Greece’s catastrophic 1930s-style depression is a salutary tale

 
Allister Heath
SORRY, but the fact that Greece collapsed at an annual rate of 4.6 per cent in the second quarter, rather than a little bit faster, isn’t good news. It’s terrible, awful, horrible news. Greek output is down by 23 per cent since 2008 and unemployment is at around 28 per cent; no wonder, given the shrinking economy, that gross tax revenues are continuing to undershoot targets.
Hyperbolic economists sometime claim that the UK has undergone a depression, which is nonsense – but Greece’s woes cannot be described in any other way. Its depression has been catastrophic, one of the worst ever recorded for any country in the modern, industrialised era (apart from during or immediately after a war). Its dramatic collapse reminds us that stupid economic policies can destroy a nation; depressions have not been banished from modern civilisation.
It may be, of course, that the collapse is beginning to abate and that the economy may finally stabilise next year. I’ll believe it when I see it; unless Greece’s money supply starts growing again, and demand begins to increase, a recovery is impossible. But Greece is just a tiny part of the Eurozone, so achieving such an outcome is even harder than in a country like the UK, especially given that the Greek financial crisis hasn’t really gone away. There is no way that Athens will meet its bailout targets and its debt burden is utterly unsustainable.
Single currencies can work, under certain very strict conditions: these include flexible labour markets, deregulated product markets, a mobile population, fiscal probity and a general commitment to free markets. Most southern European economies didn’t fulfil any of these conditions; politicians wrongly promised the public that social democracy would be compatible with the euro’s monetary discipline, and that they could have their cake and eat it. It was an atrocious lie. The Greek public was fooled, and will continue to pay the bitter price for years to come.
COALITION’S COMPETENCE
Sentiment about the UK economy is continuing to improve, and with it the government’s reputation for economic competence. The intensification of this trend poses a huge threat to Labour’s leadership. The latest ICM/Guardian poll reveals that the share of the public who believe that David Cameron and George Osborne are the most competent economic managers has shot up from 28 per cent to 40 per cent; by contrast, Ed Balls and Ed Miliband are at 24 per cent, up from 19 per cent. While it is interesting that Labour has also benefited from the economic upturn, the Tory lead is huge.
Yet Labour continues to lead (by 35 per cent to 32 per cent); Ukip may have fallen out of fashion with the commentariat but it continues to collect an extremely high proportion of votes, rising by three points to 10 per cent in the ICM survey. Labour’s inbuilt advantage in Britain’s ridiculous electoral system, combined with the rise of Ukip, mean that it will take much more than improved optimism for the Tories to have even the remotest hope of winning the next election.
QE’S FAILURE
America’s experiment with QE has just been assessed by a team of economists. Some of their findings may be relevant for the UK. In a paper for the Federal Reserve Bank of San Francisco, Vasco Curdia and Andrea Ferrero are dismissive.
They find that QE2 added just 0.13 percentage points to GDP growth in late 2010 and 0.03 percentage points to inflation; that the bulk of this was thanks to forward guidance (without it, GDP would have risen 0.04 per cent and inflation 0.02 per cent) and that cutting rates by a quarter of a point has a bigger effect than QE2. Given QE’s side-effects, it’s not exactly what you call a great policy.
allister.heath@cityam.com
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