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THIRD WORLD RESURGENCE

Are we entering into a long-term stagnation?

A growing gloomy consensus appears to be emerging among economic pundits that stagnation is here to stay. The fear is that a single adverse shock may yet push it into recession, says Roberto Savio.


LARRY Summers, Clinton's Secretary of the Treasury, has made few friends in life.

As Treasury Secretary, he was instrumental in eliminating the Glass-Steagall banking law which since 1933 had separated banks' deposit-taking from investment banking activities. The repeal of the law in 1999 released a flood of money which created the present monster financial system.

Summers was also Chief Economist of the World Bank, a position he left after polemics. He became President of the prestigious Harvard University, but was obliged to leave on a gender issue.

He was the Director of the National Economic Council under President Barack Obama, where his pro-business attitude led to new controversies.

It could perhaps be due to all these reasons that very few paid attention to his predictions about 'the new economy'. This is a term created after the crisis of 2009 to indicate that unemployment would be normal and that the market would be the centre of the economy and finance, and social and welfare measures were no longer part of the economy's concern.

Summers warns about a 'secular stagnation'. In other words, anaemic growth will stay with us for a long time.

His warnings were about the fact that there is no real political action to create stimulus, and that 'in a world that is one major adverse shock away from a global recession, little if anything was agreed upon to spur demand. Central bankers communicated a sense that there was relatively little left that they could do to strengthen growth or even to raise inflation'.

Summers was commenting on the last meeting (26 February) of finance ministers from the G20 major economies, which, unable to agree on any action, concluded with a statement that 'markets are worrying too much'. The magnitude of the recent market volatility has not reflected the underlying fundamentals of the global economy, declared Lou Jiwei, the Finance Minister of China, who hosted the G20 in Shanghai.

The inflexible German Minister of Finance, Wolfgang Schaeuble, blocked the plea for accompanying reforms with stimulus, as championed by US Treasury Secretary Jack Lew, insisting that now is the time only for structural reforms, and not for any fiscal and monetary policy of stimulus.

The case of Greece was present in the minds of all.

Later, Schaeuble, commenting on the enormous load of refugees blocked in an already exhausted Greece, declared that while this human tragedy needs attention, 'it should not distract Athens from implementing its programme of structural reforms'.

A few days later, Mario Draghi, President of the European Central Bank (ECB), did present a very large stimulus programme, which is bringing the cost of money to zero while increasing its monthly infusion of money from 60 to 80 billion euros.

The markets reacted positively at first, then went down, and now are looking up again.

But Draghi warned (as he always has) that central banks cannot do the job of governments. Inflation, which is part of growth as long as it does not go beyond 2%, has been until now at 0.1%.

Growth in the eurozone is now estimated to be 1.4% in 2016, and hopefully at 1.7% in 2017. We have practically been in a stagnation for five years, and Europe has not yet recovered to reach the economic level prior to the crisis.

Of course, this has provoked howls of indignation in Germany. Schaeuble, who has made the economy a branch of moral science, declared that 'easy money leads to perdition'. The general lament is that the ECB is adopting a policy to bail out the indebted countries of Southern Europe, at the expense of Germany and the other countries of Northern Europe which do not need a zero-cost monetary policy.

The President of the Federation of German Wholesale, Foreign Trade and Services (BGA), Anton Borner, has declared: 'For the German population it is a catastrophe. Their savings have been expropriated. This is a giant expropriation from North to South.'

It is a fact that the Germans are big savers. Their accounts have over two trillion euros, a third of the total of the eurozone. With zero interest, Union Investment has calculated that they will lose 224 billion euros compared with what they would have got with the average historical interest on deposits.

DZ Bank has estimated that the low-interest policy will save the Italian treasury 53 billion euros, against just 9.5 billion euros for Germany. Spain would also save a similar amount: 42 billion euros.

The director of the prestigious Leibniz Institute for Economic Research (IFO) has stated, 'We are facing a policy of subsidies to zombie banks and states on the verge of bankruptcy.'

All this is further proof of how any dream of a European project is fading away.

There is logic to the German complaints, but only from a very short-sighted and egocentric perspective. Germany cannot ignore the fact that remaining an island of prosperity in a region which provides it a steady trade surplus and steady revenue in its inferior cost of borrowing money (because of its positive differential with other European countries) is not a recipe for the future.

If an anaemic rate of growth and a very low rate of inflation persist in the eurozone, stagnation will settle for a long time.

It is easy to preach economic reforms, but according to the European Union, the United States, China and the BRICS, Germany should use its surplus to invest, for example, in infrastructure to spur growth.

Instead, the German government holds tight to its earnings and considers that its destiny has nothing to do with the others.

It is ready to push the European Union to disburse six billion euros to Turkey to keep refugees from coming, and even to reopen the door to admission, something until now rejected by the German population.

The North-South divide in Europe is not only the result of lack of discipline from the South, it is also the result of a major European country increasingly acting only in its immediate interests.

Summers' view looks increasingly realistic. The cost of petrol will increase, according to the International Energy Agency. The oil rig count in the US has dropped to its lowest level in more than six years, as the low price makes high-cost rigs uneconomical. This is not going to help Africa as a whole, the crucial Chinese recovery, and a large number of Latin American and Asian countries, as well as Europe.

Trade, a vital economic indicator, has been stagnant for the last five years, an unprecedented statistic. The debate over structural reforms versus economic and financial stimulus looks like resulting in a stalemate, paralysing the international community.

What happens if the 'one major adverse shock' Summers alludes to comes now from the European paralysis?

We are said to be entering the Fourth Industrial Revolution, one where robots will substitute for workers. According to Klaus Schwab, the founder of the World Economic Forum, in a decade robots will account for 52% of industrial production, up from the present 12%.

Even as this will increase concentration of wealth and social inequality, nowhere in political circles is our future outlook being debated. Instead we are engaged in discussion about savings accounts... - IPS

Roberto Savio is founder and president emeritus of the Inter Press Service (IPS) news agency and publisher of Other News.

*Third World Resurgence No. 307/308, March/April 2016, pp 21-22


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