Eurozone and the UK: A tale of two crises
Today's GDP figures for the eurozone show that across the Channel, the real economy is running several months behind events in the financial markets - many would say, just like Europe's politicians. The eurozone, after all, is still growing - even as the gap between German and French bond yields reaches new highs.
It is tempting to say that Britain has had exactly the opposite experience. The government's commitment to rein in public borrowing has helped us avoid all the financial market tumult of Greece, Italy and the rest - but that has perhaps allowed our real economy to falter that much earlier, while our government's cost of borrowing has fallen to a record low.
There is now a lively debate in Westminster over whether - and how much - the government can blame the eurozone crisis for Britain's faltering recovery. I went through some of the arguments on the Ten O'Clock news last night.
Mervyn King is on the government's side of the argument. In that gloomy speech last month about Britain's diminishing economic prospects he said the fall in sterling and the government's fiscal programme had put us "on track" to more normal economic times. But that progress had been put on hold by the crisis in the eurozone and the growing pessimism about the global recovery.
Perhaps. But the timing doesn't quite add up. Britain's recovery first went seriously "off track" in the final quarter of 2010, some time before the global PMI surveys and other measures of confidence headed down, and well before the eurozone crisis went critical.
There is also the awkward fact that the economies at the centre of this crisis have still managed to grow nearly three times faster than the UK over the past year - a fact highlighted by today's slightly better-than-expected GDP numbers for the third quarter.
These new numbers show that the 17 members of the eurozone, as a group, have grown by 1.4% in the past 12 months. In that period the UK has managed to grow by only 0.5%. The average growth rate over the past 6 months, when the crisis has been coming to head, has been 0.2% per quarter in the eurozone - versus 0.3% in the UK. The average for Germany has been 0.4%.
When the August trade figures came out, I noted the curious strength of Britain's exports to the eurozone. The September figures show exports to the single currency area have now started to fall - they were down 0.2% on the month. But over the past year they have grown by more than 17%.
In short, it's hard to argue that the slow growth of the UK in the past 12 months has been down to the Europeans.
In fact, there's a case for saying exactly the opposite, and not just because of those strong export numbers. After all, haven't we been receiving all these "safe haven" capital flows, every time the financial markets panic about the creditworthiness of Greece, Italy or the rest? That should mean Britain's long-term interest rates are even lower, now, than they might otherwise have been. One of the main ways that quantitative easing is supposed to help the economy is by pushing down those same rates.
It would be worrying for the UK's economic future if the crisis had put upward pressure on the pound. That may come. But it hasn't yet; as I noted in my last blog, the value of the euro has been remarkably stable.
As a matter of arithmetic, most economists would expect the government's tax rises and spending cuts this year to have had a bigger impact on growth than the eurozone. Goldman Sachs, for example, estimates that the fiscal tightening will have reduced growth by around 0.7% of GDP this year. Even an outright recession across the eurozone would probably have a somewhat smaller direct effect on our economy. And as I have discussed, there hasn't been a recession across Europe this year. (Next year is another matter).
It sounds like game set and match to Ed Balls in the game of "who killed the UK recovery". Except, I don't think the chancellor would quibble with much that I have written. He would certainly not quibble with the idea that his fiscal programme has had an effect on our potential growth rate this year - and will continue to do so in the years to come. The Goldman Sachs number is itself largely derived from numbers put out by the Office for Budget Responsibility.
In opposition, George Osborne flirted with the notion of an "expansionary fiscal contraction" - a fiscal tightening that so helps confidence, that it actually increases growth, even in the short run. But the IMF has since poured a lot of cold water on this idea, at least in the current global environment - and Mr Osborne more or less stopped talking about it when he came into government.
The chancellor's argument - as ever - is not that things have been great under his watch. It is not (even) that we can blame the eurozone for all our troubles. If you listen to the rhetoric, ministers have been reasonably careful to talk about the "recent" impact of the eurozone turmoil on the UK; the "indirect" effect on confidence; and the "future" consequences for growth if the crisis continues. They have not asserted that the slowdown this year is all down to Europe.
No, Mr Osborne's argument is much more straightforward - and all-encompassing. The claim is that however bad things may seem, they'd be worse if someone else were in charge - and they hadn't got tough on government borrowing.
The implicit suggestion is that we could never have had the growth that Germany (2.6%) or even France (1.6%) have enjoyed in the past year. The options were (a) carry on regardless, and risk a full-blown crisis like Greece (-5.2%), or Portugal (-1.7%); or (b) knuckle down to become a safe haven, so the government dictates our future, not the financial markets, even if that future involves pretty feeble growth.
It's up to you to decide whether these were the options that the UK faced in the summer of 2010 - and whether the government chose the right path, given all the information it had at the time. But when Mr Osborne drew up his plans to cut public borrowing, he did think he could count on the private sector - especially private sector demand from the rest of the world - to fill most of the gap.
At the time, many distinguished economists and institutions agreed with that basic assumption. But they would probably now agree that the developments of the past year have put it seriously in doubt.