The US economy is recovering at last
IT used to be said that when America sneezes, the rest of the world catches a cold. This remains the case, despite the rise of China and other emerging giants. So it is good news that the US economy has started to recover, with even unemployment going down.
The markets can barely contain themselves for joy, even though as Capital Economics points out, the US economy has already been at this point twice before, in early 2010 and then early 2011, only for growth to fall back sharply. But domestic conditions are on a much firmer footing this time, with genuine improvements in housing and credit. Things are looking up, though America still has huge, long-term economic problems. Millions have dropped out of the labour market, many Americans are finding their skills and productivity to be insufficient to compete in a globalised economy and the mood is increasingly protectionist. The US also urgently needs to make up its mind whether it wants to be a social-democracy or a traditional capitalist society. The current compromise – a huge budget deficit, public spending on a long-term exponential trajectory, combined with low taxes – just doesn’t work. Regrettably, the US political system feels increasingly broken.
America’s recovery is bound to help Barack Obama in the November presidential elections – though if the Republicans are foolish enough to pick “big government conservative” Rick Santorum as their candidate, Obama would probably win regardless of the economy. But that contest will matter hugely: on issues such as tax and Wall Street reform, there is a huge gulf between the parties; whoever wins will indirectly have a substantial impact on London’s economy.
TURKEY V GREECE
WHEN economists were making the case for the euro in the late 1980s, they produced all sort of bullish estimates to back up their argument. The most memorable was the Cecchini Report, which estimated that 0.5 per cent of GDP a year would be saved by eliminating conversion costs, while five per cent of GDP would be gained by reduced risk and uncertainty. Growth was meant to be permanently higher for members.
While of course there are benefits to the euro, it is now clear its costs are even greater. It would have been more sensible for Greece to stay out. The best thing that ever happened to its arch-rival Turkey was not to be allowed to join the EU. Even though it has its own serious problems, it has done massively better than Greece, despite not enjoying the supposed benefit of membership of a strong currency run by a credible central bank.
As Tim Congdon of International Monetary Research points out, when Greece joined the EU, its GDP per capita – in purchasing power parity terms, in current international dollars – was three times that of Turkey’s. Now it is around 1.8 times. In 1980, Turkey’s GDP was less than 50 per cent higher than Greece’s; today it is more than three times larger and will be at least four times by 2016 (and probably more). Despite suffering its own macroeconomic and political problems, being outside of the euro has served Turkey well.
Rather than pretending to be in Germany’s league, countries such as Greece – an emerging economy without the internal discipline needed to join a strong currency – are better off going it alone.
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