by Michael Roberts
There is an irony in the face-off between the Euro leaders, the
ECB and the Syriza government in Greece. It is that, in a world economy
that has crawled along at a below trend growth rate since the end of the
Great Recession in mid-2009 (see my posts, https://thenextrecession.wordpress.com/2014/08/29/the-us-recovery-the-long-depression-and-pax-americana/),
there are signs that those Eurozone economies that have been in
depression (Spain, Portugal, Greece, Slovenia etc) are beginning to show
some signs of life after death.
It is a major premise of a Marxist view of investment and growth
under capitalism that it depends on profitability of capital and also on
the return on new investment. And profitability will fall and/or stay
low if there is an existing stock of corprorate capital and debt
(represented partly by weak companies with old technology and high debt)
that only makes enough income to just cover operations and debt
servicing. Companies in this position are what have been called zombie
There were a huge number of these zombies in the weaker Eurozone
economies. As sales collapsed in the Great Recession, these
‘uncompetitive companies’ (mostly small but also large) struggled on for
a while, but eventually succumbed to bankruptcy and elimination, laying
off huge swathes of labour. This is the process of the destruction of
capital values that capitalism periodically goes through to ‘cleanse’
itself and restore profitability.
Well, there are now signs that, in the weakest Eurozone economies,
this process is beginning to ‘work’. The ‘competitiveness’ of the
capitalist sector in Ireland, Spain, Portugal and even Greece, has
improved sharply relative to the stronger Eurozone economies of Germany
Take Spain. The boom before the Great Recession was mainly based on a credit-fuelled expansion in the property sector.
But now there are signs that the huge hangover of ‘dead’ property
left in the Great Recession is beginning to be stripped down, taken over
or written off. Spain’s capitalist sector is beginning to look meaner
and cleaner. There is still some way to go but in all these weak
Eurozone economies, the unemployment rate has peaked and begun to fall
And finally there is some employment growth.
Indeed, the weaker Eurozone economies including Greece have lowered
labour costs and closed down so many weaker companies that they are
beginning to look competitive even with Germany.
Economies like Spain and Greece have actually had faster growth in
productivity than in Germany because Spaniards and Greeks have worked
Germany has still done better because its level of productivity is
much higher anyway and it has been able to hold down wages (see my post, /).
Business activity indexes have started to pick up in several Eurozone
economies (although not yet in Greece). Indeed, this explains why there
has been a slight rise in the business activity index for the major
developed economies in the last month or so.
I have argued that the recent sharp fall in the oil prices leading to
significant reductions in prices at the gas pumps and for energy is
two-sided. It heralds a deflationary environment which is bad news for
profitability. But it also means slightly more in the pockets of
households to spend. And that is especially so in Europe, where oil
prices are not an important source of growth and profit but are mainly a
cost to households and businesses.
Retail sales in the shops in Europe have started to pick up, up by
2.8% yoy in December compared to just 1.6% yoy in November. Excluding
spending on fuel, growth is even faster.
However, the risk of debt deflationary spiral remains, as the Eurozone remains in deflation.
If prices keep falling and growth does not return sufficiently, then
the debt burden faced by both the public sector and the private sector
in Eurozone economies will rise and there is a danger of a collapse of
banking and corporate sectors.
A new report by McKinsey reckons that world capitalism has never been so awash with debt (McKinsey – Debt (Not Much) Deleveraging 040215.
Global debt has increased by $57tn since 2007 to almost $200tn — far
outpacing GDP growth. As a share of world GDP, debt has risen from 270%
to 286%, despite the cleansing of the Great Recession. Capitalism is not
out of the woods.
Overall, almost half of the increase in global debt since 2007 was in
developing economies, but a third was the result of higher government
debt levels in advanced economies. Households have also increased debt
levels across economies — the most notable exceptions being crisis-hit
countries such as Ireland and the US. China’s total debt, including the
financial sector, has nearly quadrupled since 2007 to the equivalent of
282% of GDP.
The Monetarist wing of mainstream economics, as represented by Ben
Bernanke, former head of the US Federal Reserve, the Bank of Japan, the
Bank of England and now Mario Draghi at the ECB, reckon that when
central bank interest rates are near zero (or even below as in
Switzerland and Sweden), a good dose of money printing , or
‘quantitative easing’, can do the trick in getting an economy going.
However, this has proved to be a chimera. Most of this extra credit or
money has ended up in the stock and bond markets and in the cash
reserves of the banks; very little has found its way to the so-called
‘real economy’ (see my post, https://thenextrecession.wordpress.com/2014/11/02/the-story-of-qe-and-the-recovery/).
The Keynesian wing of the mainstream has argued that just printing
more money is not enough: there must fiscal expansion i.e. government
spending, to get capitalist economies out of their ‘secular stagnation’.
The doyen of Keynesian economics, Paul Krugman, has demanded such
spending and claims that increased government borrowing and debt is not a
problem if it is just owed to others in the same economy or when
economies are flat. Debt can be paid back later.
Simon Wren-Lewis, the UK counterpart of Krugman, has recently argued
that the policy of fiscal austerity (government spending cuts and budget
deficit reduction) pursued by the US, UK and European governments after
2010 was the main reason why the recovery after the Great Recession was
slow in the major capitalist economies. In the US, real GDP growth was
held back a full percentage point a year from 2010. More fiscal spending
and all would have been well – it’s simples! (http://mainlymacro.blogspot.co.uk/2015/01/post-recession-lessons.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+MainlyMacro+%28mainly+macro%29).
Such an argument is based yet again on the size of the spending
‘multiplier’. Wren-Lewis applies a multiplier of 1.5 – in other words
for every 1% of GDP increase in government spending, there would be a
1.5% rise in real GDP. Actually, there is a big dispute about what the
spending multiplier actually is, with some studies arguing for a
multiplier of less than one. And then is the causal sequence: was
austerity the product of the collapse in the real economy in 2009 or was
the slow recovery a result of austerity? I have dealt with these
Keynesian arguments and evidence in several posts.
For me, what G Carchedi and I call the Marxist multiplier is the most relevant driver of economic growth (https://thenextrecession.wordpress.com/2012/06/13/keynes-the-profits-equation-and-the-marxist-multiplier/.) What
matters is whether profitability in the productive sectors of the
capitalist economy rises or falls. From this will flow increased
investment, employment and the ability to rise government spending.
Increased government spending may boost consumer demand for a while, but
at the expense of profitability. So it cannot last as a way out of
In southern Europe, the worst hit part of advanced capitalism in this
Long Depression, there are some signs that the bottom has been reached
and recovery in profitability may soon begin. The problem is that in the
other parts of the world economy, the risk of a new slump is increasing
and is still necessary to cleanse dead capital and excessive debt.
But it is an irony that, as the Euro leaders and the ECB try to
impose more fiscal austerity on Greece, there may just be a short window
of opportunity for growth opening up for the Greek capitalist economy.
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