Total GDP growth in both the EU and the eurozone was 1.7% - sluggish but not entirely unexpected, compared to 3.2% growth in the US and a 0.5% contraction in the UK.
A clear pattern seems to be emerging after the European Union’s statistics office, Eurostat, released its figures showing that the eurozone economy grew by a lower than expected 0.3 per cent in Q4 2010, with the growth figure for the EU as a whole 0.2%. This meant that total GDP growth in both the EU and the eurozone was 1.7% – sluggish but not entirely unexpected after a turbulent year.
Andreas Rees of Unicredit has taken the George Osborne approach and blamed most of Germany’s lower than expected 0.4% growth on the adverse winter weather, although at least Germany had growth as opposed to the 0.5% contraction in the UK. However, a look across the Atlantic indicates a slightly different picture.
The US GDP figures for Q4 showed that the US economy grew at an annualised rate of 3.2% (despite the snow), much faster than the 2.6% annualised rate it achieved in Q3. This meant that 2010 was the best year for the US economy for five years, with GDP expanding by 2.9%. What should be of particular interest are the reasons for the rapid increase in US growth, namely, higher than expected export levels alongside the strongest level of consumer spending for more than four years.
The US, unlike most EU countries, is still pursuing stimulus measures and the signs are that this is working. Although it still has a high budget deficit, it is widely expected to be one of the fastest growing economies in 2011, meaning that its deficit will reduce faster than most European countries where collective austerity measures will limit the possibility of an export driven recovery and consumer demand.
Contrast this with the UK and other EU countries. Although manufacturing driven economies such as Germany and, to a lesser extent, France, have seen decent growth in 2010 and will drive European growth rates in 2011, countries that are more dependent on consumer demand and have made the most painful austerity cuts are in deep trouble.
For example, the Greek economy contracted by 6.6% in 2010, and 1.4% in Q4, while Spain and Portugal had between 0% and 0.5% growth throughout most of 2010.
With inflation hitting 4% and expecting to remain between 4% and 5% in 2011, it is very difficult to see consumer spending picking up in the UK. The combination of the VAT rise and rising inflation has left consumer confidence very low. Certainly, it is difficult to imagine that growth will be anything better than very sluggish in 2011. Meanwhile, while other EU countries take similar measures to stifle domestic consumption the chances of the UK exporting its way out of trouble are low.
So, what does the data mean? The pattern is that the harsher the austerity programme the weaker the economic performance. While the economic powerhouses of Germany and France are seeing higher levels of exports and investment, most other EU countries will probably continue to struggle, even though eurozone inflation is, at 2.4%, almost half the rate in the UK.
Meanwhile, the apparent success of the stimulus measures in the US, which Labour had also used and had led to growth of 1.1% and 0.6% in Qs 2 and 3, should be a salutary warning to the government that choosing the path of austerity could have very bleak consequences for the UK in 2011.
11 Responses to “Weak EU growth reveals the price of austerity”
Wendy Maddox
RT @leftfootfwd: Weak EU growth reveals the price of austerity http://bit.ly/esjeS0
David Jobe
RT @MsWigsy: RT @leftfootfwd: Weak EU growth reveals the price of austerity http://bit.ly/esjeS0
inyourhouse
The difference in growth rates between the US and European countries has nothing to do with fiscal policy and everything to do with monetary policy (well, almost everything; Europe also suffered a negative real shock in the form of very harsh weather). Fiscal policy simply has no effect on real GDP when monetary policy is considered. Your argument only makes sense if we assume that monetary policy doesn’t exist, so that aggregate demand falls when government spending falls. This is clearly not the case in reality, though. The Bank of England (as well as the Fed and the ECB) can offset any and all demand effects caused by contractionary fiscal policy with a more expansionary monetary policy. Given that we’re close to the zero bound for nominal short term interest rates, that means increasing the monetary base at a faster rate.
It follows from the equation of exchange: M*V = P*Y. In other words, the money supply (however measured) multiplied by its velocity is equal to nominal expenditure (ie. aggregate demand). This is an identity – ie. it’s true by definition. Given that the money supply is the monetary base (B) multiplied by the money multiplier (m), the equation becomes B*m*V = P*Y. B is entirely exogenous and m can only fall as far as 1, so the Bank of England will be able to offset any negative aggregate demand effects caused by a falling velocity as long as velocity does not fall to zero – ie. as long as people are spending any money at all (and given that all government spending will not be cut, velocity will always be above zero).
The implication is that cutting government spending will have no negative effects on aggregate demand and thus no negative effects on growth. All that will change is the distribution of aggregate demand between government and the private sector. Moving away from theory, we can clearly see that monetary policy is the primary driver of the recovery by looking at the figures. US nominal GDP in 2010 Q4 was 2.7% above its pre-recession peak. The Eurozone NGDP figures for 2010 Q4 have not been released yet, but Q3 NGDP was 4.9% below its pre-recession peak and it’s unlikely that it has come anywhere close to the US level. Clearly US monetary policy has been much more expansionary than Eurozone monetary policy and even if one doesn’t attribute all of the difference in growth rates to this, it is undoubtedly a major factor. For the author of this article to not mention this (even in passing) and simply attribute the difference in growth rates to fiscal stimulus is at best indicative of an inadequate knowledge of economics and is at worst intellectually dishonest.
Stephen W
I’m starting to think that LFF is just trolling us by releasing these articles but hey ho, I’ll respond anyway.
Apart from the question about monetary policy introduced, and the fact that the unemployment figures in the US do not paint nearly as rosy a picture, there are further issues.
Your analysis is just silly. The US is not weighed down by areas that are absolute basket cases such as Greece, Ireland, (and to a lesser extent UK, Portugal and Spain). Of course this means their growth figures will be considerably higher. Strip out the PIGS and then tell us EU growth figures for a decent analysis.
And you completely ignore why Greece, Ireland etc, and also the UK have had to bring in austerity measures and Germany, France and the US have not. That is because those are the countries that are already broke. Greece hasn’t implemented austerity measures because of some ideological commitment to austerity, it is doing it because it had no choice because no-one would lend it any more money. Your causality is backwards. Ditto Ireland, ditto Portugal. All these countries have borrowing costs well above 8%. Do you think borrowing vast amounts is even possible in that climate?
In the UK the austerity plans announced by both Labour and Coalition governments are the only things keeping us out of this group. The US is a unique case because its size and role as reserve currency for the world effectively means it has a much larger borrowing capacity that vastly smaller economies don’t have. France and Germany don’t need the same austerity measures because they don’t have massive deficits to begin with and to the extent France does they are having austerity measures, just not as big ones.
Basically your analysis is entirely backwards from start to finish.
John
Having barely 2.9% growth for the entire year in exchange for a 2 trillion increase in your government debt can hardly be something to cheer about. Now Germany on the other hand enjoyed a 3.6% increase in GDP(though strangely it is not mentioned in the article) and their government debt increased only slightly. Besides the 2.9% are only an initial estimate you never now how much it may come down when the second and third revision are made.