The sheep of Europe have voted for slower growth
The contagion marches onwards.
I continue my globetrotting. Believe me, it isn't that glamorous - the hotels all look the same and you never really beat the jet lag, although it helps that I can sleep on a rock. Last week I was in San Diego for an international conference; this week I attended a meeting at the Institute for the Study of Labour (IZA) in the German city of Bonn, where I am director of the "Future of Labor" research programme.
We had gathered in Bonn to talk about unemployment. Germany is a big economic success story at the moment, with an unemployment rate of 6 per cent and falling.
This stands in marked contrast to the United States, where the most recent labour market news was horrid: the unemployment rate has risen to 9.2 per cent, and there has been a much smaller increase in private non-farm payrolls than the market expected.
Our discussions in Bonn quickly turned to the troubles in Greece, Ireland, Portugal and Spain, where the unemployment rates are, respectively, 15 per cent, 14 per cent, 12.4 per cent and 20.9 per cent. Youth unemployment is 7.7 per cent in Germany; in Spain it is 44.4 per cent, and likely to rise even further as the latest austerity plan begins to bite.
The decision by the European Central Bank (ECB) to raise interest rates again, to 1.5 per cent, will only make a grave situation worse. The step was taken even though there is no evidence of inflation in the eurozone and the money supply is falling, not rising.
What is astonishing is that every single one of the 23 members of the ECB's governing council, which includes two executive board members from Portugal and Spain and four central bank governors from Ireland, Greece, Portugal and Spain, voted for the rate rise.
It is hard to understand why those six sheep voted for a move that will slow growth and increase the prospects of sovereign default in the countries they are supposed to represent.
European leaders have also been unable to sort out another bailout for Greece and so the contagion marches onwards. This lot couldn't run a whelk stall. Italian and Spanish bond yields have jumped, reflecting the rising cost of their debts, while the share prices of Italian banks have collapsed amid fears that Italy will need a bailout.
It hasn't helped that the country's prime minister, Silvio Berlusconi, is feuding with his finance minister. But it may not stop there, given that French banks alone have $472bn of exposure to Italy and $175bn to Spain, and French ten-year yields rose 0.7 per cent.
The second round of stress tests on European banks, to be published on 15 July, is another potential flashpoint, as there is every likelihood that they will reveal some banks, possibly even some UK banks, are in worse shape than previously thought.
On my way to Germany, the lead story on the Lufthansa flight was the closure of the News of the World, with pictures of David Cameron and his former director of communications, Andy Coulson, rolling across the screen.
It pushed into second place the story that Moody's had downgraded Portugal's credit rating to junk status (Ba2). The Hackergate scandal, as it is becoming known in the US, is another example of the failure of corporate governance that brought down the banks, their boards having recklessly approved huge bonuses and risky loans.
It is reported that Cameron hired Coulson as his media strategist on the recommendation of George Osborne, who is proving an intensely political Chancellor.
WikiLeaks revealed that the governor of the Bank of England, Mervyn King, was critical of both Cameron and Osborne in discussions with the US ambassador to London, not just pointing out their lack of economic knowledge, but accusing them of playing politics with the economics.
I had a private meeting with Osborne just before the election last year, when he was still shadow chancellor. I was less than impressed by his knowledge of economics. When I asked him why he had proposed a cap on cash bonuses for bankers, he told me that it was "just politics" - and the idea has since been dropped.
He also surprised me by asking for advice on which economists he should talk to.
This seemed odd to me, because he'd had many years in opposition to hire a credible bunch of advisers and an election was fast approaching. I explained to him that, even though his actions were driven by politics, he would still have to get his policies past economists such as me. Unfortunately, he has not been able to do that.
It would be interesting to know which economists back Osborne now, over and above the usual right-wing suspects. My suspicion is that the few who do are heavily outweighed by those who think his policies are a disaster. The politicising of economics by Osborne and this government has resulted in bad policy that is now hurting everyone.
Despite Osborne's claim that the Organisation for Economic Co-operation and Development (OECD) supports his austerity measures, its latest leading indicators suggest that the UK economy is slowing, and has done so every month from February through May this year.
On 7 July, the National Institute of Economic and Social Research (NIESR) forecast that GDP growth for the second quarter of 2011 would be only
0.1 per cent; the next day, even that forecast was made to look over-optimistic by the weak construction figures released. It is possible that GDP growth in either the second or third quarters could be negative.
The CPI inflation rate dropped unexpectedly to 4.2 per cent, driven by weak household spending, and the trade data worsened once again and the claimant count continues to rise. The British Chambers of Commerce, in its report for the second quarter of this year released recently, said that its results "signal a weak and fragile recovery, with the economy still facing many risks". The economy is tanking.
Unlike the attempted cover-up over phone-hacking, there is no hiding place for those who are making the wrong economic decisions. I always felt that the economics would trump the politics, and so it is turning out.
David Blanchflower is NS economics editor and a professor at Dartmouth College, New Hampshire, and the University of Stirling
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