International Economics

Will High Economic Growth Ever Return?


By DEAN CARROLL | 30.06.2011

europeancentralbankThis week, China made clear its intention to buy up government debt in Europe. The country’s $3 trillion currency reserves, the largest in the world, have already started to diversify holdings beyond US dollars. So there could be hope for Greece even if the European Union and the International Monetary Fund turn away, as a result of austerity measures not being implemented.

And it may be that Europe – and the rest of the western world – cannot ever expect to return to the lofty economic growth levels of the post-war boom years. It speaks volumes that Goldman Sachs is cutting back jobs in the US, but employing 1,000 new staff in Singapore. We know that more of the richest people in the world now live in Asia rather than in Europe – for the first time in the modern epoch.

But even in the east, there are storm clouds looming. China’s prolonged and commonplace double-digit growth will come to an end eventually. Aside from the embryonic bubbles in the Chinese economy, we can see from history that when developing countries make the transition into developed nations, long-term economic growth slows from a sprint to a plodding walk at best – if they are lucky enough to overcome the worst effects of the inevitable financial crises along the way. The way things stand at the moment in Europe, it seems the west has failed in that respect.

As former British Prime Minister Tony Blair put it this week in his latest audition to become the first-ever elected President of Europe – should that post ever exist – the single currency is not to blame for the continent’s troubles. “The eurozone has not caused the crisis, it has exposed the crisis,” uttered Blair. And the Bank for International Settlements also made it clear that pre-crisis growth had been unsustainable – in its global annual report. General manager of BIS Jaime Caruana explained that the imbalances caused by such runaway growth “now need to be rectified”, adding: “Policy-makers should not hinder this inevitable adjustment.”

Some now say that the might of the German economy – currently considered to be Europe’s rock – has been overestimated. Chief economist at the Centre for European Reform think-tank Simon Tilford’s interesting paper, ominously titled “Germany’s brief moment in the sun”, warns of “good reasons for thinking that its economic and political ascendancy will be short-lived”. After all – just four years ago, Germany was considered to be the sick man of Europe. And it still suffers from higher than average levels of public debt, an ageing population, excessive export dependence and the often-heralded manufacturing sector accounting for just a fifth of economic activity. Tilford suggests that Germany’s economic recovery is “almost entirely down to a cyclical rebound in exports and investment”. He adds: “There are mounting risks of a synchronised global slowdown – including in the hitherto booming Chinese economy.”

Whether Greece defaults in a “Lehman moment”, causing a break-up of the eurozone and another potential global economic crisis, or a way out of the mire is found – through an orderly restructuring of sovereign debt, bank recapitalisation and bail-outs from the Europe Union, the International Monetary Fund and the sale of government bonds to hungry Chinese investors – one thing is for sure, globalisation means that contagion exists even outside of a currency union. Talk of a return to national currencies in the eurozone is somewhat of a distraction from the bigger picture – it being that economic growth in the west will probably continue to climb only at lower levels than we have become accustomed to over the last 50 years.

Printing more money can only take you so far, as Zimbabwe has shown us. Meanwhile, even in the east there are possible financial busts on the horizon – resulting from the current booms. Is it time for Europe and the west to accept that super-charged economic growth will never return? It is a very difficult question to ask, but one that governments should ponder nevertheless.

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