The cause of the crisis remains unaltered. Full data for all the components of GDP in the EU and Euro Area are not yet available. But comprehensive data is published up to the 4th quarter of 2012. No substantial turn in events took place at the beginning of 2013, simply an extension of previous negative trends.
In that period from the 1st quarter of 2008 to the 4th quarter of 2012, GDP in the Euro Area has contracted by €288bn in real terms. In the European Union, it has contracted by €310bn. However, if the components of GDP are examined it is clear that the decline in investment more than accounts for the entire fall in GDP in both cases.
Investment (Gross Fixed Capital Formation) has fallen in the Euro Area over the same period by €362bn and fell by €461bn in the EU. In both cases this is far in excess of the total decline in GDP, and is shown in Chart 2 below.
Since the slump in both the EU and the Euro Area is driven by the fall in investment, the slump itself and all its economic symptoms (unemployment, falling real incomes, strained government finances, and so on) cannot be resolved without increasing the level of investment.
This would be impossible if the mantra that ‘there is no money left’ were true. But it is very far from being true. The aim and purpose of capital in a capitalist economy is the accumulation of capital.
Where that cannot be achieved capital will simply remain idle as cash balances accumulating in banks. In the latest monthly report from the ECB the currency and bank deposits of non-financial firms in the Euro Area banking system are €2,073bn and short-term bills are a further €83bn (p.143). They are considerably more when the EU cash deposits of firms in non-Euro Area are added.
The accumulation of these assets has been more or less equivalent to the slump in investment. From the end of 2007 to December 2012 currency, bank deposits and bills held by non-financial financial firms has increased by €350bn in cash terms. The refusal of firms to invest has led to a rise in their cash holdings.
These are assets which could be directed towards productive investment. Firms refuse to do so because they are cannot be confident about returning sufficient profit. But the European governments could direct these assets into productive lending at both the national and supranational level. Before the era of financial liberalisation credit direction, which is the central bank or other authority directing the commercial banks’ lending, was widespread in industrialised economies.
It cannot be seriously argued that this would interfere with market’s efficient allocation of resources, not after the crisis of 2008 and 2009. The authorities also have numerous levers to ensure that credit is direct towards productive investment in infrastructure, de-carbonisation, transport, housing, education and so on).
The banks operating in Europe can only do so because their deposits are guaranteed by the state. The state also issues banking licenses. The ECB is effectively a state body and supplies all banks with needed liquidity. The authorities could direct credit by altering capital rules to favour state-guaranteed investments. Many banks are also now effectively owned by the state. Only the political will to compel bank lending to the productive sector is lacking.
EIB & EBRD
In addition, both the European Bank for Reconstruction and Development (EBRD) and European Investment Bank (EIB) have increased their net equity in the recent past, but cut their lending just when it would have most beneficial effect. The EBRD’s equity has risen by €133bn since 2010 but its lending has fallen by €89bn (p.5). In 2012 alone, the EIB’s lending fell by €8bn even though its own funds increased by €13bn (pp.7 &8).
Taken together a prudent rise in the level of lending to infrastructure and other projects in both Eastern and Western Europe based on previous lending/capital ratios could provide significant funds towards an investment-led recovery.
The question of the Euro
As the crisis in Europe is determined by a refusal of the private sector to invest, and which is compounded by cuts in government investment and the investment of entities like the EBRD and EIB, it follows that only a significant increase in state-related bodies can resolve the crisis.
The latest GDP data show that the crisis is reaching into the ‘core’ of Europe. France and the Netherlands were among the countries whose economies contracted once more. Austria, Belgium and Germany only avoided recession by the narrowest of margins. This is a crisis that is engulfing the whole of Europe.
It is frequently suggested that leaving the Euro would provide a panacea for this crisis. Yet it is self-evident that not all countries can devalue against one another. Further, the argument that devaluation without increased investment will not produce a recovery requires only a one-word proof: Britain. Sterling devalued by approximately 30% in 2008 and 2009, without much of a rebound since. Yet the current account deficit has widened from -0.2% of GDP to 3.6% of GDP over that period.
Returning to earlier data on GDP growth, investment (GFCF) in the Euro Area and EU, we can now add further points on the growth of government spending and net exports. These are shown below for the Euro Area and for the EU economies outside the Euro Area as a separate group. The results are shown in Table 1. below.
The economies outside the Euro Area have contracted just like those inside the Euro Area. Government current spending has risen in both. But non-Euro countries have not had higher levels of investment. They have, on a net basis, simply gained in terms of net exports.
In this sense, the question of in or out of the Euro is a secondary one, which would not resolve the crisis either way if the investment slump is not addressed. Of course, there is a severe structural crisis in the Euro Area, which the crisis has exposed. The US has built a continental scale economy and so too has China. India appears to be heading in the same direction. The European Union has the potential to create the same.
But the Euro is an attempt to graft a 21st century monetary unity onto a 19th century patchwork of small nation states. What is required to supplement a monetary union is a fiscal union. Since that must be democratically controlled that also requires political union. In the United States, which is very far from the EU’s former attachment to the ‘social model’ fiscal transfers vary but generally comprise 12% to 15% of GDP. In the European Union they amount to around one-tenth of that. If the single currency is to be maintained then its principal beneficiaries will need to contribute to its maintenance, led by German capital.