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Europe is the sick man of the global economy

He needs a dollar. Credit: Getty

January 11, 2024 - 10:00am

The world economy, which was meant to bounce back to life after the pandemic, is showing signs of persistent illness. The World Bank’s recent Global Economic Prospects paints a gloomy picture of slowing growth, marking what it calls a “wretched milestone”: not only a world economy that is growing more slowly than before the pandemic, but one expected to grow at the slowest rate in three decades: 2.4% this year, with hopefully a slight improvement in 2025. Worse, investment is expected to rise at 3.7% a year, barely half the average of the last decade, which risks locking in slow growth.

While almost everywhere is feeling the burn, the global performance is considerably weighed down by the advanced economies, with expected growth of just above 1%. Even this performance is flattered by the United States, which is estimated to have grown by an estimated 2.5% last year, and is expected to slow to 1.6% this year — though that performance has a big asterisk next to it because the country’s investment-fuelled rebound has been driven by a huge borrowing binge which recently took the country’s national debt past $34 trillion.

However, the real sick man of the world economy at the moment is Europe. With the exception of Eastern Europe, the continent barely grew last year, and European manufacturing is now in recession. By the IMF’s reckoning, six of the world’s 10 worst-performing economies last year were to be found there. 

It looks to be a case of economic long Covid. In the same way the pandemic exacerbated many existing morbidities, so too the economic measures used to stave off collapse may have aggravated underlying economic ailments. 

During the pandemic, Western countries paid their citizens to stay at home while their central banks flooded their economies with money. This served to keep asset prices from tanking. But while that prevented the deep scarring that has marked some of the less fortunate developing countries, it seems to have hobbled recoveries. With governments having added an average of a quarter of GDP to their debts, they now lack the funds available to invest in fixing the problems they had let fester before the pandemic, whether that be a lack of housing, decaying German infrastructure or Britain’s strapped healthcare system. 

Meanwhile the inflation of asset values, from property to corporate bonds to crypto, sucked capital away from productive investment and into rent-seeking opportunities. Barring a major fall in asset prices, this misallocation of capital is likely to remain a problem.

Even the US isn’t immune to these difficulties, since it’s not clear if its debt is sustainable, while the proliferation of zombie companies kept alive by cheap credit is causing persistent strains in the banking system. But because America still holds the world’s reserve currency, the planet has been willing to keep buying its bonds, funding its recovery. 

In contrast, as Britain discovered with Liz Truss’s ill-fated 2022 mini-budget, European countries lack the luxury of seemingly unlimited credit. Left to try to engineer recoveries while balancing the books, they are finding the world economy a less friendly place.


John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).

jarapley

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Jürg Gassmann
JG
Jürg Gassmann
3 months ago

What the article omits to say: Like the Covid-measures, Europe’s current economic malaise is entirely self-inflicted, perpetrated by singularly idiotic politicians gleefully acting in defiance of the experts.
The WHO’s guidance on pandemic responses, based on decades of experience and summarised in a September 2019 publication, was explicit: Non-pharmaceutical interventions (i) don’t work, AND (ii) cause more harm in terms of all-cause mortality, general population mental and physical health, societal health, economic health, and trust in government.
Guess what – they’ve been proven right.
On the sanctions packages, central banks said: Don’t do it, it’ll backfire. Guess what – it did.
Stand-out among the idiots are the UK and the leading Troikas of the EU (where Jean Michel seems have seen the light and is jumping ship, though Flinten-Uschi von der Leyen and Jungle Joseph Borrell are plugging on) and Germany. Children’s book author and minister for deindustrialisation Habeck is on course to realising the Morgenthau Plan, minister for foot-in-mouth Baerbock has reduced German diplomacy to a laughing stock, and the Chancellor stands out as the Man Who Isn’t There.
Of course, the US blowing up Nordstream, Europe’s economic lifeline, sealed Europe’s fate. Europe is on course to rapidly meeting NATO’s 2%-of-GDP target simply because GDPs are shrinking. But any expectation of Europe shouldering any burden, whether it is defence or economy or throwing more money into the Project Ukraine money-pit, are illusory.

Mike Downing
Mike Downing
3 months ago
Reply to  Jürg Gassmann

I watched a video of the ‘mean streets’ in Athens recently and as they are familiar to me from frequent past visits, it was truly jaw-dropping to see the rampant decay and degradation.

Then last week I watched one about Torquay and Paignton, both of which I holidayed in many moons ago and the look of decay and desolation, if smaller in scale, was remarkably similar.

Maybe the Great money-printing Ponzi scheme is really about to implode while the population increasingly self-medicates its way into the twilight zone.

It’s as if the whole body politic and economic is rotting from the inside out.

I’m learning Polish and planning my escape.

