|George Osborne will have been turning cartwheels in his office after learning of the latest GDP figures, which confirmed evidence of a slowly recovering economy and denied Labour the satisfaction of being able to declare a “triple-dip” recession. Yet encouraging though the headline number was, the detail continues to look pretty grim, with growth, such as it is, still highly reliant on services, household spending and government consumption.
Basically, it is the wrong kind of growth. You might even characterise it as the type of growth that got Britain into such deep trouble in the first place. Policy seems to be slowly succeeding in restoring the economy to the way it was, but it is not yet delivering the structural change away from consumption and towards investment and exports which is so desperately needed.
On the Eddie George principle that even unbalanced growth is better than no growth, then the Chancellor is right to celebrate. It would, however, be most unwise to think this the beginning of a sustained recovery.
The hoped-for export-led uplift in manufacturing is simply not happening. The same is true of investment, which remains deep in the doldrums, with construction still 18 per cent below its pre-crisis peak. What growth there is remains highly dependent on artificial stimulus.
And that, regrettably, is how things are likely to stay, as long as economic activity in the eurozone continues to stagnate. The external demand Britain needs for a more balanced and sustainable form of growth has been denied. In fact, we have become the very reverse of what we should be.
Britain remains far and away the most indebted major economy in Europe, but ironically, it has also become one of the continent’s most potent sources of demand. More cars were registered in Britain last month than Germany, a much bigger economy. And the IMF, complicit in crippling austerity across much of southern Europe, asks the UK to stimulate more. What planet do these people inhabit? Were not the idea so fanciful, you might even suspect some sort of IMF conspiracy to bankrupt Britain in pursuit of the assumed greater good of a bit of demand for the beleaguered eurozone.
In any case, Britain’s ability to grow in a sustainable way depends vitally on Europe pulling out of its economic funk. Unfortunately, there is little reason for optimism. Unemployment in Spain yesterday hit a record 27 per cent, and even in Germany, business surveys point to deepening gloom. Neither the UK’s economy, nor indeed the world’s, is going to achieve escape velocity as long as this persists. Europe has become a cloud of uncertainty, casting a long shadow across all gainful economic activity.
Why is it that central bank money-printing on the unprecedented and global scale practised in recent years has had so little traction? A large part of the answer lies in Europe’s failure to confront the design flaws at the heart of its experiment in monetary union. The whole process of post-boom economic adjustment is made very much more difficult by the euro, which acts as a virtually insurmountable barrier to the relative price movements necessary to resolve the debt stand-off.
With European leaders collectively unprepared to accept either break-up of the single currency or the type of transfer union that would make it viable, it is hard to know where the solutions might lie. Yet perhaps there is a flicker of hope, even if it remains some distance off.
At the highest levels of German policy-making, it is understood that either the design flaws must be eliminated or the euro will disintegrate. So, will Angela Merkel, once safely re-elected as German Chancellor, be prepared to provide the leadership necessary to save monetary union?
Certainly there is as yet nothing in the rhetoric to suggest she’s willing to back debt mutualisation or some other form of transfer union. None the less, my guess is that she will, if for no better reason than this: if you examine the record, she’s already ceded a considerable amount of ground, first in agreeing sovereign bail-outs and then in sanctioning the European Central Bank to act like a proper lender of last resort.
To go significantly further would require treaty change, referendums throughout the eurozone, and even a change in the German constitution, which forbids debt mutualisation. This is a much bigger ask than anything done to date, a huge debate she would have to win with a sceptical German public and beyond.
It would also require a trade-off which most other members of the eurozone don’t want to make – political union, with adequate democratic accountability, checks, balances and constraints, in return for some form of fiscal union. The German preference is for the political union to precede the joint liability.
Yet to be remembered as the Abraham Lincoln of her age (minus the civil war, obviously), driving through the rudiments of European unification, is plainly a much better legacy than the alternative – the politician who impotently presides over Europe’s final disintegration. She’s already used the term Schicksalsgemeinschaft, a semi-mystical German concept of unity which broadly equates to the American idea of “manifest destiny”.
Britain is caught in the crossr09;hairs of these agonised birth pangs. Not until they are resolved, one way or the other, can there be any lasting fix for the UK economy, with external demand providing the growth that exhausted domestic consumption no longer can.