis was wrecking these foundations ... it would resurface.”
As for Greece: “It is in the clasps of a triple insolvency: an insolvent state, insolvent banks and an insolvent private sector … Until and unless we have a new agreement [with the EU, imposed by a Syriza government], everything Europe and the IMF will do will remain in the realm of window-dressing.”
By the same token, however, if a Syriza government can force through its program of radical debt renegotiation, higher working-class incomes and greater public investment funded by higher taxes on the rich, then the start of the only possible road out of austerity will become visible.
[Dick Nichols is Green Left Weekly’s European correspondent, based in Barcelona. A longer version of this article will soon appear at Links International Journal of Socialist Renewal. Data is from Eurostat.]
Like the article? Subscribe to Green Left now! You can also like us on Facebook and follow us on Twitter.