Olivier Blanchard, the recently retired Head of Economics at the International Monetary Fund, has something of a track record with his predictions. In 2013, he warned George Osborne that he was “playing with fire” with the UK’s recovery from the financial crisis. Austerity had to be relaxed. We now know that we were actually nowhere near a drop in GDP. Growth has been unequivocally positive in every year since 2009. Compared to the year immediately before the crisis, 2007, GDP is now 6 per cent higher, a recovery of similar strength to that of America, with US GDP being 8 per cent up on its 2007 level.
In August 2008, only a few weeks before the collapse of Lehman Brothers, Blanchard published an MIT Discussion paper on the state of macro-economics. This is the part of economic theory which tries to explain how the economy as a whole moves, why variables such as GDP or unemployment go up or down. The state of macro-economics, Blanchard opined, as the most serious crisis since the 1930s was about to burst upon the world, was “good”.
But his pronouncements this week on the Eurozone deserve to be taken seriously, not merely because a stopped clock occasionally tells the correct time. There is real substance to them. Blanchard warned that the planned moves to closer integration within the Eurozone would not solve its fundamental problems. Very powerful figures such as Mario Draghi, President of the European Central Bank, and Jean-Claude Juncker, head of the European Commission, are heading the drive to full fiscal integration of the Eurozone.
Under the plan, member countries of the Euro would pool funds to a Euro Treasury in Brussels. This outfit would have the ability to transfer funds from strong to weak economies. The UK Treasury has similar powers to move money around within the UK, which is a monetary union based on sterling. Huge amounts have been taken from London and the South East and given to the rest of the UK over a period of decades. But the gap in performance remains.
The relative performance of the Eurozone economies in recent years highlights the problems faced by the zone. German GDP is now 6 per cent higher than it was in the year just before the crash, 2007. Positive gains have been registered in countries like Austria, Belgium. France, too, is up, though here growth has more or less stalled since 2011. Even Ireland, which was very badly hit, is now registering strong growth and the economy is larger than it was in 2007.
But there is another group where growth has been disastrously bad. The Italian economy has shrunk by 9 per cent since 2007, Portugal by 7 per cent and Spain by 5 per cent. These economies just do not seem to have the enterprise and the resilience to bounce back in the way in which Germany and its immediate economic satellites have done. Closer integration may make sense for the successful countries in the Eurozone, but not for the rest.
As published in City AM on Wednesday 14th October 2015