Posts tagged "GDP"

Prime Minister and Deputy Prime Minister economy speech

The Prime Minister and Deputy Prime Minister are visiting a business in Essex today to talk about the economy.

The Prime Minister is expected to say:

“Two years ago our two parties came together to form a strong Coalition. We agreed that our number one priority was to keep Britain safe from the financial storm and to rescue our economy.

“That was and remains our guiding task and in these perilous times it’s more important than ever for Britain that we stick to it. I don’t hide from the scale of that challenge – or from the message sent by voters in many places in last week’s elections. I’m listening. I’m leading. I get it.  There are no closed minds, no closed doors in Downing Street.
 
“So here is the unvarnished truth. The damage done by the crisis was greater than anyone thought. The first quarter growth figures have shown a tough task getting even tougher.
 
“Abroad, the Eurozone remains in extreme trouble and is in recession. Oil prices are making life difficult for families around the world. At home, we inherited an economy built on the sands of debt, not on the rock of sustainable investment.
 
“We set out to change that and we are doing so. This means two things.
 
“First, getting our deficit under control. Yes, this means we have had to take tough decisions. The task is long and hard. You can’t borrow your way out of a debt crisis. We can’t burden our children with the costs of paying today’s bills tomorrow.
 
“Britain’s deficit was the biggest of any major economy on the planet and despite two years of firm action, it is still almost as big as a share of GDP as Greece’s.

 

“But we are making progress: under this government the deficit is falling and public sector net borrowing is down. This allowed the Bank of England to keep interest rates at 0.5 per cent. That means real security for people, right now. There can be no going back on our carefully judged strategy for restoring the public finances.
 
“That brings me to the second part of our answer. Our job is to build a recovery on real growth and investment – not debt.
 
“To build a balanced economy, in which all the sectors – business, retail, manufacturing – play a part.
 
“A diversified economy, across all sectors and regions, not one that is overly reliant on financial services and the City of London.
 
“Because our solution is not just about deficit reduction. It’s about getting the banks lending. It’s about creating the most competitive business tax regime in the developed world.
 
“It’s about helping small businesses and freeing them from the mass of unnecessary bureaucracy that too often stifles enterprise and entrepreneurship. It’s about helping people onto the housing ladder, and reforming the planning system to allow for much needed new development.
 
“It’s about supporting business investment, whether through the Regional Growth Fund, the Growing Places Fund, the Enterprise Zones or the world’s first Green Investment Bank. It’s about cutting income tax for hard working, hard pressed families and taking two million low paid workers out of tax altogether.
 
“It’s about reforming and simplifying our benefits system to ensure that work really does pay. It’s about helping people back into the labour market by offering apprenticeships, work experience opportunities and wage subsidies, all part of the Work Programme and the Youth Contract.
 
“It’s about investing in skills, driving up standards in our schools, creating academies, Free Schools and our new University Technical Colleges. It’s about all these things and more.
 
“I know that the task of getting driving our economy forward when faced with the headwinds that are blowing in from the Eurozone is a formidable one.
 
“But the Government is determined to do whatever needs doing to succeed.
 
“We’ve got to sort out our debts…get real growth…and change this country so that once again it rewards people who work hard, want to get on and play by the rules.
 
“And that’s what I am here to do.”

The Deputy Prime Minister is expected to say:

“As the Prime Minister said, the Coalition is now two years old. Recent weeks have seen disappointing news on the economy. Both parties in the Government took a hit in the local elections. And it is only right that we now take stock.

“Our parties came together to rescue, repair and reform our economy. We’ve taken difficult and decisive action to keep the country safe in the immediate future. But we must never lose sight of why we are doing this; what we are trying to achieve; and where we can do more to get it right.
 
“First: we have to remember our economy has undergone a massive trauma, the depth and nature of which we are only beginning to fully grasp.
 
“2008 was like a giant heart attack. The banking sector blew up. The housing bubble burst. People – and government – had astronomical debts they suddenly couldn’t afford. And you cannot recover from that overnight. Our task is nothing short of rebuilding a new economy out of the rubble of the old and that is going to take time.
 
“Second: we don’t just have economic responsibilities here, but a clear moral responsibility too. We have been living under the shadow of debt, against a backdrop of cuts, for two years now. Imagine living like that for years and years with no end in sight. Imagine if, instead of taking the difficult decisions now we left them for our children to take.
 
“Ducking the tough choices would only prolong the pain condemning the next generation to decades of higher interest rates, poorer public services and fewer jobs.
 
“We are taking the tough choices not because we want to, but because we have to – any government would have to do the same.
 
“And when our critics say that we are driven by some sort of ideological obsession with shrinking the state that is plain nonsense.
 
“By the end of this parliament we’ll still be spending over £730 billion . That’s around 42 per cent  of GDP – more than any year between 1995 and the collapse of the banks in 2008.
 
“Finally, third: we must never forget that tackling the deficit is a means to an end and the end we all seek is growth.
 
