A remarkable piece over at A Fistful of Euros puts the Eurozone crisis and, by implication, our own economic woes, into the context of a generalised crisis facing all developed economies. Three things have caused this, says Edward Hugh, high levels of debt, aging populations and the shift in the balance of economic power to the emerging economies.
The point to get is that it isn’t simply the level of debt that is the problem, it is the level of debt in the context of the implicit liabilities (in terms of health and pensions) which such population ageing represents, and the reduced growth outlook that having declining and ageing populations represents. Europe’s leaders are essentially in denial on the extent of this problem, and are putting all their eggs in the “structural reforms to raise trend growth” basket.
And the reforms haven’t worked. As Newsnight’s Paul Mason said earlier this week, ”expansionary fiscal contraction” has failed:
Yesterday, then, allows us to look at the real structural problems and opportunities that face Britain. We are a country that was not able to enact “expansionary fiscal contraction” – because we had kidded ourselves about our basic economic potential….
Chris Dillow reckons the British economy may have been running out of oomph even before the recession. In 2008, the banking crisis threw one of the few oomphy bits into reverse, taking everyone else with it.
Then, as Paul Krugman says, George Osborne’s attempts to reform the economy drained what little oomph was left:
[H]istory says that a financial crisis reduces long-run growth potential if policymakers don’t limit the short-run damage it does.
The recession and the build up of debt has come just at the point where the developed economies are least able to deal with it. As I said yesterday, the young society of the 1960s could outrun its debt. The aging society of the 2010s may just not have the oomph.