Recession on the horizon

Europe is looking at stagnation and recession, at least throughout 2012. The euro-zone economy will grow by only 0.5 percent (one-third of that predicted this spring) and several countries will sink into recession (Italy very probably, and surely Portugal and Greece, which have already been in it for six quarters): an economic paralysis which threatens to last well into 2013.

The European Commission's message for Spain is doubly bad: the rate of growth for this year and the next will be 0.7 percent; the economy will go on destroying jobs, and the rate of unemployment will continue to grow, limited only by the decline in active population and the exit of immigrants; and Spain will not fulfill the deficit-reduction objectives, neither this year, nor the next, nor in 2013.

The concern about the solvency of national debts has obscured the fact that in 2011 the euro-zone economy has been slipping toward stagnation and, in some cases, recession. The causes are firstly, the debt crisis; secondly the fiscal curtailment policies in response to it; and finally the course so obstinately followed by Germany, France and the ECB, in maintaining these policies inflexibly across the board, stands as the great obstacle to an economic recovery that ought to have started early in 2011. Orthodox advocates of stability-at-all-cost point to the pressure of investors in demanding sharp, short-term deficit adjustments in the bailouts of Greece, Ireland and Portugal.

Can this prospect of more unemployment and less wealth be avoided in any way? So far there has been little room for maneuver. The EU's inability to solve the Greek crisis, and the chronic putting-off of obvious solutions (the main one being the creation of a European Treasury) has inexorably led to the chaos in Italy - true, with the help of Berlusconi's inept government. The thin line that now separates the euro from a catastrophic breakdown is the intervention of the ECB, massively purchasing Italian debt.

The "two-speed" option solves nothing. It would imply an overall loss of wealth unacceptable even to Germany and France. A reasonable solution to the debt-induced recession, suggested sotto voce by the G20, is that the countries of the zone that do not have deficit problems, (Germany, the Netherlands, Austria and Finland) should implement expansive fiscal policies, to increase spending, demand and imports. Germany is preparing to reduce taxes, but this is a response to the hike in VAT, which German Finance Minister Schäuble considers excessive. There exists no conscious policy of incentivating demand, and any sign of relaxation is anathema to Madrid.

In Spain, discussion will soon revive on the costs of the adjustment policy. The current intention is to cut back (with less spending or more taxes) ¤15 billion in 2012 and ¤23 billion in 2013. The first question in the discussion is whether Spanish society can bear this draining; the second, whether an effort on this scale will lead to reactivation in 2014.