“Our goal isn’t balancing the books for the sake of it, but doing so to meet our real aim: jobs; businesses investing; entrepreneurs getting off the ground. There isn’t a single button  Government can press to deliver that but I am the first to admit: there’s more we need to do.
 
“And there are two areas I want to single out where you will now see a renewed sense of urgency from Government – a redoubling of our efforts.
 
“One is getting finance flowing to businesses – crucial for growth today.
 
“We’ve already done a significant amount:
 
“Project Merlin: where we secured around £215bn of bank lending for businesses.
 
“Our £20bn national loan guarantee scheme.
 
“Last month I announced a variety of alternative sources of finance so that cash-strapped firms aren’t solely reliant on the big banks.
 
“But the problem is enormous. Too many good British businesses are still telling me they cannot get loans. So I’m determined that we do everything to get the balance right:
 
“Helping the banks recover their strength for the future but not at the cost of lending to good businesses today.
 
“The other area is infrastructure – so roads, rail, broadband, our energy networks. Investments that underpin a stronger economy for the years ahead while creating the jobs that young people need now.
 
“Again, we’ve taken some big steps; prioritising major projects and setting up the world’s first national green investment bank to give you just a few examples.
 
“But this part of our economy was neglected for years and more will need to be done to secure the levels of private investment necessary to get UK infrastructure up to scratch.
 
“So this is where I want Whitehall directing its energies, getting projects delivered as well as scouring every possible source of private funding – leaving no stone unturned. I hope that gives you a sense of our priorities. Think of today as a kind of statement of intent.
 
“Two years in and building the new economy remains the Coalition’s biggest challenge and while the deficit is part of that – it is only a means to an end. This Government is galvanised around growth. We owe it to the next generation to get it right.”

Greece must remain in the eurozone | Nikos Chrysoloras

Printing a new currency while already bankrupt is suicidal – and the ensuing chaos would hurt the rest of Europe

It is striking that, when it comes to the European debt crisis, an ever increasing number of pundits, broadsheet press columnists and experts are in complete agreement with populists from the far left and the far right: the fiscal consolidation programme is self-defeating, they say, and Greece (and possibly other states in the periphery) should abandon the eurozone in order to regain their competitiveness. However, if there was one thing that the 2008 financial crisis should have taught us is not to trust the experts, especially since, in this case, they claim to know the remedy for a country which they have rarely, if ever, visited, and have no knowledge of its economic and social history.

So, although everyone is an expert on Greece these days, it seems that they have missed the fact that the country has tried the path they propose: expansionary fiscal policies, successive competitive devaluations, and the like. We’ve been there and done that during the 1980s. The result of the “miracle medicine” was average growth rate of 0.75% over the decade, average inflation at about 20%, interest rates at 33%, quadrupling of public debt and deficits of up to 16% of GDP. If that is the economic paradise of devaluations, thanks, but no thanks, I prefer the hell of austerity. Besides the fact that the younger generation has to pick up the bill for what happened in the 1980s, it is also worth mentioning that during the fiscal consolidation period that followed, in the years before the introduction of the euro, Greece enjoyed healthy growth rates, twice the EU average.

Hence, it is not reform that brought the economy to a standstill. On the contrary, the root of the crisis is the fact that Greece essentially ceased its efforts to reform after the adoption of the euro. Haunted by the stock market bubble of 1999 and exhausted by the continuous fights with trade unions, the Simitis government called it quits back then.

Growth continued to be strong though, since the public investment programme peaked ahead of the Olympics, while the sharp reduction of interest rates on government bonds and bank loans after the adoption of the euro kept the economy afloat. The international climate was also favourable for the powerhouses of the Greek economy (tourism and shipping) and tension in Greek-Turkish relations eased. Even more importantly, continuous pay rises in both the public and the private sector boosted consumption. Salary expenses in the Greek public sector increased by 117% between 1999 and 2009.

Moreover, if the experts were not sleeping during “Greek economic history 101″ lectures in school, they would notice that the Greek economy went into recession not after the adoption of the economic adjustment programme in mid 2010, but well before that: immediately after the global 2008 financial crisis, which signalled the end of cheap and easily available credit. In 2009, Greece ran a huge public deficit (15.6% of GDP) in order to avert a recession, but failed to do so (GDP contracted by 3.2%). So we tried to spend our way out of recession and again, just like in the 1980s, it did not work.

And although it is true that austerity suppresses economic output, Greece’s main problem is not austerity, but uncertainty. It should have been clear that no matter how much wages drop, and no matter how good opportunities present, no one will invest in the Greek economy and create jobs, if they are not certain about what will happen in the country. For as long as Greeks and Europeans alike do not provide a definitive and convincing answer to the question of whether Greece will remain part of the eurozone and the EU, GDP will keep contracting and unemployment will be rising.

The drachma will not solve any of the problems of the Greek economy, namely, public finance mismanagement, over-reliance on public and private consumption, lack of medium and large export-oriented enterprises, extremely high percentage of self-employed professionals, low competitiveness, tax evasion, and unbelievably weak administrative capacity.

