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World economy: statistics and damned lies

Category: World of Business

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World economy: statistics and damned lies

Tuesday 20 September 2011 / Editorial

In Berlin, Brussels and Washington leaders are more interested in polite fictions than grim realities


The lamps are going out all over the world economy, and who knows when we shall see them lit again. Instead of raging against the dying of the light, those in authority carry on like the cast of Weekend at Bernie's, and prop up cadavers. In Berlin, Brussels and Washington the over-riding concern is lending the appearance of life to the dead, whether they be deceased debt contracts or expired ideas.


The latest blizzard of statistics blew in yesterday from the International Monetary Fund, which knocked a quarter off the fragile growth forecast pencilled in for the rich economies In June. The UK fared slightly worse than this average, with a downgrade nearer a third. The IMF came closer than ever to warning the chancellor to change course on the cuts. Let's hope last night's reports about £5bn in new capital spending indicate a new willingness to listen. But Britain is a small fish in global waters: it may have ruled the waves; it does not make them now. The horrific twist concerns the two economies that do, the US and the eurozone. The projections assume that compromise triumphs in Washington, and that the eurozone crisis gets "resolved". Without these heroic assumptions, a dank grey outlook turns unremitting black. Already nations like Britain are experiencing a second spike in unemployment, and the IMF was explicit: we could soon be looking at the long-mooted double dip in output too.


Sadly, world leaders still seem more interested in polite fictions than grim realities, especially in Berlin. Of the reparations imposed on Germany at Versailles, Keynes stated that the one thing that could be said with certainty was that these were debts that would not be repaid. If Germany itself could only grasp that insight now, it would cease to pretend that Greek bonds will be honoured. That claim survives even though the last rescue deal saw bondholders accept "voluntary" reductions; they were voluntary in the give-me-some-money-or-I-will-mug-you sort of sense. Amid the scramble to apply another sticking plaster last night, the distortion of truth was worsening the prognosis. The lie that Athens remains solvent blurs the line between merely cash-strapped and outright bankrupt, thereby tainting other treasuries. All sorts of objective differences between Italy and Greece should make it easier for the former to foot its bills, and yet – ahead of S&P's downgrading of Rome's debt yesterday – the great fear was contagion.


In the US, meanwhile, the right decries President Obama's plan to raise the tax rates on plutocrats to match that which their secretaries pay. In defiance of any calm analysis, it insists the nation can close its overdraft without any new taxes at all. No matter that the hope of self-financing handouts was disproved a generation ago by the Reagan deficit, the pretence that fresh rewards for the wealthy will inspire them to enrich the rest retains its hold. And from its Washington base, the IMF itself is not immune from local dogma. Greek democracy is challenged when the IMF applies not merely for bills to be settled, but to dictate that this should be through spending cuts and not tax rises. Likewise the continued stress on flexible labour, which had some relevance in the past, is misplaced this time: lower pay cannot resolve a problem which is, at root, a lack of demand.


As for the Fund's suggestion that a revived Doha trade round could see the world turn the corner, it must be said that the faith is touching. Through a near-decade of good times Doha achieved nothing, and – whatever the theoretical merits – no state will choose this moment to expose its industries to fresh winds of foreign competition. While the IMF protests that it is at a "critical juncture", the reality is that the dodo round would be a better name. As vitality drains from the world's economy, the remedy will not be found among the ranks of the extinct. The answers are uncertain, but as good a starting point as any is to face the facts.

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