Fernando G. Urbaneja | The chances of Europe (and Spain) entering in recession in the near future grow as the weeks pass. Italy and Germany are already flirting with the end of the (mediocre) growth cycle which has lasted since 2013. The other central European economies are getting close. Can we avoid avoid it? Of course, we should try to. The European Central Bank is attempting it with the loosest and most complacent monetary policy in history. But as Mario Draghi has been indicating for a couple of years, it is not enough: fiscal policy and so-called “structural reforms” needed to contribute decisively to sustaining growth and extending the cycle. But neither the countries nor the European Union itself, have been capable of implementing the fiscal measures and structural effects which could accompany, reinforce and finally replace the monetary policy, which has practically exhausted its tool box.
The transmission of expectations is very rapid in the new globalised and digitalised world, almost instantaneous. As the number of analysts fearing a new recession grows, economic actors take note and adjust their targets with the necessary prudence. Invest, grow, contract, take risks … it seems neither prudent or reasonable when there is suspicion of recession. The reports on the situation which boards and strategy and investment committees receive advise caution. Although cheap credit is available, increasing debt is not advised.
It is as if weathermen were announcing storms and warning about a wave of polar air. Before it arrives, it is advisable to check roofs, boilers and pipes. Preventive work to avoid catastrophic damage. In Spain we have recent experience, that of the Great Recession of 2008. It hit us hard with the boiler broken. The official narrative insisted that the financial system was sound, the best, and that the financial crisis was for others. The outcome is well known and eleven years later the bills have still not been paid.
The risk of recession is beginning to be seen in the data: in exports, as the outer circle of defence. If Germany sells less it also buys less; the powerful Spanish car components and machine tool industries are seeing a fall in orders and noting it is the time to cut back and not expand. The trade war between the big powers impacts on global trade and encourages protectionist movements in all markets. For Spain, which today is an exporting power, which has exited the recession, among other factors, through exports, the new environment is not favourable.
The state of public finances also cause misgivings. Until now there has been no problem in financing at low cost, but the debt is very high and the deficit (which is the problem) is not falling. Given this situation, talk of cutting taxes (with an inertial rise in spending) is dominant and worrying. And those who do propose increasing some taxes, do so not to reduce the deficit but to be able to increase public spending.
In short, winter is coming and the house is not prepared. There are leaks, the windows close badly and the boiler is broken.