To the contrary, we should bear in mind that Greece will not devalue an existing currency, because the drachma does not exist. It will introduce a new currency, while already being in a state of default. Leaving aside the logistics of such an endeavour, printing a new currency while already bankrupt is a suicidal move, since no one will want to buy it.

Unlike Argentina, Greece is not a net exporter of raw materials. Hence, it will have no means to support the new currency, which will have no exchange value. The country will be unable to pay in order to import oil, gas, food, and medicines with drachmas. Chaos will ensue and uncertainty will spread to the rest of the eurozone.

Strange as it may sound, what we are going through in Greece, is the best of all possible worlds. Restoring the competitiveness of the Greek economy and changing its structure is the only way for the country to survive in the absence of cheap credit.

The gigantic support programme by the EU and the IMF can only help Greece escape a crash. But the hard landing cannot be avoided. In a sense, Greece now finds itself in “the desert of the real”, as its standards of living are adapting to a world without loans, and reflect the actual production of wealth in the country. Staying in the eurozone and pursuing reform is the only chance Greece has. Hopefully, everyone will realise it before descending into chaos.

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At least Hollande and Merkel agree on one thing – a financial transaction tax

Cameron believes a Tobin tax would hurt the City – but France and Germany are under pressure to finance a eurozone boost

Supporters of a financial transaction tax have a strong ally in the new French president, François Hollande, who wants to recycle the revenue raised from the so-called Tobin tax into growth-enhancing investment projects. On this, if little else, he may have the backing of Angela Merkel, but not of David Cameron, who believes the City would be damaged by the proposed levy.

Opponents of the FTT say it would raise the cost of doing business and would hinder rather than stimulate growth. It would cost more for firms to do currency deals and so make exports dearer, and it would push up interest rates, leading to lower investment. A lower level of transactions would mean that the yield from an FTT would be lower than expected. What’s more, it would be subject to considerable tax avoidance.

Brussels believes it would be nigh-on impossible to avoid paying an FTT but its attempts to quantify the tax’s impact do appear to suggest there would be a hit to growth, albeit a modest one. Initial work by the European commission showed that on the assumption of 1.5% annual growth and a 0.1% FTT on shares and 0.01% on derivatives, GDP would be 0.53% lower by 2050. More specifically, GDP would be 81.4% above today’s level without an FTT and 80.9% with one.

The commission has now refined its model to take into account the fact that many firms – particularly small and medium sized companies – don’t rely on the financial markets to fund investment, but raise funds from retained earnings or banks instead. Once this is taken into account, the growth hit is reduced to 0.2% in total by 2050.

What, though, if the tax raised by an FTT – €57bn a year according to some estimates – were to be pumped back into the economy? This is a course of action, dubbed balanced-budget growth, in which policymakers leave overall tax and spending levels unchanged but seek to move resources from low growth to high growth sectors of the economy. The International Monetary Fund champions this approach, as does the Social Market Foundation.

According to the commission, using the resources raised by an FTT for investment, either at a national or European level, would boost growth rather than detract from it. Again, the numbers are quite small: overall GDP would be between 0.2%-0.4% higher by 2050. Lobbyists for the FTT, however, say this underestimates the growth potential of the tax, as the likely reduction in high-frequency trading would lead to greater financial stability and thus a more favourable climate for sustained growth.

Cameron thinks financial stability can be achieved in other ways, through the bank levy and by beefing up the watchdog powers of the Bank of England. He sees an FTT as a Trojan horse, designed to curb the City. The mood, though, is different in France and Germany, under pressure to boost the eurozone and, even more importantly, to find ways of financing it.

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Exports close UK trade deficit

UK exports to countries outside the European Union grow – but economists warn net trade still likely to dent GDP growth

The trade deficit in the UK shrank in March as exports to the US, China and Russia grew strongly, official figures show.

The UK’s trade deficit on goods and services was £2.7bn in March, compared with £2.9bn in February, while the deficit on goods alone was flat at £8.6bn.

Exports to countries outside the EU grew 12%, driven by chemicals and cars, while the eurozone crisis continued to take its toll as EU exports were flat month on month.

While the deficit shrank slightly, economists said net trade was still likely to have knocked 0.2% off gross domestic product (GDP) growth, putting a dampener on hopes that growth figures for the first quarter of the year will be revised upwards.

Vicky Redwood, chief UK economist at Capital Economics, said: “March’s UK trade figures showed a bit of an improvement, although the external sector still looks likely to have dragged on GDP growth in the first quarter overall.”

The UK economy shrank 0.2% in the first three months of the year, following a 0.3% decline in GDP in the final quarter of 2011, meaning the country entered a technical recession.

The chancellor, George Osborne, is relying on a shift in the economy towards the private sector, particularly in manufacturing and exports, to withstand his far-reaching package of public sector spending cuts.

The deficit in trade in goods with the EU, the UK’s biggest trade partner, widened by £700m to £4.5bn in March, as exports were unchanged at £13.2bn and imports rose 4% to £17.6bn.

