Hamish McRae: Celebrate Europe’s return to growth. Then prepare to face the next crisis

The first message I would take from the results from Eurostat, the statistical
office of the European Commission, is that the similarities between the
major countries are much greater than the differences. It is true that
France has had a rather less serious dip than other large economies, most
notably Germany, Italy and the UK. Greece has done not too badly either. But
French unemployment is exceptionally high and is forecast by the OECD to
reach 11.2 per cent next year. Youth unemployment is high too. As for
Greece, it has the most serious current account deficit in the eurozone and
is also running into criticism for its fiscal policies.

So I think it is more important to focus on the big story rather than trying
to slice the nuances. The big story surely is that in round numbers the main
European economies are down between 2.5 and 5 per cent year-on-year. That is
dreadful whatever gloss you seek to put on it. But ? and this is equally
important ? I have yet to see a single forecast for any major economy that
suggests there will not be some growth in 2010. We are not through this
sorry tale by any means but just as there was a clear financial turning
point in the spring, now there has been an equally clear economic turning
point too.

It is totally unscientific but it is worth noting that just as the equity
markets collapsed last summer and autumn some months ahead of the plunge in
economic output, so they recovered from March onwards, again some months
before the recovery was evident. It would be silly to ascribe this to
superior wisdom but it is worth observing that it typically occurs during
economic cycles that the markets turn three to six months ahead of the
economy. They have proved yet again that they are a leading indicator of

If that is lesson one, lesson two surely is that most of the major economies
have managed to stumble through this downturn with less destruction to
employment than one might have thought given the collapse of output that has
occurred. There have been disasters. Countries that have seen a particularly
serious house price collapse have seen the sharpest rises in unemployment.
The rise from the trough to the present is more than 11 percentage points in
Spain and more than 8 percentage points in Ireland. By contrast in Germany,
where house prices have been flat for at least a decade, the rise in
unemployment has been less than 1 percentage point.

So if you have a housing bust and the associated collapse of the construction
industry, you are going to have a big rise in unemployment. That is a sad
inevitability. But if you look at Germany or indeed the UK, while
unemployment has risen, it is clear that companies have made a huge effort
to hold on to staff if at all possible. The UK labour data last week showed
that employment actually rose during the past three months. True, that was
the result of the rise in part-time jobs being greater than the loss of
full-time ones, but that in a way is positive because if people are kept in
part-time work it is easier to bring them back to full-time jobs as demand

It is too early to be able to dig into the data and find the answer, but the
question that really does need examining is whether service industries are
more flexible in their employment patterns than manufacturing industries,
and if so what we should learn from that. In an uncertain world, having a
flexible workforce provides huge advantages, not just in terms of skills but
also in terms of the hours worked. You might say that this transfers risk
from employer to employee but if it results in higher employment overall
then surely that is a price worth paying. Better to have a part-time job
than no job at all.

If that is the way labour practices are going ? more part-time working, more
self-employment, maybe more choice on the part of the worker ? then big
changes will have to be made in labour legislation. We will have to fit the
legislation to the reality of the evolving labour market, not to the labour
market of 20 years ago.

What should we look for next? The data will continue to unfold and I suppose
from a British perspective there will be obvious interest in the official
figures for the final quarter. But they won’t come until January and between
now and then we will have had the pre-Budget report and the new Treasury

For continental Europe, the issue that seems to me to be the most important is
whether consumer spending will show a self-sustained rise. Germany is the
key here. The newly confirmed Chancellor, Angela Merkel, has promised tax
cuts to boost demand. That is a marked shift in policy in macro-economic
terms because it signals a more relaxed approach to the fiscal deficit. But
it is a shift in political direction because it makes the assumption that
tax cuts are more effective in boosting demand than higher public spending.
If it is successful, pressure will be placed on other European economies,
including our own, to go down that route. The trouble is that we don’t have
the leeway that Germany has to cut taxes and will instead have to put them

There is a broader point here. I suspect that when, in three or four years’
time, we look back on this downturn it may be that Germany will emerge as
the European country that has coped best. It has, to be sure, been
particularly hard hit by the collapse in demand for its top-end exports but
that is now recovering along with global demand more generally. It has a
stronger fiscal position than other major European countries, or at least a
less weak one, and if it can now boost demand through tax cuts, other EU
nations will have to sit up and take notice.

The long-term financial problems of Europe are as daunting as ever: in
particular the declining workforce having to support the growing army of
pensioners. As growth recovers, the focus of policy will shift from
crisis-management to coping with the fiscal catastrophe. But we should
celebrate that growth in Europe has returned, for that is an essential
precondition for coping with the pressures ahead.

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