Acknowledging over-optimism: Christine Lagarde, MD of the IMF at a CNN debate in Washington DC. Photo: Getty
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The “New Mediocre” – and why the eurozone may be sliding back into recession

Something seems to have gone structurally wrong with all of the advanced economies: their ailment is chronic, not acute.

This summer, we went on holiday to Italy. While Britain seems to be in a state of perpetual flux, nothing much had changed since the last time we were there: the same delicious food and wine, the same immaculate medieval towns, the same beautiful frescoes and churches and galleries.

Yet there is a dark side to Italy’s immutability, especially for its citizens. Another thing that has hardly changed in the past decade and a half is the level of the country’s national income. Italy’s GDP was, in real terms, no larger this past year than it was at the turn of the millennium. That is a staggering fact. Even with the collapse of 2008 to 2009, the UK’s national income has grown by more than a quarter over the same period.

Nor are Italy’s prospects improving. The International Monetary Fund has revised its forecast for Italy’s growth this year from an already desultory 0.3 per cent to -0.2 per cent. If this projection is correct, it will signal that Italy’s economy will have contracted in every quarter since June 2011, with a single exception.

For most of the post-crisis period, the received wisdom has been that the laggardly performance of the eurozone’s Latin periphery has been the result of fiscal incontinence and a sad lack of the moral fibre needed to undertake the necessary structural reforms. That has certainly been the line taken by Germany in the interminable negotiations over how to resolve the sovereign debt crisis that reached a crescendo in the summer of 2012.

This year, however, the authorised version has become much harder to sustain. The German economy, too, has begun to contract, despite Germany’s vaunted current account surplus and unimpeachable public finances. In Italy’s case, the charges never quite stuck anyway. The government there runs a primary surplus. It takes in more revenue than it spends, if interest costs are excluded, and has done for years: a situation that dedicated austerians such as our own government can only dream of. Because of this, the IMF’s gloomy judgement that there is a significant probability that the entire eurozone will slide back into recession this year has been greeted by many with puzzlement. “What exactly,” they ask, “is the problem?”

The right context for an answer is probably to be found in another announcement from the IMF. Christine Lagarde, the organ­isation’s managing director, used its autumn summit to acknowledge that its economic forecasts since the crisis have been consistently overoptimistic for all of the advanced economies. The problem, in other words, is not unique to Italy, nor even just to the eurozone. Something seems to have gone structurally wrong with all of the advanced economies: their ailment is chronic, not acute. It is time, Lagarde suggested, that we reconciled ourselves to a “new mediocre” – the reality that economic growth will not recover to the 2-3 per cent range that developed economies typically enjoyed in the three decades before the crisis.

This saturnine assessment of the world’s economic predicament has been whispered about in worried tones for months now in the world of high finance. The fashionable term for it is “secular stagnation” – a shorthand coined by an American professor of the 1930s and popularised by Larry Summers, the former US treasury secretary and Harvard economist, in a speech last year. But “secular stagnation” is a description of the problem, rather than an analysis of its causes. If it is true that we are not going back to the good old days of 3 per cent growth (let alone the 4 or 5 per cent of the 1950s and 1960s), the important question is: why?

On this, unfortunately, mainstream economics is unilluminating. Indeed, “secular” is code among economists for “unexplained” – meaning that the new mediocre is an anomaly that cannot be accounted for by the factors that mainstream economic models normally consider important.

The most convincing explanations come instead from more heterodox quarters. Lagarde referred to one herself, warning that inequality is casting a “dark shadow” over the global economy. The problem is that the rich tend to save a larger proportion of their income than the poor; so that increasing inequality may be not just socially undesirable but a structural drag on demand.

Another theory is that the vast overhang of public and private debt that the advanced economies have accumulated since 1980 is to blame for their stagnation. This idea makes intuitive sense. Losing your job makes you much more cautious if you have a hefty mortgage than if you are debt-free. It’s easy to see that the same desire to pay down debt rather than to invest and spend might be causing a prolonged “balance-sheet recession” if the economy as a whole is seeking to minimise the financial risks heaped up in more optimistic times.

Nevertheless, even these explanations don’t get to the root of things. They offer plausible hypotheses concerning the mechanics of what has gone wrong. But they prompt still more fundamental questions, especially if we want to know what to do about it. Why has inequality been increasing since the late 1970s – and why was there the giant build-up of debt in the first place?

For an answer to these questions, it is necessary to venture outside the neat reserve of economics into the wild savannah of politics. It was the postwar political settlements that gave us the trente glorieuses in France and “You’ve never had it so good!”. It was Thatcherism and ordoliberalism that gave us the pre-crisis era of debt-fuelled growth. So, how can we engineer a renaissance from secular stagnation? Don’t look to the economists for the answer. Only a new generation of politicians and voters can provide one. 

Mehdi Hasan returns next week

Macroeconomist, bond trader and author of Money

This article first appeared in the 15 October 2014 issue of the New Statesman, Isis can be beaten

Ukip's Nigel Farage and Paul Nuttall. Photo: Getty
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Is the general election 2017 the end of Ukip?

Ukip led the way to Brexit, but now the party is on less than 10 per cent in the polls. 

Ukip could be finished. Ukip has only ever had two MPs, but it held an outside influence on politics: without it, we’d probably never have had the EU referendum. But Brexit has turned Ukip into a single-issue party without an issue. Ukip’s sole remaining MP, Douglas Carswell, left the party in March 2017, and told Sky News’ Adam Boulton that there was “no point” to the party anymore. 

Not everyone in Ukip has given up, though: Nigel Farage told Peston on Sunday that Ukip “will survive”, and current leader Paul Nuttall will be contesting a seat this year. But Ukip is standing in fewer constituencies than last time thanks to a shortage of both money and people. Who benefits if Ukip is finished? It’s likely to be the Tories. 

Is Ukip finished? 

What are Ukip's poll ratings?

Ukip’s poll ratings peaked in June 2016 at 16 per cent. Since the leave campaign’s success, that has steadily declined so that Ukip is going into the 2017 general election on 4 per cent, according to the latest polls. If the polls can be trusted, that’s a serious collapse.

Can Ukip get anymore MPs?

In the 2015 general election Ukip contested nearly every seat and got 13 per cent of the vote, making it the third biggest party (although is only returned one MP). Now Ukip is reportedly struggling to find candidates and could stand in as few as 100 seats. Ukip leader Paul Nuttall will stand in Boston and Skegness, but both ex-leader Nigel Farage and donor Arron Banks have ruled themselves out of running this time.

How many members does Ukip have?

Ukip’s membership declined from 45,994 at the 2015 general election to 39,000 in 2016. That’s a worrying sign for any political party, which relies on grassroots memberships to put in the campaigning legwork.

What does Ukip's decline mean for Labour and the Conservatives? 

The rise of Ukip took votes from both the Conservatives and Labour, with a nationalist message that appealed to disaffected voters from both right and left. But the decline of Ukip only seems to be helping the Conservatives. Stephen Bush has written about how in Wales voting Ukip seems to have been a gateway drug for traditional Labour voters who are now backing the mainstream right; so the voters Ukip took from the Conservatives are reverting to the Conservatives, and the ones they took from Labour are transferring to the Conservatives too.

Ukip might be finished as an electoral force, but its influence on the rest of British politics will be felt for many years yet. 

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