The deficit on trade in goods with non-EU countries narrowed by £0.8bn to £4.1bn in March, as exports rose 12% to £13.2bn and imports rose 4% to £17.3bn.

David Kern, chief economist at the British Chambers of Commerce (BCC), said the eurozone crisis and stronger pound will put pressure on exporters.

He said: “The government must take action to address the issues faced by our exporters.

“British companies, particularly small and medium-sized firms, have huge untapped potential to increase exports. Giving them extra support will help them compete on equitable terms, and will benefit the national economy as a whole.”

How Greece could leave the eurozone – in five difficult steps

Two years ago, the prospect of a state falling out of the single currency area was unthinkable. But as the Greek electorate turns against austerity, it is becoming all too easy to picture how breakup might happen

Mass unemployment in Greece, inflation at 50%, a devastating recession and Greeks heading for the borders – that’s the apocalyptic scenario being painted by some economists in the increasingly likely event that Greece leaves the eurozone in coming months.

Greece is small in economic terms: it contributes only 2.2% of eurozone GDP. But withdrawal from the single currency would unleash chaos in the country, and have potentially severe knock-on effects on other euro nations.

US bank Citigroup now reckons there is a 75% chance that Greece will pull out of the single currency within the next 18 months. This would set a precedent, and the eurozone could quickly unravel if other vulnerable members like Spain and Italy were to follow suit.

The fallout from a Greek exit would quickly wipe 20% off Greece’s GDP, send inflation soaring to 40%-50%, and see Greece’s debt-to-GDP ratio soaring over 200%, say analysts at French bank BNP Paribas.

Such predictions are obviously estimates – the actual outcome would depend on how large a devaluation Greece would take if it reverted to the drachma. Dawn Holland at UK thinktank the National Institute of Economic and Social Research expects a 50% fall in the value of the currency. By comparison, the Argentinian peso lost 70% in value after the country’s bankruptcy a decade ago.

The practicalities of unpicking the eurozone are mind-boggling. Philip Shaw, chief economist at Investec, says: “It was bad enough putting the euro together, but splitting it apart, or a little bit of it, would be more complex still. One issue would be what is denominated in euro and what in, say, drachma. Not easy.”

But it may be that, however challenging, that scenario will have to be faced. The warning signs are already clear: it is not difficult to envisage a sequence of events over the coming months that would leave Greece no choice but to break away.

1. ELECTORAL PARALYSIS

Greece’s election last week produced a messy result, with the two hitherto dominant mainstream parties suffering huge losses. Socialist leader Evangelos Venizelos, the former finance minister who negotiated Greece’s second, €130bn bailout, tried to put together a government of national unity with his conservative counterpart, Antonis Samaras. However, the two parties jointly had 149 seats in parliament, two short of a majority, and could not have ruled alone.

The political deadlock has triggered repeated warnings from European leaders that Greece could be thrown out of the euro if it does not stick to the spending cuts and economic reforms stipulated for the bailout – the only thing that that keeps Athens from a messy bankruptcy, which would mean a halt to paying government workers and pensioners.

If Greece cannot form a government – and the majority of voters backed parties who are against abiding by the agreed bailout terms – political unrest will grow on the streets and its neighbours will get increasingly nervous. A second round of elections in mid-June could produce an even larger anti-austerity vote.

2. THE MONEY RUNS OUT

So what happens if Greece remains without a government? Belgium recently set a modern-day record when it remained without a government for 541 days. Or what if a government is formed that does not adhere to the strict bailout conditions?

The “troika” – the European Union, International Monetary Fund and European Central Bank – would probably turn off the taps and bailout money would stop flowing to the highly indebted country. At the same time, Greek banks would probably be cut off from the liquidity provided by the ECB.

According to Jens Nordvig, global head of currency strategy at Nomura, this would mean that the euros held by Greek banks would become separated from the euros in the rest of the eurozone and over time would turn into a separate currency.

He believes that there will be a “Grexit”, as it has become called, and that it will come as a result of “a political accident”.

Christian Schultz, senior economist at Berenberg Bank, says last week’s €4.2bn payment could be the last injection of bailout money and a run on its banks would become likely.

“If Greece continues to redeem bonds, and pay interest, it could run out of cash by July,” he says. “After that, the government would be unable to make full euro payments to pensioners and public employees. It may instead make these payments in promissory notes, which could form the nucleus of a new currency. Greece would face financial infarction: the country’s banks would face a bank run.”

The last time this happened – in Argentina in 2001 – some people started sleeping outside cash machines in Buenos Aires so that they could withdraw as much money as possible once the machines has been refilled.

The Argentinian government froze all accounts, banned individuals from taking out more than 250 pesos and halted withdrawals from dollar-based accounts. But the so-called corralito strategy didn’t work. The courts supported tens of thousands of depositors and instructed the banks to repay them immediately in full. The government’s policies sparked bloody protests that ended up toppling the government as Argentina plunged into a deep recession.

