The economic crisis intensifies across Europe, with the US and south east Asia close behind, argues Chris Bambery
The general consensus is that Brexit is to blame for any economic woes the UK faces, from High Street shop closures to falls in industrial output and construction. Yet that simply ignores the fact that globally there is an economic slowdown, crucially in China, and that the Eurozone economy, the UK’s biggest trading partner, looks to be in trouble.
This week the European Central Bank slashed its 2019 growth forecast for the Eurozone to 1.1% from 1.7%. In an attempt to revive the economy, it launched a fresh round of cheap bank loans and promised interest rates will stay at record lows ‘at least through 2019.’
The ECB President, Mario Draghi, blamed the slowdown on a mixture of internal and external factors. The external slowdown was ‘mostly the slowdown in world trade’, with China, some emerging markets, and a ‘potential slowdown’ in the US at issue.
The trade war developing between the EU and the USA was also a factor with Draghi coyly blaming “lower confidence produced by the trade... discussions – let’s call it this way.”
Germany is the economic motor of the Eurozone but last week the OECD (The Organisation for Economic Co-operation and Development) cut its forecast for German economic growth by more than half, now predicting 0.7% growth in gross domestic product this year.
A survey by Markit IHS of German manufacturing found that it had fallen to a 74-month low of 47.6 in February, a level last registered during the low point of the Eurozone debt crisis which followed the 2008 financial crash.
Consequently, the Eurozone faces economic expansion of just 1 % of GDP for the year, the OECD predicted, down from its previous projection of 1.8%, a figure subsequently shared by the ECB.
In addition the OECD found that Spanish and Italian banks are shrinking their loan books while German and French banks have somewhat slowed their rate of growth in lending, all of which could weaken growth.
Italy is now officially in recession, after registering two successive quarters of negative economic growth. Youth unemployment in Italy rose to 33% in January from 32.8% in December and 32.6% in January 2018, overtaking Spain whose youth unemployment rate fell to 32.6%. Italy now has the second largest unemployment rate in the EU, after Greece.
Spain has been held up by the European Union as a success story for its austerity package, imposed after the 2008 crash. But now Spain’s factory output is contracting. The biggest expansion in job growth has been in tourism, followed by construction, much of it precarious and both sectors are highly vulnerable to any economic downturn.
The Telegraph quoted Chris Williamson from IHS Markit as saying Eurozone manufacturing is in its worst downturn since 2013 with no light yet at the end of the tunnel: “Orders are falling at a faster rate than output to a degree not seen for seven years,” he said. “The new orders to inventory ratio has also fallen to its lowest since 2012, with many companies reporting excess warehouse stocks."
The Eurozone is certainly facing a slowdown and possibly a recession. Even if it avoids the latter, one danger may be the “Japanisation” of its economy – economic stagnation which lasted from 1994 till today. Statistics released at the close of January showed the Eurozone economy’s growth had flat lined in the last three months of 2018.
That picture fits Italy and to an extent France where stagnant and falling living standards have created the Yellow Vest protests.
The increase in economic problems also feeds into political ones.
This week the Regional Government of Saxony has used public money to guarantee the future for a publically owned saving bank, Nord LB, which has too many bad loans it made to shipping companies now operating in a market with over-capacity and with a number of firms going bankrupt.
This bail out had the blessing of the Central Government in Berlin, which might raise a few eyebrows in Italy where the Merkel Government and the German State Bank ruled out any such bailouts for struggling Italian banks. Although Italy’s right wing government has given a similar public guarantee in an effort to save Banca Carige, the country’s 10th largest lender, which has been placed under the temporary administration of European Central Bank supervisors.
Persistent rumours circulate that the German Government is trying to arrange a merger of the country’s two biggest, and troubled, banks, Deutsche Bank and Commerzbank. It owns a 15 % stake in the latter.
Both are seen in Berlin as being “too big to fail,” but that problem will only loom larger if such a merger goes through.
This is a case of the German Government putting its supposed national interest first, trying to preserve its “own” financial giants. Critics also point out that Merkel’s Government has put restrictions on cross-border banks which own subsidiaries in Germany.
Supporters of greater Eurozone financial union argue against such obstacles to the movement of capital across European borders.
Meanwhile the European Commission warned Italy, Cyprus and Greece of “excessive” imbalances in their economies because of high debt and the number of bad loans carried by their banks.
Again it looks like there is one law for Germany and another for its Southern European “partners.”
The European Central Bank ended its Quantitative Easing programme last year, helping supply cheap loans and other economic help, on the basis of wildly optimistic economic growth figures. In reality it was because of growing opposition to such largesse in the German Government.
