Not only is the United States slouching toward a
double dip, but so is Europe. New data out today show even Europe's
strongest core economies -- Germany, France, and the Netherlands --
slowing to a crawl.
We're on the cusp of a global recession.
Policy makers be warned: Austerity is the wrong medicine.
We all know about the weaknesses in Europe's "periphery" -- Greece,
Ireland, Spain, Portugal, and Italy. But the drop in Europe's core is
Germany grew at an annualized rate of just half a percent last
quarter, down from 5.5 percent in the first quarter of the year. France
didn't grow at all.
What's going on in Europe's core? Partly it's a loss of confidence due to debt crises in the periphery. But that's hardly all.
Europe depends on exports -- especially to Asia, India, Latin America,
and the United States. But exports to China and other emerging markets
have been dropping. China, worried about inflation, has pulled in the
reins on its sizzling economy. Brazil has been pulling back as well.
And as the United States economy sputters, exports to America have been slowing.
But chalk up a big part of Europe's slowdown to the politics and
economics of austerity. Europe -- including Britain -- have turned John
Maynard Keynes on his head. They've been cutting public spending just
when they should be spending more to counteract slowing private
The United States has been moving in the same bizarre direction.
Cutbacks by state and local governments have all but negated the federal
government's original stimulus, and no one in Washington is talking
seriously about a second. The pitiful showdown over increasing the debt
limit has produced the opposite: a Rube-Goldberg-like process for
capping spending rather than increasing it, and a public that's being
sold the Republican lie that less government spending means more jobs.
Yes, governments on both sides of the Atlantic are deeply in debt.
But policy makers on both sides seem to have forgotten that economic
growth is the most important tonic.
Public debt has meaning only in relation to a nation's GDP. When more
people are working, more companies are profiting, and economies are
expanding, revenues pour into national treasuries.
When economies stop growing or contract, the opposite occurs.
Economies can fall into vicious cycles of slower growth, lower tax
revenues, spending cuts, and even slower growth.
That's what we're seeing now.
What's worse, nations are so intertwined that when every major economy is slowing the cumulative effect is larger.
With anemic growth in America and Europe, the Japanese economy
comatose, and emerging markets (including China) pulling in their reins,
the vicious cycle could become worldwide. If global demand for goods
and services continues to fall behind the potential supply we'll see
unemployment rise further and growth slow even more -- especially in
Europe and the U.S.