3. NEW CURRENCY, NEW BANKS

To counteract a run on its banks after a debt default, a new Greek government would have to freeze bank accounts and introduce capital controls to prevent the country’s citizens from moving money abroad. But analysts at Fathom Consulting believe Greeks would be “likely to conclude that the space under their mattress would be safer than the vault of a Greek bank”, making a series of bank runs a strong possibility.

The government would also have to pass a currency law and start up the banknote-printing machines. It is not inconceivable that Greece might already be quietly printing new money: when Slovakia broke away from Czechoslovakia in 1993, it emerged that it had started printing its own currency six months earlier. The money was stored in a warehouse in London and shipped to the newly created country once the breakup became official. To minimise the likely chaos that would ensue, the Greek government would probably choose to reintroduce the drachma over a weekend.

Because the Greek banks are entirely reliant on the ECB for liquidity, they would become insolvent as soon as the money stopped flowing. The Greek government would have no choice but to create new banks, with substantial government involvement. Iceland was forced to do this during the financial crisis: it created three new banks from the ruins of the old bankrupt lenders.

4. GREEKS HEAD FOR THE BORDERS

The Argentinian example shows that a Greek debt default and exit from the eurozone are likely to have dire economic and social consequences, at least in the short term. The country will become isolated. With lending drying up and accounts frozen, small businesses will go bust, exports plunge and the country will lurch deeper into recession. “Consumption could drop by 30%,” says Nordvig. “There will be some pretty extreme effects.”

In Argentina’s case, the largest ever sovereign bankruptcy – defaulting on $93bn of foreign debt – triggered a 60% fall in domestic consumption as household savings were wiped out and inflation rose.

The depreciation of the new currency will make imported goods more expensive and drive up inflation. Mass unemployment is likely, as is an exodus of young skilled workers. If tens of thousands of Greeks headed to the borders, they might even be closed. Greek soldiers patrolling the roads and ports to keep their fellow citizens in? It is not impossible.

The examples of Iceland and Argentina, where recovery has been impressive, offer some hope, though – although Argentina’s default took place at a time when the global economy was on the up.

5. THE SHOCKWAVE SPREADS

Holders of Greek government debt would undoubtedly suffer, as they risk having their assets redenominated into a rapidly falling new Greek currency – as would holders of Greek corporate debt. Returning to a Greek national currency would create all sorts of legal problems with business and government contracts. Greek companies forced still to make payments in euros will see costs and interest payments on euro loans double. Then, of course, there is the cost of bolstering the other vulnerable nations – such as Portugal and Spain – which the Institute of International Finance has recently estimated could run to €1 trillion. This burden would fall on the taxpayers of the remaining 16 eurozone states.

Once the precedent of a country leaving the eurozone is established, stability and confidence in the rest of the currency bloc would be shot to pieces and in all likelihood send it back into recession. “We have long held the view that, following the departure of just one member, a total breakup would be very much on the cards,” says Fathom Consulting.

Richard Ward, chief executive of the Lloyd’s of London insurance market, on Friday warned that a eurozone breakup could lead to a “potentially terrible recession for the globe”.

And UBS says: “The costs of breakup go way beyond the economic. To quote Shakespeare, in the event of a fragmentation of the euro, economists will have little to do but ‘cry havoc, and let slip the dogs of war.’”

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Unthinkable? Selling shares in Britain’s economy | Editorial

It takes a brave economist to propose yet another financial innovation, but this one would help pensioners share in national prosperity

Eminent American economist Bob Shiller likes to show off a truly frightening graph. On it, he plots Britain’s GDP against the value of our state pension. Strip out inflation, and national income has doubled over the past 30 years. The basic state pension on the other hand has increased only 17%. So while the country as a whole has got vastly richer, someone living on a basic state pension has fallen far behind. The solution, thinks Shiller, is a simple one: the government should sell IOUs tied not to interest rates, but to GDP. He and his colleague Mark Kamstra call these trills – because every three months they would pay a trillionth of whatever British GDP is: just under £1.50 last winter. Compare that to the current system, where the government issues bonds with the implicit promise that they will pay a fixed interest rate for the next 10 or 25 years. Amid a global crisis caused in part by financial tricksiness, it takes a brave economist to propose yet another financial innovation. But this one would help pensioners share in national prosperity. It would also align the interests of people who live off their savings – for whom inflation is a mortal enemy – with the rest of society, who don’t mind rising prices as long as they come with increasing pay. And states wouldn’t be lumbered with fixed-interest repayments which so many are currently finding impossible to meet. When he was over last month, Bob Shiller discussed his proposal with the Bank of England. This idea may not be so unthinkable after all.

US reaps the rewards for making austerity wait

A closer look at the US GDP numbers allayed fears the US was suffering from the knock-on effects of the crisis in Europe

The US stock market paused this afternoon to consider the latest GDP figures for the world’s most powerful economy.

Initially, traders expressed disapointment with the 2.2% rise for the first quarter after the whopping 3% registered in the last three months of 2011 and predictions of 2.5% for this quarter.

