Gilet jaune demonstrators assemble in Paris to protest President Macron’s gas tax seeming indifference to their plight. Photo: Stephane Mahe/Reuters
The year is 2019, and contrary to many economists’ concern, the world’s two largest national economies seem to be doing well for the moment. U.S. first quarter growth came in at an estimated 3.2%, a rather respectable figure given the widespread skepticism. Meanwhile, a slowing Chinese economy is showing signs of improving due to credit growth and increased central government spending. Simultaneously, however, trouble looms in Europe as German manufacturing reports demonstrate signs of a recession. French manufacturing data is also weak this year, and the European stock market is still yet to have recovered from recent Italian debt crisis caused by erratic government budget proposals. The past 12 months have not seen a single quarter in which the euro area reported GDP growth above 0.5% GDP, and yet, the European Central Bank’s (ECB) rates are still in negative territory in both real and relative terms which suggests there are issues with the current European economic tack.
Since the crisis, ECB policy has been often touted as the tool by which the euro area will resurrect some semblance of still-elusive growth. Far from stimulating the economy, ECB policy had adverse effects on individuals and on investors. To see the adverse effects of negative rates note that the average German savings interest rate is only 0.001% per annum. Contrast this with the US average savings interest rate of 0.09%, a difference of nearly +90 times. Needless to say that the adverse effect that this has on households and consumers is not to be underestimated. The effect of this policy is even more drastic in Germany than it would be in the US, because for historical and psychological reasons Germans tend to save on average much more than Americans. Thus, the interest they generate on their savings has a much greater effect on consumer spending and household value than it would otherwise. Additionally, because German households often see the stock market as an excessively risky and complicated investment, savings remains their primary means of building long term capital. This means that the ECB rate policy has direct negative effects on the consumer and household in the largest economy a eurozone that has struggled to grow in the face of austerity and American tariffs in the decade since the Global Financial Crisis (GFC).
The political turmoil in Europe certainly has had a self reinforcing effect on the performance of eurozone economies. The last Italian election surprised commentators with the surreal synthesis of far-left and far-right politics, a situation which cannot but help evoke parallels with the rise of fascism in the 1930’s. This surprise partly provoked last years sovereign debt crisis. The Italian economy is showing very few signs of improving since the GFC. Notably, Italy has the second highest youth unemployment in the euro area, after Greece. It also has the highest rate of young adults living with their parents, despite a relatively good education system. These conditions cannot help but be correlated to the desperation that is leading youth to abandon traditional centrist parties and vote in overwhelming numbers for far-left and far-right parties.
Supporters of Lega Nord, one of the two parties in Italy’s governing far-left and far-right coalition, greet party leader Matteo Salvini in Rome. Photo: Max Rossi/Reuters
But the long-compounding political crisis in Italy is only the prelude of the eurozone’s woes, as France, too, seems to be amidst a political crisis. Since the election of the neoliberal centrist President Macron in 2016, France has been pointed to as a beacon of stability in European politics. Hopes of Macron delivering stability and prosperity have since faded; France has seen mass protests of the gilet jaunes every weekend for five months, interrupted only by the tragedy at the Notre Dame. Originally a movement against an increase in fuel taxes, the gilet jaunes have since dredged up many other, seemingly unrelated concerns, concerns that are catered to by extreme politicians such as socialist Jean Luc Melenchon and populist-nationalist Marine le Pen. These include growing classism, complaints about capitalism, countering the adverse effects of globalization, and even the suggestion of an increased wealth tax. Riding on such concerns, Marine le Pen made it past the first round in the last French presidential election. Worsening conditions could mean a repeat performance; even victory seems increasingly likely.
