Are We Entering Into a Long Term Stagnation?

Mar 17 2016

By Roberto Savio*

ROME, Mar (IPS) Larry Summers, Clinton’s minister of treasury, has made few friends in life. At that time, he was instrumental in eliminating the Glass Stegall Banking Law, which since 1933 separated the bank’s customer deposits from the financial activities of the Stock Exchange, releasing a flood of money which created the present monster financial system.

He was also Chief Economist of the World Bank, a position he left after polemics. He became the President of the prestigious Harvard Academy, but was obliged to leave on a gender issue. He was the Director of the National Economic Council under president Barack Obama, where is pro-business attitude led to new controversies.

Maybe, for all these reasons, 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 economy and finance, and social and welfare measures were not any 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 shock away from a global recession, little if anything directed on spurring demand was agreed. 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 G20 meeting of Ministers of Finance( Feb.26), where 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 Minister of Finance of China, who hosted the G20 in Shanghai.

The inflexible German Minister of Finance, Wolfgang Schauble, did block the plea for accompanying stimulus to reforms, championed by the American 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 Schauble, 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 it’s program of structural reforms”.

A few days later, Mario Draghi, President of the European Central Bank (ECB), did present a very large program of fiscal stimulus, which is bringing the cost of money to zero, while increasing its monthly infusion of money from 60 t0 80 billions euro per month. The markets did react at first positively, then went down, and now are lookingup again.

But Draghi did warn (as he always did), that central banks cannot do the job of governments.

Inflation, which is part of growth as long as it does go beyond 2%, has been until now at 0,1%.

Growth in the Eurozone, is now at 1.4% in 2016, and hopefully at 1.7% in 2017. It is now five years that we are practically in a stagnation, and Europe has not recovered yet to reach the economic level prior to the crisis.

Of course, this has created a strong howling in Germany. Schauble, who has made economy a branch of moral science, declared that “Easy money brings to perdition”. The general lament is that the ECB is making a policy to bail out the indebted countries of the South of Europe, at the expenses of Germany and the other countries of the North of Europe who do not need a zero cost monetary policy. The President of the Federation of German Wholesale, Foreign Trade and Sevices (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 the Germans are big savers. There accounts have over two trillion euro, one third of the total of Eurozone. With zero interest, Union Investment has calculated that they will lose 224 billion, compared with what they would have got with the average historical interest on deposits.

The DZ bank has published a study, which according to the Italian treasury will save 53 billion euro, against 9.5 for Germany. Spain would also save a similar amount: 42 billion euro. The director of the prestigious institute of research Leibniz Institute for Economic Research (IFO), 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.

German complaints are logical, but only from a very short-sighted and egocentric angle of observation.

Germany cannot ignore that to remain an island of prosperity in a region which provides them with a steady superavit in its balance of trade, and a 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 the Euro zone will keep an anaemic rate of growth, and a very low rate of inflation, stagnation will settle for a long time. It is easy to preach economic reforms, but according to the European Union, United States, China, the BRICS, and Germany should use its superavit atleast to invest in structural costs (like infrastructure), to spur growth.

Instead the German government keeps its earnings tight, and considers that its destiny has nothing to do with the others. It is ready to push the European Union to disburse six billion euro 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 Europe’s divide is not only the result of the lack of discipline from the South, it is also the result of a major European country, who is increasingly acting only for its immediate interests.

Summers view looks increasingly realistic. 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 the high-cost rigs un-economical.

The number of oil and gas rigs has sunk to 1,761, the lowest number since 2002.

This is not going to help Africa as a whole, the Chinese crucial recovery, and a large number of Latin Americans and Asian countries, as well Europe.

Trade, a vital economic indicator, has been stagnant for the last five years, an unprecedented data. The debate about structural reforms versus economic and financial stimulus look like a stalemate, which is paralyzing the international community. What happens if “the major shock from a global recession” comes now from the European paralysis? We are entering into the Fourth Industrial Revolution, the one where robots will substitute workers. According to the latest book of Klaus Schwab, the founder of the World Economic Forum of Davos, in a decade robots will account for 52% of industrial production, up from its present 12%. This will increase concentration of wealth, and social inequality The debate about our future is nowhere in the political circles. We now discuss about saving accounts…

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

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