But with Amazon.com profits beating expectations along with a host of major corporates this week, including Boeing, stock market computers were soon humming again.

A closer look at the GDP numbers also allayed fears the US was suffering from the knock-on effects of the crisis in Europe.

Chris Williamson, chief executive at financial data providers Markit, says once stock building has been accounted for, the underlying rate of growth picked up, from an annualised rate of 1.1% late last year to 1.6%.

“It was also encouraging to see consumer spending grow at an increased rate of 2.9%, compared to 2.1% in the final quarter of last year, helped by auto sales growing at their fastest pace for four years,” he says.

“Consumer sentiment has clearly improved somewhat in recent months, aided by steadily the improving job market and better economic news flow.”

Like many economists, Williamson is sceptical the US can sail on benignly if the European situation deteriorates further. A rise in oil prices could also choke off growth.

But the underlying point is that Washington threw caution to the wind; injected trillions of dollars into the financial system, the car industry and federal welfare programs to maintain confidence and stability. Ultimately, the Obama administration cared less about its AAA credit rating than jobs and living standards, saving austerity for a time when the economy is stronger.

Eurozone austerity junkies should take note.

Greece did not cause the euro crisis

Yes, my country was the spark, but it merely exposed the inherent flaws within the eurozone

During the recent debate in the parliaments of many eurozone member states regarding the approval of the new €130bn loan to Greece, some members questioned whether the country had been ready to participate in the euro at the time of its entry.

In the mid-1990s, Greece made a formidable effort to meet the convergence criteria. It employed all available means: budgetary policy, monetary policy, income policy and extensive privatisation of banks and public enterprises. By any measure of fiscal performance (cash or national accounts), the government deficit fell by 10 percentage points, from 12.5% of GDP in 1993 to 2.5% in 1999, the year whose economic statistics were used by the European Council at Santa Maria da Feira in June 2000 to endorse Greece’s eurozone participation.

Greece’s performance was also positive with regard to the other nominal convergence criteria (inflation rate, long-term interest rates, public debt and exchange rate). It is worth recalling that the decision endorsing Greece’s eurozone admission was made after exhaustive scrutiny of the Greek economy and respective reports by the European Commission, the European Central Bank and the Economic and Financial Committee.

It is also worth noting that, in spite of the tight budgetary and monetary policies, which were essential in order to reduce government deficit and inflation rates, GDP growth rates started to improve. From negative growth in 1993, it rose to 4% by the end of the 1990s and remained at that level until 2007. Private investment increased and foreign capital flowed into Greece due to the reduction of inflation, and due to the fall of interest rates to single-digit figures after 20 years of double digits.

Those who claim that Greece should not have joined the euro area name three reasons. The first and most well-known is that Greece supposedly falsified its economic statistics in order to gain EMU entry. In 2004, four years after Greece’s eurozone application had been endorsed on the basis of those statistics, the newly elected New Democracy government decided to change the method of recording defence equipment expenditure, so as to lighten the budgetary burden during its term of office.

This change meant recording expenditure upon payment of the deposit, instead of recording it upon delivery, as had been done by the government until then. However, this change had the effect of increasing government deficits prior to 2004 and thus damaged Greece’s reputation. The allegation that Greece had entered the eurozone by falsifying data made headlines in numerous newspapers around the world. Unfortunately, the assertion was also adopted by many politicians in the eurozone and is repeated to this day.

But the allegation indicates ignorance, not to say hypocrisy. Because even including defence expenditure upon order and not delivery, under the new recording method the revised state deficit figures in the critical year (1999) became 3.1% of GDP against 2.5% of GDP previously. The precise figure was actually 3.07%, according to Eurostat (AMECO). This deficit is still lower than the equivalent revised deficits of other member states that were assessed on the basis of 1997 statistics, and which formed the first wave of member states that created the euro area in 1999. The AMECO website shows that many other member states entered the euro area with state deficits that were higher than 3.1% of GDP. But there is little public reference to this fact, even though many of these now manifest similar problems to Greece.

The responsibility for this certainly lies with the New Democracy government of Greece at that time. However, it also lies with AMECO and the European Commission, which simply adopted the (revised) budgetary data issued by the Greek government of the day. They did not ask the Greek central bank, or the previous government, for their views. What happened later, in 2006, was in complete contrast: AMECO decided that the correct method of recording defence equipment expenditure was upon on delivery of equipment – the very same method that Greece had used prior to 2004. Despite this decision, however, AMECO did not retrospectively correct the figures: Greece’s government deficit remained at 3.07% of GDP in 1999 when it should have been adjusted in line with the new decision. The insignificant divergence of 0.07% of GDP from the treaty limit, which was adopted uncritically by the administration of the eurozone, thus became the reason to disparage a very formidable effort of economic adjustment.

On this subject, we also note that an attempt has been made recently to defame Greece in connection with a conventional currency swap between the Greek economy ministry and Goldman Sachs at the end of 2001 – one out of hundreds transacted at that time by all member states in straightforward acts of public debt management. Once again, it was said that Greece had cooked its books so as to enter the euro area: again this became a headline and was adopted by many politicians. Yet the fact that the swap took place two entire years after 1999, the year on whose economic data Greece’s entry to the eurozone was decided, and one year after the European Council of Santa Maria da Feira endorsed Greece’s entry, appears to have been forgotten.

