The United States has managed the Great Recession far more successfully than Europe has done. There is no sign of an upturn in Europe generally and much wishful thinking about the position in Ireland. Every release of Irish economic statistics in recent months has been accompanied by an official "spin" to the effect that the figures show early signs of economic recovery. For all we know economic recovery could well be in the offing but the figures do not show that it has begun. The economy is flat as a pancake.
Employment data for the first quarter of 2013 released last week showed a small increase in the total numbers at work, but on closer inspection it transpires that the improvement is coming from rising numbers in part-time jobs. In the last year, full-time jobs fell by about 5,000 while part-time jobs rose 24,000. A part-time job is better than none, but the demand for labour remains severely depressed. Unemployment figures have not risen for quite some time but this reflects emigration as well as a fall in labour force participation. The numbers of retired people, and of adults in full-time education, are both rising rapidly.
Total exports appear to be rising, but the composition tells the real story. Exports of goods are in continuing decline and the apparent overall improvement due entirely to an increase in exports of services. These services exports represent in large part the activities of multinational companies in the digital economy booking worldwide sales as exports through Ireland, offset by imports of intellectual property in the form of royalty payments on patents and the like. The national economic statistics are being distorted. To be blunt, some of the apparent buoyancy in the services figures is due to fake exports with little impact on the real economy here. These reported exports reflect the (perfectly legal) manoeuvres undertaken by the multinationals to minimise their tax liabilities in other jurisdictions. Everyone knows this but each data release is greeted with cheer-leading PR announcements, which is just childish.
If the economy really was recovering, it would be visible in the retail sales figures, and it is not. The chart shows the volume of retail sales, adjusted for seasonal factors, from January 2006 up to April 2013. Sales collapsed through 2008 and 2009 and have failed to recover at any stage since. If you can detect an economic recovery in these data, your eyesight is in exceptional condition.
After five years of sustained economic downturn in Europe (in Ireland, the worst since World War Two) it is hardly surprising that fatigue begins to set in and serious politicians go looking for softer options. Opposition parties are especially prone to this form of temptation but governments are not immune. In Ireland the most tempting soft option is usually some form of investment programme, ideally financed outside the government's balance sheet and designed explicitly to give a boost to construction. At European level, there are proposals floating around to expand funding for infrastructure projects in southern Europe and to increase lending through the European Investment Bank. Experience does not favour gimmicky investment programmes financed off-balance-sheet for a long list of reasons. They are slow to implement, susceptible to cost over-runs, do not create any long-term jobs and often involve the politicians' favourite pet, the cuddly little white elephant. Meanwhile, the creation of a proper monetary union, without which there will be no eurozone recovery, is endlessly deferred and the fragile banking system goes unrepaired.
There is no discussion of soft options in the United States, since there is no need for any. Rather, US policymakers are beginning to consider how the expansionary monetary and budget policies of the past few years can be unravelled in an orderly way as the economy returns to normality. The conduct of policy in the US, where the financial crisis struck first, has been streets ahead of the faltering and at times quite inept performance in Europe. The US recovery, including net job creation, is well under way.
The US faced both a financial crisis and a severe recession. When the crisis struck, the US government acted quickly to address the problem at its core in the financial sector and encouraged banks to recapitalise. It also provided taxpayer capital to banks and other institutions, earning back virtually all of the state investment in due course. One large bank (Lehmans) was allowed to go under and unsecured bondholders in others took losses. The taxpayer exposure to the financial rescue was enormous for a while but the net cost turned out to be close to zero. Proper stress tests were undertaken quickly on the major banks and they were forced to raise extra capital in the markets. Much of this work was undertaken in the closing months of 2008 by the outgoing Bush administration and continued under president Obama in 2009. The system of financial regulation also got a major overhaul in the Dodd-Frank Act.
A severe recession requires a prompt policy response and the US authorities employed both budget and monetary policy with vigour. The budget deficit was permitted to rise from around three per cent of GDP at the end of the bubble to 10 per cent at the recession's trough in 2009. It is expected to fall back to around four per cent in 2013. More importantly, the fiscal stimulus did its work and the US economy has already recovered. The banking system is in working order again. The budget relaxation was accompanied by early and firm monetary policy measures. The Federal Reserve began cutting its policy interest rate in 2007 and the rate has been close to zero since late 2009. The Fed has also engaged in direct purchases of non-government securities from the market, an unconventional policy suited to conditions of credit famine.
In Europe there has been no co-ordinated budget policy whatsoever. The eurozone countries with the weakest economies and the highest unemployment rates have been required to cut their budget deficits by the largest amounts! Monetary policy has been fitful. Under the ill-starred presidency of Jean-Claude Trichet the European Central Bank was slow to begin cutting interest rates and even raised rates twice in 2011, in the mistaken belief that the worst of the crisis was over. Flawed stress tests on the banks were undertaken which failed to convince the doubters of the soundness of their balance sheets. The eurozone countries that sought financial rescue all have been treated differently as one-off cases, without any coherent policy template. In Greece, the first rescue in May 2010 was mismanaged, leading inevitably to Europe's first sovereign default since 1953 and the largest such default in history. The most recent intervention, in Cyprus, was a shambles, with internal as well as external payments from banks, including solvent banks, arbitrarily suspended.
There are two enduring weaknesses in the eurozone design, neither of which is receiving serious political attention. You cannot have financial stability in a half-completed monetary union. A banking union, with centralised supervision, failing banks resolved at the expense of unsecured creditors, and deposit protection, is essential for the common currency to endure. There also needs to be an institutional structure that permits a co-ordinated macroeconomic policy response when recession strikes. Under existing arrangements, nobody is in charge and the 17 eurozone members are trapped in a common currency which increasingly suits none of them. Serious consideration of a new architecture seems to be on hold until after the German elections in September. At that stage, it is time for eurozone members to face the true alternatives, including treaty changes if need be. A renewed financial upheaval in the eurozone with the potential to destabilise the world economy is not a risk worth taking. Fix it, or find an orderly way to scrap it.