“The divisions on the Governing Council represent the national interests,” said Ashoka Mody, ex-deputy chief in Europe for the International Monetary Fund. "This has been so from the day the ECB began to operate."
It seems that such squeamishness in Germany vanished when it became clear its economy was in more serious trouble than had been thought and that the ECB should now turn back on the taps of quantitative easing.
Germany’s economy relies heavily on exports, particularly to China. Between January and October 2018, exports from the German car sector industry contracted, hit by the shrinking of sales in China and reliance on old technology which cannot match new restrictions on emissions.
Chinese Premier Li Keqiang on Tuesday announced the country would set a target for growth of 6 to 6.5% in 2019, below last year’s figure of 6.6% —that was a 28-year low. The slowdown in China is just that, it still records growth figures which would be proclaimed as miraculous in North America or Europe. But one warning sign is that inward investment is now outgrowing outward investment. Exports sank 20.7 % last month compared with February 2018.
The reason for this drop is the trade war with the United States and lower domestic demand but even if Beijing reaches a deal with Trump over tariffs other Asian economies have seen similar falls: South Korea has seen exports drop for three straight months, while in January Japanese exports had the biggest fall in two years. Japan’s industrial output fell 3.7% in January. South Korean exports to China were down in February compared to a year ago, with sales of ships and semi-conductors taking the biggest hit.
In the USA the economy had received a boost from Donald Trump’s tax cuts and had appeared to be bucking the trend but in January figures showed a slump in GDP. A new sub-prime crisis beckons over cheap loans to those buying a new car (often from banks owned or connected to auto firms), loans which cannot be repaid. Delinquencies on car loans now equal those in the second quarter of 2009, at the height of the last economic crisis.
Behind the hype of Trump’s economic recovery are ever increasing record Federal (state) debt, record student loan debt with growing numbers in default, and very high credit card debt (the delinquency rate is not known). Against that background the Federal Reserve would struggle to match the 2008 bank bailouts or its later pump prime measures.
There are long term problems facing the US car industry:
Sales of the passenger-car body style that’s dominated the industry since the Model T will sink to 21.5 percent of the U.S. market by 2025, according to researchers at LMC Automotive, relegating sedans to fringe products. That leaves automakers with excess factory capacity that can turn out about 3 million more vehicles than buyers want. And overcapacity is precisely what spurred losses the last time a recession wracked the industry.
Overproduction and lack of investment are mounting problems but another is that the global recovery post-2008 depended on a too narrow group of transnationals who could record hefty profits. That did not roll out overall across the rest of the economy.
The other problem was the post-2008 bail outs and low interest rates created zombie companies which could survive but were going nowhere – the two big German banks are cases in point. Any increase in lending rates would be near fatal for many.
That recovery did not create a feel good factor for the many. Living standards have struggled to match those in 2008 and growing numbers of new jobs are zero hours, part time, freelance and so on, vulnerable and bringing little satisfaction.
Returning to the European Union, discussion of it in the UK has always been parochial but if we lift our sights there is a clear trend towards authoritarianism, not just in Eastern Europe but in Spain, Italy and Austria.
French president, Emmanuel Macron this week issued an appeal for the people of Europe to mobilise for “the values of progress” and against “nationalists without solutions.”
But Macron is closely allied with the neo-liberal Ciudadanos party in Spain which is competing with the Popular Party and the fascist Vox party as to who takes the hardest stand on Catalonia. Last month all three came together to hold a rally in Madrid against Catalan independence: all three entered an agreement after December’s regional elections in Andalusia whereby Vox voted to install a Popular Party and Ciudadanos. The latter have now come out against plans to exhume General Franco’s remains from the hideous publicly funded memorial outside Madrid where he lies, built by the slave labour of Republican prisoners of war after the dictator’s bloody victory in the Spanish Civil War.
Nearer home Macron’s “values of progress” have been on display with police being deployed to physically try and block Yellow Vest protests.
Those protests show how resistance to neo-liberalism and austerity can suddenly arise. That was central to Jeremy Corbyn taking leadership of the British Labour Party and the huge membership surge accompanying that. As in Scotland during the 2014 independence referendum that resistance is also becoming apparent within the movement for Catalan independence.
In Britain it is vital that we build links and solidarity with such movements.
Chris Bambery is an author, political activist and commentator, and a supporter of Rise, the radical left wing coalition in Scotland. His books include A People's History of Scotland and The Second World War: A Marxist Analysis.