If worries about France were not enough, its neighbor south of the Pyrenees also faces challenges. Though notorious for its fractious politics, Spain enjoyed a brief period of relative stability in the late 1990s as democratization and heavy European, mostly German, investment in the Spanish property market carried the economy to prosperity, allowing long-impoverished rural Spaniards to begin to make a decent living in the construction business and adjoining industries. So long as the illusory prosperity continued, these newly enriched voters supported centrist candidates. The once-communist PSOE moderated and became the leading party of the center-left. Meanwhile the center-right People’s Party also grew, leaving behind Spain’s autocratic past.This bubble, built on abundant capital, but spent on poor investments, would not last long, ending both Spain’s economic prosperity and political stability. As a consequence over the past 4 years, Spain has had 3 elections.
The consequences of this bubble were severe for Spain. In the wake of the Global Financial Crisis, the ruling PSOE was induced to nationalize banks’ toxic debt assets. This debt load has strained the Spanish government’s finances, leading to a period of austerity that has once again left voters looking for alternatives, including alternatives as radical as regional secession. Fringe parties that in the past were unable to get above the country’s 10% vote threshold now hold seats in parliament. This includes Vox Populi (reactionary right), Podemos (leftist radicals), Catalan separatists, and Basque nationalists. The PSOE, which has veered back leftward to maintain relevance, holds such a slim majority it might well have to include radicals and separatists in its coalition.
A 2017 demonstration in Barcelona for Catalan independence. Photo: Albert Gea/Reuters
Last is the ongoing debacle that is Brexit. Propelled by nativistic, anti-globalist, patriotic sentiments, English voters (but, crucially, not those in Scotland and Wales) voted to extricate the United Kingdom from the European Union. The process has since caused significant unrest and uncertainty both in the UK and on the continent. The EU, unwilling to create a precedent of smooth, simple withdrawal from its union has taken measures to make the process as painful to the UK as possible. One might understand the motivations of EU negotiators, but this does nothing to improve business conditions for companies and citizens on either side of the channel. This cannot but contribute to the entire area’s depressed GDP and resultant political instability. Stockpiles of raw materials in British manufacturing firms have reached all time records due to the uncertainty that the “great divorce” is causing.
This endless parade of European crises has a number of common threads. In various tones, they are powered by the rejection of globalism, varying extents of dissatisfaction with capitalism as a whole, and a growing sense of disillusionment among the vulnerable and the young. The benign platitudes offered by the Jupiterian Macron and Matronly Merkel no longer hold weight to the people who face cuts in their social safety nets, survive on so called “zero hour” contract employment which provides little security or prospects for advancement. These shrunken opportunities persist despite many of these countries providing affordable or ‘free’ higher education.
In the ECB’s desperate attempt to shore up lenders following the global financial crisis, it promoted a negative interest rate regime that was meant to incentivise investment, lending, and create real-world growth. But years later, said policies appear to have done more harm than good. Instead of supporting the real economy, low rates reinflated vulnerable asset classes and made investment in the stock market more gainful than investment in emerging businesses—the sort of investment that creates gainful employment, and sociopolitical stability. Furthermore, low savings interest, and in many cases underemployment or unemployment in the wake of the GFC have decimated the consumer, thus impoverishing the consumer on which the modern economy depends.
ECB headquarters in Frankfurt. Photo: European Central Bank
By keeping rates negative, the ECB has lowered the risk premium for investors in subprime asset classes, thereby stimulating growth in the financial sector, but lack of “real” growth means the ECB cannot even begin to unwind its balance sheet, the acquisition of which originally raised the value of said risky assets. However, it is fully aware that if it were to actually raise rates, the borrowing on which European countries, businesses, and financial institutions depend would be imperiled. Currently, the ECB plans to keep rates neutral; it remains to be seen if it can ever emerge from its predicament.
Meanwhile, EU parliamentary elections are only a month away, elections in which far-right and far-left parties will potentially secure record seat allocations. Despite their seemingly different ideologies, they have one thing in common: support from the desperate youth and disaffected who have been dispossessed by the policies of the ECB. If real growth cannot emerge soon in Europe, the odds are very real that the political and economic project of the EU may well be fated to fail.