Euro crisis blocks the path to full economic recovery
The year ahead looks gloomy, but quantative easing and inflation across Europe should prevent a full-blown depression.
By Jeremy Warner
28 Dec 2011
’Tis the season for economic and political punditry, the time of year when “opinion formers” across the globe, crystal balls at the ready, are expected to predict what’s going to happen over the next 12 months. We’ve already had Nick Clegg’s doom-laden prognosis. You can expect much more of the same “blood, toil, tears and sweat” predictions over the next few days.
Very little of this annual outpouring of forecasting, professional and otherwise, ever survives the anvil of events, so it came as a relief when Sir Mervyn King, Governor of the Bank of England, dared at a recent Inflation Report press conference to speak the truth. “Who knows,” he said, “what is going to happen tomorrow, let alone next month?” It was perhaps the most candid and therefore insightful remark yet made by a senior policymaker about the ongoing economic and financial crisis.
Tradition nevertheless condemns us at least to pretend, so here goes. In formulating a view, it is helpful to analyse what went wrong with previous consensually driven thinking. The past year has been a chapter of disappointed expectations. Higher than forecast inflation has squeezed disposable incomes, and therefore led to lower than generally predicted UK growth. Europe’s inability to face up to the underlying causes of its sovereign debt crisis has meanwhile astonished even the most sceptical of observers. And the jury is still very much out on whether China has managed to engineer a soft landing. Only the US has performed broadly as expected, though even that recovery was knocked temporarily off course by the supply-chain disruptions caused by the earthquake in east Japan.
Yet perhaps the biggest surprise of the lot was the persistence of extraordinarily low interest rates. I’m speaking here not just of officially determined short-term rates, which in the face of relatively high inflation have in the UK been held at close to zero. Even the European Central Bank, after a disastrously misjudged attempt to raise rates this year, has belatedly fallen into line. The rate rises of April and July have now been reversed.