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

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Want to send a positive Brexit message to Europe? Back Arsene Wenger for England manager

Boris Johnson could make a gesture of goodwill. 

It is hard not to feel some sympathy for Sam Allardyce, who coveted the England job for so many years, before losing it after playing just a single match. Yet Allardyce has only himself to blame and the Football Association were right to move quickly to end his tenure.

There are many candidates for the job. The experience of Alan Pardew and the potential of Eddie Howe make them strong contenders. The FA's reported interest in Ralf Rangner sent most of us scurrying to Google to find out who the little known Leipzig manager is. But the standout contender is Arsenal's French boss Arsene Wenger, 

Would England fans accept a foreign manager? The experience of Sven Goran-Eriksson suggests so, especially when the results are good. Nobody complained about having a Swede in charge the night that England won 5-1 in Munich, though Sven's sides never won the glittering prizes, the Swede proving perhaps too rigidly English in his commitment to the 4-4-2 formation.

Fabio Capello's brief stint was less successful. He never seemed happy in the English game, preferring to give interviews in Italian. That perhaps contributed to his abrupt departure, falling out with his FA bosses after he seemed unable to understand why allegations of racial abuse by the England captain had to be taken seriously by the governing body.

Arsene Wenger could not be more different. Almost unknown when he arrived to "Arsene Who?" headlines two decades ago, he became as much part of North London folklore as all-time great Arsenal and Spurs bosses, Herbert Chapman or Bill Nicholson, his own Invicibles once dominating the premier league without losing a game all season. There has been more frustration since the move from Highbury to the Emirates, but Wenger's track record means he ranks among the greatest managers of the last hundred years - and he could surely do a job for England.

Arsene is a European Anglophile. While the media debate whether or not the FA Cup has lost its place in our hearts, Wenger has no doubt that its magic still matters, which may be why his Arsenal sides have kept on winning it so often. Wenger manages a multinational team but England's football traditions have certainly got under his skin. The Arsenal boss has changed his mind about emulating the continental innovation of a winter break. "I would cry if you changed that", he has said, citing his love of Boxing Day football as part of the popular tradition of English football.

Obviously, the FA must make this decision on football grounds. It is an important one to get right. Fifty years of hurt still haven't stopped us dreaming, but losing to Iceland this summer while watching Wales march to the semi-finals certainly tested any lingering optimism. Wenger was as gutted as anybody. "This is my second country. I was absolutely on my knees when we lost to Iceland. I couldn't believe it" he said.

The man to turn things around must clearly be chosen on merit. But I wonder if our new Foreign Secretary Boris Johnson - albeit more of a rugger man himself - might be tempted to quietly  suggest in the corridors of footballing power that the appointment could play an unlikely role in helping to get the mood music in place which would help to secure the best Brexit deal for Britain, and for Europe too.

Johnson does have one serious bit of unfinished business from the referendum campaign: to persuade his new boss Theresa May that the commitments made to European nationals in Britain must be honoured in full.  The government should speed up its response and put that guarantee in place. 

Nor should that commitment to 3m of our neighbours and friends be made grudgingly.

So Boris should also come out and back Arsene for the England job, as a very good symbolic way to show that we will continue to celebrate the Europeans here who contribute so much to our society.

British negotiators will be watching the twists and turns of the battle for the Elysee Palace, to see whether Alain Juppe, Nicolas Sarkozy end up as President. It is a reminder that other countries face domestic pressures over the negotiations to come too. So the political negotiations will be tough - but we should make sure our social and cultural relations with Europe remain warm.

More than half of Britons voted to leave the political structures of the European Union in June. Most voters on both sides of the referendum had little love of the Brussels institutions, or indeed any understanding of what they do.

But how can we ensure that our European neighbours and friends understand and hear that this was no rejection of them - and that so many of the ways that we engage with our fellow Europeans rom family ties to foreign holidays, the European contributions to making our society that bit better - the baguettes and cappuccinos, cultural links and sporting heroes remain as much loved as ever.

We will see that this weekend when nobody in the golf clubs will be asking who voted Remain and who voted Leave as we cheer on our European team - seven Brits playing in the twelve-strong side, alongside their Spanish, Belgian, German, Irish and Swedish team-mates.

And now another important opportunity to get that message across suddenly presents itself.

Wenger for England. What better post-Brexit commitment to a new Entente Cordiale could we possibly make?

Sunder Katwala is director of British Future and former general secretary of the Fabian Society.