On Tuesday (June 9, 2020), Eurostat published the March-quarter national accounts data for the EU and the Eurozone – GDP down by 3.6% and employment down by 0.2% in the euro area – which revealed that the decline in GDP “were the sharpest declines observed since time series started in 1995”. Of course, Europe went into this crisis in poor shape. Eurostat noted that “In the fourth quarter of 2019, GDP had grown by 0.1% in both the euro area and the EU.” So it was barely crawling anyway due to the austerity bias that is built into the monetary system. The larger Member States such as France and Italy (-5.3 per cent) and Spain (-5.2 per cent) are in terrible shape. In the last few weeks, we have been hearing and reading a lot of hype from European politicians about ‘Hamilton moments’ as various euro figures are bandied around about government support for the European economy. Emma Clancy’s article (June 6, 2020) – Behind the Spin on the EU’s Recovery Plan – is sobering if you are drunk on all the Euro elite hype. There isn’t really a recovery plan at all nor any significant shift in attitudes towards creating a functional federation, the only structure that will see Europe break free of this austerity bias. And as I examined the Eurostat data in more detail something very stark was apparent.
The coronavirus crisis is global, which means one cannot accuse the EU of anything in that regard. In general, lockdown strategies were at the discretion of the Member State governments and the variable outcomes reflect the veracity of decision making at that level.
It is clear that some Member States waited too long or have opened up too early and the consequences are for all to see.
But the economic policies of the Member States is another matter.
Let’s start with this graph which was part of Eurostat’s published data release.
It shows the GDP components and their contributions to ‘growth’ (growth being a euphemism for Europe these days).
What was striking about this graph to me is that only inventories were contributing to growth (see below).
In a period where the private sectors of the Member States were in melt down as a result of the lockdowns and it was obvious that GDP would take a huge hit, the sector that could have stepped in to the breach – I rephrase – SHOULD have stepped in to support employment and incomes – was absent.
Absent isn’t exactly correct.
The general government sector actually undermined growth.
I found that result stunning and an exemplification of what is wrong with Europe these days. It’s structures and cultures have combined to create dysfunctional responses from government to crises.
Eurostat note that:
During the first quarter of 2020, household final consumption expenditure decreased by 4.7% in the euro area and by 4.3% in the EU (after +0.1% in the euro area and +0.3% in the EU in the previous quarter). Gross fixed capital formation decreased by 4.3% in the euro area and by 3.9% in the EU (after +5.0% and +4.3% respectively). Exports decreased by 4.2% in the euro area and by 3.5% in the EU (after +0.1% and -0.1% respectively). Imports decreased by 3.6% in the euro area and by 3.2% in the EU (after +1.9% and +1.5% respectively).
And this translated into the following contributions to the GDP outcome:
Household final consumption expenditure had a strong negative contribution to GDP growth in both the euro area and the EU (-2.5 and -2.3 percentage points – pp, respectively) and the contribution from gross fixed capital formation was also negative in both zones (-1.0 and -0.9 pp respectively) as was the contribution of the external balance. The contribution of changes in inventories was positive for both zones (+0.3 pp for the euro area and +0.4 pp for the EU).
Two things to note:
1. They don’t mention the government sector at all.
2. The only positive contributor to growth in the EU and Eurozone were ‘inventories’.
What does that mean?
It means that sales were so weak and below the expectations of producers when they committed working capital to producing the goods and services that there was unexpected or unintended inventory accumulation.
In the national accounts framework, the statistician considered unintended inventory accumulation to be a component of capital formation (or investment) and so the build up of unsold goods is an ‘investment’ for the future.
Which sounds good – ‘investment’ – but is actually an additional sign of disaster.
I investigated further.
The following graphs show the contributions to GDP growth of General government final consumption expenditure (in percentage points) for the Eurozone, first, then the European Union without the UK.
The data confirms what we know.
When times are tough in the Eurozone, the government goes missing.
During the GFC, government recurrent expenditure was exacerbating the decline in private sector spending.
And in the March-quarter 2020, just when you expect the government sector to be injecting fiscal support, it once again undermines growth – making the economic consequences of the pandemic worse.
Given the dominance of the Euro 19 Member States in the EU27, the graph is similar.
In other words, at crucial times in the recent economic history of Europe, government recurrent spending has been pro-cyclical.
What does that mean?
It means that when the private economic cycle is going down, the government spending cycle follows it and makes it worse.
That is the anathema of irresponsible fiscal policy management.
But it is a central characteristic of the Economic and Monetary Union, which forced nations to surrender their currencies and then imposed ridiculously pernicious fiscal rules on the governments for political reasons.