Jürg Gassmann
Jürg Gassmann
3 months ago
Reply to  Mike Downing

In the ’70s, we joked that optimists learn Russian, pessimists Chinese

Hugh Bryant
HB
Hugh Bryant
3 months ago
Reply to  Jürg Gassmann

politicians gleefully acting in defiance of the experts

Our problems in Britain are more due to politicians cowering before ‘experts’.

Yvonne Hayton
YH
Yvonne Hayton
3 months ago
Reply to  Hugh Bryant

Depends on the “expert”.

Ethniciodo Rodenydo
Ethniciodo Rodenydo
3 months ago
Reply to  Jürg Gassmann

I have to say I read the report and it did not appear to say that.
Can you point me in the right direction

Robbie K
RK
Robbie K
3 months ago

Intriguing. I read an article on Reuters just twenty minutes ago illustrating the exact opposite and how the economic global outlook for 2024 is remarkably positive.
https://www.reuters.com/markets/global-markets-recession-analysis-2024-01-11/

Julian Farrows
Julian Farrows
3 months ago
Reply to  Robbie K

I’m curious to see which forecast is right. Maybe we should revisit this article this time next year.

Billy Bob
Billy Bob
3 months ago
Reply to  Robbie K

You’ll get as much accuracy from a tarot card reader as you will from any economist

Steve Jolly
Steve Jolly
3 months ago
Reply to  Billy Bob

When I was a child there was a notable snake oil salesman who peddled weather advice to farmers using methods reputedly involving trees, chickens, and miscellaneous nonsense. He was right about as often as the regular ‘scientific’ weather forecasters. I became a cynic at an early age.

Walter Marvell
Walter Marvell
3 months ago

The 30 year EU – and EU Legacy State UK – do indeed have severe morbidities. First is the crippling risk aversion and Over Regulation built into its governing Bureaucratic Blob & Legal machine. Second are the cancers caused by the radical progressive ideologies that have captured these Establishments; hostility to the market, capitalism and enterprise as expressed in a redistributive only oppressive tax system, degrowth and Neo Pol Potism from crazed top down Diktat Net Zero; DEI inspired anti-meritocracy and enforced mediocrity and an all pervasive culture of greviance and entitlement best expressed by chronic welfarism; and the fourth horseman of open border mass uncontrolled unplanned migration – both criminal and legal. The EU Progressive States have inflicted deep wounds over the past 20 years to all the key structural markets necessary for a fair social contract . The housing market – rigged for London greed. The energy market – blsckputs coming due to hostility to nukes and now oil and gas. The labour market – torn apart by free movement and the tax credit madness. Food market – wolves and weeds preferred to potatoes and cows. These multiple failures at least highlight the source of the problem. Our feckless useless Party States and illberal progressive overlords. The problem is the payback and bill is not yet in.

j watson
JW
j watson
3 months ago

The diagnosis can obviously include the biggest European war since 45, middle east conflict, Chinese economy slow down etc, but that’s the easy bit of any commentary.
The Author crucially touches on the ‘misallocation of capital’. It’s remarkable we’ve had a Right Wing Govt, freed of EU tethers allegedly, that’s done virtually nothing on this whilst fixating on tax cuts. Doh!
More specifically regarding the UK – something quite specific has deteriorated yet in our gift to address. We have structural undervaluation, we pay unnecessarily high dividends, huge cash leakage overseas, and arguably excessive pension contributions. The UK has created no great companies the last 20 years and 50 that would have been in FTSE 100 now foreign-owned. That trend quickened post Brexit.
So what we need are interventions to provide a ‘home bias’ on how ‘our’ savings are used with ‘our’ own companies. That would give a huge surge to the UK economy. It’s doable. Aus and Canada offer tax credits for home based investment
And how about a proportion – e.g 5% – of fund assets organised into a national growth fund? Only for our own start-ups and with a supporting public wealth fund with requirement to list in London and penalties/pay back if they go elsewhere.

Peter B
PB
Peter B
3 months ago
Reply to  j watson

So your solution is a de facto state appropriation of 5% of our savings. Really ? You really think the government is better able to pick investment winners ? Remember the 1970s ?
Frankly, it’s bad enough private investment companies trying to mis-allocate my savings into so-called “ESG” investments which they claim “must offer better returns than the market”. This is as obviously untrue as the current widespread belief that more diverse workplanes must produce better financial returns. In both cases, if better returns were available, businesses would be doing these things anyway.
Most tax credits and tinkering merely distort markets and encourage misallocation of resources (which you purport to wish to avoid). But-to-let investment was trubo-charged by Gordon Brown’s disastrous tinkering with pension taxation. What we need a tax simplification (which only Nigel Lawson in my recollection has ever seriously actioned) and not more tinkering, complexity and permanent change.
I’m sure there are very good reasons firms choose not to list in London that the LSE should look at. I see no reason whatever for us to get involved – nor for you to generously offer to spend my money on this project. Let the LSE sort this out. Or go out of business. Propping up poorly run businesses is never the answer (1970s again).
I think you’ll find that most of us (and the majority do not have state-funded pensions above the minimum state pension) are not in fact over-investing in our pensions and desperately need those funds to cover own own retirement costs.
The time to create a national wealth fund was when 10% of national income came from Norht Sea Oil and we had a surplus to invest.