The second reason cited was Greece’s alleged extravagance and excessive deficits. But the principal causes of the crisis in Greece and other states on the eurozone’s periphery were their large and increasing current account deficits, their loss of competitiveness and, more crucially, the different levels of development of the north and the south – rather than the administrative incompetence of their leaders. The south buys high-quality, hi-tech industrial products from the north. The north buys far fewer goods from the south.

The tardy operation of public administration and institutions also gave rise to the claim that Greece, and possibly other member states on the periphery, should not have joined the eurozone. But the zone is not a club of advanced countries whose common interests are opposed to those of the countries that lag behind. It is a stage of development in the union whose purpose is to facilitate economic co-operation among its members, to create relationships that strengthen the common endeavour to grow, to achieve gradual convergence of their economies and to better exploit the opportunities presented by shared objectives and the abolition of borders. Since it is a joint plan for progress, its design should include both the powerful with their strengths, and the less powerful with their weaknesses. It must take into account the inequalities and the fact that the developed countries not only bear burdens but also obtain significant benefits, thanks to their financial services and exports.

The stabilisation measures in Greece since May 2010 have significantly improved fiscal performance and competitiveness, but they have also contributed to the deep and lasting economic recession, the rise in unemployment to 20%, and the impoverishment and destitution of part of the population. Greece is not solely responsible for this outcome. Since the economic policy mix imposed by the first loan agreement was not the most appropriate, the performance expected was unrealistic even for countries with far stronger economies than Greece. There is a widespread feeling that the conditions imposed were a punishment intended to teach other countries a lesson. The recession, initially predicted by the IMF to be -7.5% between 2009 and 2012, is now estimated to have reached -18%, resulting in a failure to meet other targets and generating intense social unrest.

Greece sparked the eurozone crisis but was not its cause. The cause lies in the fact that the eurozone is a fully fledged monetary union but an incomplete economic and fiscal union of member states with different structures: the more mature economies of the European north and the less mature ones of the European south.

The present crisis is only in part a public debt crisis, and that mainly concerns Greece and Portugal. Other than that, it is a crisis of the private sector and the banking system in several member states as well as a crisis of control and supervision by the financial and monetary authorities of the eurozone.

The European Union has not created an overall framework of economic governance – a method of dealing with the inequalities between its developed core and its less developed periphery. It has not worked systematically to truly promote economic growth. If this is not done, there will be more crises. The fiscal compact which, according to eurozone leaders, will stabilise their economies, cannot achieve that without additional measures for growth and convergence and, ultimately, without sufficient progress towards economic integration and political union.

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Britain’s economy sinks into longest depression for 100 years

Slump in financial services, building and the high street mean it is unlikely economic growth can be regained until 2014

Britain’s economy has sunk into recession for the second time in three years after a dramatic slump across the financial services and construction sectors and a poor start to the year on the high street.

Official figures showed the economy contracted in the first three months of the year after a poor performance before Christmas. This meant it registered two consecutive quarters of negative growth, the standard definition of a recession. The economy is now in its longest depression for 100 years, with little sign of regaining its previous record output before 2014.

A silver lining was provided by a CBI survey of the manufacturing sector that pointed to a recovery in sales and confidence, albeit from one of its worst slumps on record in January. And a survey by the British Retail Consortium found an increasing willingness by shop owners to hire workers. More than 3,000 jobs were created, mainly by large supermarkets opening new stores.

But HSBC, Britain’s largest bank, offset this news when it announced plans to shed 2,000 staff in its UK retail division over the next year as part of a worldwide redundancy programme. Banks have cut thousands of jobs in the past few years to reduce costs and cope with a sharp slowdown in business caused by the financial crisis and subsequent drop in lending.

The business and financial services sector fell by 0.1% in the first three months of the year. The once all-powerful financial services sector, which accounts for a whopping 29% of GDP, “made the largest negative contribution”, according to the Office for National Statistics.

The CBI said it was concerned that poor GDP figures would persuade other employers that a recent improvement in sentiment across several sectors was misplaced, leading them to reverse plans to add jobs and increase investment. Forecasters have pencilled in growth of around 0.8% this year followed by a jump to 2% next year. But several economists argue that, without a rethink of its austerity measures by the Treasury and limited plans for investment, growth could evaporate next year as quickly as it did over the past two years.

After a series of small ups and downs, output has flatlined since September 2010, according to the ONS, shortly after the coalition government took office. Its latest survey of output showed a contraction of 0.2% in the first quarter after a 0.3% decline in the last three months of 2011.

Several European countries have been hit by double-dip recessions following turmoil in the eurozone and the fallout from the Greek crisis. Italy, Spain, France and the Netherlands have all seen growth turn negative in the past six months. Spain, in particular, is expected to remain in difficulty throughout the year as it wrestles with soaring unemployment, rising debt levels and a fall in consumer spending after wage and benefit cuts.

