WHO IS WINNING IN THE RACE FOR RECOVERY / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( VERY HIGHLY RECOMMENDED READING )

Who is winning in the race for recovery

By Samuel Brittan

Published: May 12 2011 22:29

It is far too early for a final assessment of the relative behaviour of the different parts of the industrial world in the recent nearly unprecedented recession, but it is not too early for a preliminary examination.

If we look at the fall in output from the peak quarter before the recession in 2007 or 2008 to the recession trough and the recovery since then, the US emerges as the easy winner. The fall in output was slightly less than that experienced in the eurozone, the UK or Japan and the recovery has been much more impressive. It is the only one of the four main groups where output has recovered to above the pre-recession peak. You might think that the domestic American reaction would be one of rejoicing, but it is not.

Hardly a day passes without warnings of doom from Republican politicians, many financial analysts and even some economists. It is true, as Clive Crook points out, that the US authorities would have more room for manoeuvre if there were a Congressional agreement on the long-term budgetary problem, but they have not done too badly as it is. They have pulled out the monetary and fiscal stops to keep the economy going and there has been no inflationary breakout.

The annual rise in consumer prices has rarely risen much above 3 per cent and the main inflationary threat comes from external energy and commodity prices generated outside the developed world. The dollar, like the other main currencies (except sterling), has fluctuated since 2007, with no pronounced trend.

In any case there is no obvious place for fundholders, distrustful of “quantitative easing”, to go. The yen is no longer the attraction it once was; and the idea of the problem-beset euro as a safe haven is frankly a joke.

Even if investors want to acquire gold they must acquire currencies with which to buy it from existing holders. The real US problem is that of jobless recovery. This is the other side of the rapid rise in productivity – another league in which the US heads the western world – and the answer to this problem is still faster growth rather than just special schemes.

The worst showing on GDP performance is Japan, mainly because of the depth of its recession. But next worst is easily the UK. So far an anaemic recovery has left UK output 4 per cent below its pre-recession peak.

If the rise to that peak owed a lot to a financial bubble and the underlying growth rate is now only 1-1½ per cent per annum, as the former deputy governor of the Bank of England asserts, this makes the picture worse; for there is then less room to catch up. For what they are worth, the data show a marked slowdown in the pace of UK recovery between the last three quarters of Labour rule and the three quarters since the election. But let us not go in for what used to be called post hoc ergo propter hoc. A more serious point is that the government and the Bank of England have a masochistic vested interest in marking down the growth capacity of the British economy. For the more low growth can be blamed on structural factors, the less it can be blamed on their own austerity programme, which it seems blasphemy to criticise.

The obsession with inflation of financial authorities such as the ECB is yet another example of generals fighting the last war. The only entity in the main currency areas with an inflation problem is the UK and that is largely self-inflicted, reflecting VAT increases and the underestimated effects of the large but silent 2008-09 depreciation of sterling. The latter was probably desirable, but had its costs. Contrary to what Harold Wilson once said, the pound in your pocket has been devalued.

As for the eurozone it emerges as about average in everything except fiscal performance, where its record should please the dinosaurs who believe in balanced budgets. I cannot end without referring readers to an excellent study both of the eurozone and of the Greek case by Jason Manolopoulos, Greece’s ‘Odious’ Debt’ (Anthem Press.) He shows conclusively that the eurozone is far from an optimum currency area.

The eurocrats deluded themselves in particular about the nature of Greece, which has not thrown off its Ottoman legacy and where government is regarded as a source of favours rather than a provider of taxpayer-financed services.

A severe debt write-off by Greece and Portugal is a foregone conclusion; and in my view both countries would be better off without the euro. Ireland has carried out an internal devaluation with unit labour costs falling by 15 per cent since 2008, achieved at the terrible cost of a rise in unemployment to 15 per cent. The Republic can now stay with the euro if it wishes despite my personal view that it would be better off going back to sterling.

Of course, exiting a currency area has its financial complexities. But it has been done before and that merely underlines the need for an (unpublished) plan B rather than a messy exit.

Copyright The Financial Times Limited 2011.