The result is a dysfunctional monetary system and millions of people being unnecessarily unemployed and disadvantaged as a result.
I investigated further.
Well because it might have been that the austerity bias was just concentrated on recurrent (consumption) expenditure and the overal negative impact of the government sector was attenuated by its contribution via gross capital formation – or investment spending.
This is the spending that builds transport infrastructure, schools, hospitals, urban infrastructure and that sort of essential capacity.
It also provides a basis for private sector capital expenditure – leveraging of the public infrastructure.
Given the way the data is presented by Eurostat, it is more difficult to decompose the aggregate investment data into sectors.
We know from the March-quarter national accounts that “Gross fixed capital formation decreased by 4.3% in the euro area and by 3.9% in the EU” and the “the contribution from gross fixed capital formation was also negative in both zones (-1.0 and -0.9 pp respectively)”.
So it is hardly likely that government investment spending was so large that it offset the recurrent austerity.
First, the overall investment ratio in the Eurozone slumped from 23.7 per cent in the December-quarter 2007 to a low of 19.3 per cent by the March-quarter 2013.
Overall capital formation slumped 21.1 per cent over that period.
It is still below the pre-GFC peak.
By the March-quarter 2020, total investment spending in the Eurozone was only a fraction above the December-quarter 2007 value (index value of 100.1 compared to 100).
So for more than 12 years, total investment spending in the Eurozone has been below the level it reached just prior to the GFC.
That alone is a damning statistic.
The following graph shows the performance of the Member States (where data is available) in terms of the percentage point deviation from the December-quarter 2007 levels of total gross capital formation evident in the March-quarter 2020.
A negative bar indicates that the level is below the December-quarter 2007 level.
Estonia is 9.4 per cent below.
Greece 64 per cent lower (shocking policy abuse), Spain 24.4 per cent, Italy 25.4 per cent, Cyprus 15.7 per cent, Latvia 30.2 per cent, Lithuania 16.1 per cent, Netherlands 12.2 per cent, Portugal 15.2 per cent, Slovenia 33.2 per cent.
So the application of the fiscal rules and the austerity mindset within the Eurozone has meant that several of the largest economies (and smaller ones) have been undermining their future productivity and prosperity by creating conditions where governments and business stopped investing in new capacity and technologies.
The pain of that folly will resonate for generations to come.
That is how bad the dysfunctional monetary system they created is.
Using AMECO data, I investigated further.
This data allows us to split Gross Capital Formation in millions of euros in the government and private sectors.
1. For the period 2008-2014, public investment expenditure fell by 14.3 per cent in the Eurozone. So the austerity was impacting negatively on both recurrent and capital spending during the worst of the GFC.
2. Between 2008 and the end of 2019, public investment expenditure has only grown by 1.42 per cent overall – in other words, hardly at all.
3. But the spatial divergence is huge in a monetary system that was claimed to be constructed to promote convergence across Europe.
4. Between 2008 and 2014, public investment expenditure fell by:
– 1.8 per cent in Estonia.
– 56.7 per cent in Ireland.
– 51.37 per cent in Greece.
– 56.64 per cent in Spain.
– 26.81 per cent in Italy.
– 39.56 per cent in Cyprus.
– 26.56 per cent in Lithuania.
– 16.82 per cent in Latvia.
– 8.04 per cent in the Netherlands.
– 48.18 per cent in Portugal.
5. Between 2008 and 2019, public investment expenditure fell by:
– 28.14 per cent in Ireland.
– 69.1 per cent in Greece.
– 47.6 per cent in Spain.
– 19.31 per cent in Italy.
– 29.3 per cent in Cyprus.
– 21.28 per cent in Lithuania.
– 37.07 per cent in Portugal.
These contractions are catastrophic in terms of future productivity growth and prosperity.
They undermine the ability of nations to pay higher real wages without impacting on inflation.
It is obvious that the fiscal positions of the Member States have moved to lower deficits (higher surpluses) since the GFC.
But part of that shift has been the systematic trashing of economic potential which will blight the Member States for generations.
The cuts to public capital expenditure signify a lost past and an endangered future.
For those progressives who hang on to the dream of “Europe” that works, this data should be enough to tell you that the system they claim to support will never deliver the ‘dream’ they long for.
This is a massively dysfunctional system.
Even at a time when the world has fallen into the worst economic crisis in nearly 100 years along with a health emergency not seen since the early C19th, the governments still cannot break free and underpin growth.
The data released this week by Eurostat (as shown in the initial graph above) is stunning really – and I have been examining data for quite a while now.
That is enough for today!
(c) Copyright 2020 William Mitchell. All Rights Reserved.