Concern over Spain’s future and the possibility it will need a multibillion-euro bailout from Brussels and the International Monetary Fund has weighed heavily on global growth. While the situation in the UK is less acute, the government could face a similar squeeze towards the end of the year once welfare benefit cuts, limits on tax credit payments and persistently high inflation have taken their toll.

Pay rises have lagged behind inflation for more than two years, cutting disposable incomes and hurting high street spending, with a knock-on effect for the Treasury in lower tax receipts. But the US economy has grown strongly. Ben Bernanke, the central bank chief, said on Wednesday that the outlook remained on course for moderate growth, although he cited Europe as a reason to be cautious. The US economy is expected to have grown 2.5% in the first quarter when estimates are published on Friday. The ONS said that Britain’s service industries, which make up more than three-quarters of the economy, grew by just 0.1% in the first quarter, after declining by 0.1% in the fourth quarter of last year. Industrial output was 0.4% lower, while construction shrank by 3% – the biggest drop since the start of 2009.

Like the US Fed, the Bank of England has refrained from pumping more money into the economy under its quantitative easing programme, which currently stands at £325bn.

“The biggest surprise – and perhaps the most worrying element of this report – was the disappointment in services output,” said Alan Clarke at Scotia bank. “Ironically, construction, which had the most potential to determine whether or not the UK is in recession, proved much less negative than feared. The Bank [of England] recently highlighted that it cares most about underlying growth. Our gauge of underlying GDP showed zero growth – still very disappointing.”

The GDP figures conflict with other recent surveys, which have painted a steadily improving economic picture.Economists also question the reliability of the construction numbers. Joe Grice, the statistics office’s chief economist, said the bigger picture is that the UK economy, in volume terms, was flat between January and March compared with the same period last year. Looking at the UK since last summer, he added that the picture is of “a flattish economy”. Britain is the first major economy to report GDP data for the first quarter of 2012.

Government meets borrowing target

Public sector net borrowing, excluding effect of banking bailouts, rose to £18.17bn last month, from £17.95bn a year ago

The British government borrowed more than expected last month, but still managed to meet its target for the financial year.

City economists said the high March shortfall highlighted the pressure on the chancellor to stick to his austerity measures, especially as the credit rating agencies Moody’s and Fitch have put the UK’s AAA-rating on negative outlook.

But Labour warned that George Osborne risked choking off the recovery, with falling tax receipts last month underlining the fragile state of the economy.

Public sector net borrowing, excluding the effect of the banking bailouts – the government’s preferred measure – rose to £18.2bn last month, from £18bn a year ago, according to the Office for National Statistics. This was worse than the £16bn predicted by City economists. Tax receipts fell and government departments went on an unusually large spending splurge ahead of the end of the fiscal year.

However, downward revisions to previous months (the February shortfall was trimmed to £12.2bn from the previously reported £15.2bn) meant Osborne met his full-year target. The government borrowed £126bn over the 2011/12 financial year, bang in line with the Office for Budget Responsibility’s forecast in the March budget, and far below the £136.8bn deficit run up last year.

“These figures show that last year George Osborne borrowed £9bn more than he planned to at the time of his spending review,” said Rachel Reeves, Labour’s shadow chief secretary to the Treasury. “There do need to be tough decisions on tax, spending and pay. But by choking off the recovery, pushing up unemployment and so borrowing billions more to pay for economic failure, cutting spending and raising taxes too far and too fast has backfired. And this government’s pledge to balance the books by 2015 is now in tatters.”

As a percentage of GDP, borrowing fell to 8.3% in 2011/12 from 9.3% in 2010/11, also in line with government forecasts. The chancellor has vowed to largely eliminate Britain’s budget deficit in coming years. It was at a record 11% when the coalition government took power in 2010.

Britain’s net debt climbed to £1.02tn in March, equivalent to 66% of GDP, the highest since records began in 1993.

When the government set out its deficit reduction plans in 2010, it pencilled in tax increases worth £29bn and spending cuts worth £83bn over the next five years. However, Blerina Uci at Barclays Capital said the five-year plan had turned into a seven-year plan: “The OBR has lowered its GDP growth forecast for 2011-12 to 0.5% from 2.4% and its 2012-13 forecast to 1% from 2.9%. This has led the government to slow the pace of fiscal consolidation in the medium term. The government has eased both the pace of spending cuts and the pace of tax increases – the net effect has, however, been for fiscal consolidation to last for longer and to be even more severe in the long run (cumulative spending cuts have increased to £126bn).”

Tax receipts were disappointing in March, which suggests that weaker economic activity took its toll. Income and capital gains tax receipts were down by 3.6% year-on-year, while the VAT take fell 1%.

“With the economic recovery continuing to stutter, we think it will become increasingly difficult for the government to meet its ambitious deficit reduction plans in the coming fiscal year,” said Samuel Tombs, UK economist at Capital Economics.