j watson
j watson
3 months ago
Reply to  Peter B

Let’s keep with the order I raised things.
Firstly I’m not sure if you are/aren’t agreeing with the Authors point on ‘misallocation of capital’. I think you might be but differ on what then to do. If you are then that’s at least a start (and some common ground). Secondly that then begs question, well why haven’t they done anything about this last 14yrs? Market value of UK pension funds something like £2.5trillion-ish? And get’s invested somewhere, but evidently increasingly not here.
If Aus and Canada doing something why not us too?
The final point on a potential wealth fund does lead into the point about how decisions might be made and agree that’s not entirely straight-forward. But as regards the 70s – we’d die for the Growth rates of that decade right now, so it’s worth sifting what might still have a role.

Peter B
PB
Peter B
3 months ago
Reply to  j watson

I don’t care whether my pension funds re invested in the UK or abroad. And nor should I. I just need an adequate return. Since Asia and the US have consistently grown faster than Europen over the past two decades, that implies more overseas investment. Remember also that pre-WWII, Britain and the British people had huge earnings from overseas investments. So investing overseas is neither wrong, nor anything new.
If other countries are being panicked into frankly stupid policies, I see no reason to copy them. Joe Biden’s “Inflation Reduction Act” will, of course, have exactly the opposite effect. Subsidising and protecting less competitive domestic companies can only in the end raise costs and prices for the US consumer.
Very few people would die for a return to the 1970s. I remember it all too well. People keep trying to tell me how terrible things are these days. They’re way better than they were in the 1970s.

Hugh Bryant
HB
Hugh Bryant
3 months ago
Reply to  j watson

And how about a proportion – e.g 5% – of fund assets organised into a national growth fund? Only for our own start-ups and with a supporting public wealth fund with requirement to list in London and penalties/pay back if they go elsewhere.

Don’t even think about it: politicians and bureaucrats cannot ‘pick winners’.
Our problem in Britain is simple: we have far too many middle class freeloaders thanks to asset prices artificially inflated by QE and mass immigration and a dysfunctional tax system that penalises productive activity in order to reward rent-seeking. Householders are sitting on trillions in hoarded and entirely unearned wealth. We need to recover a proportion of that wealth and re-distribute it by re-building our public services.

Simon Boudewijn
SB
Simon Boudewijn
3 months ago
Reply to  Hugh Bryant

That is crazy – take the wealth and give it to the poor. Then everyone can be poor.

Martin M
Martin M
3 months ago
Reply to  Hugh Bryant

Every time I hear the term “re-distribute”, my “Socialism Warning Light” flashes.

j watson
j watson
3 months ago
Reply to  Hugh Bryant

Blimey, you know what despite some differences we aren’t a million miles apart on some of this.

Ethniciodo Rodenydo
Ethniciodo Rodenydo
3 months ago
Reply to  j watson

That does sound superficially attractive. What am I missing
Mr Bryant (below or above) makes a good point until he mentioned re-building public service.
Is that not where the middle-class freeloaders all work

Alex Lekas
AL
Alex Lekas
3 months ago

With governments having added an average of a quarter of GDP to their debts, they now lack the funds available to invest in fixing the problems they had let fester before the pandemic.
If only there was a field of study dedicated to studying such things with the ability to notice foreseeable consequences. And ‘foreseeable’ is the right word. This was no accident.  

Simon Boudewijn
SB
Simon Boudewijn
3 months ago
Reply to  Alex Lekas

It’s called ”The Great Reset, Stupid’.

No none of this is an accident. Anymore than the European people being replaced – it is all to destroy you. This coming brave new world cannot have power blocks of Moral and Well off people (Middle Class and skilled trades) trying to do the right thing. They need to be broken as a power block so ‘The Wrong Thing’ can be done.

The wrong thing being the power all in the hands of 0.001% of Globalist power brokers (as Salty calls them ‘The Lizard People’.)

They are wining as they own the Uniparties in all the Democrat countries. If Biden wins again (or any other with his same agenda – Haley, Newsome, RFK even) and Trump loses, everything ends – an Iron Curtain descends on the world. The reset goes too far to stop.

Martin M
MM
Martin M
3 months ago

And if Trump wins? He declares himself “President for Life, and everybody is happy?