The depression of British economy is a unique event: two other large economies in the European Union are also in a depression. The performance of this group of three countries (the others are Italy and Spain) is in contrast to a number of EU countries that have (nearly) recovered the total loss of output incurred in the course of the recession. This group includes Sweden, which has recovered all the lost output of the recession; Germany, which is back to it pre-recession peak; and to a lesser extent France, which is still 0.8 per cent below its own prior peak in output. A third group consists of economies that have been the subject of 'bail-outs' by the Troika of the EU/ECB/ IMF. If not beforehand, then since the imposition of deep public spending cuts, Greece, Ireland and Portugal have experienced very deep domestic recessions. The economies in the intermediate grouping of Britain, Italy and Spain are all effectively stagnating. The GDP data for the second quarter of 2011 show that the British economy grew cumulatively by just 0.1 per cent in the three quarters since the Comprehensive Spending Review, while Italy and Spain grew by 0.5 per cent and 0.7 per cent respectively.
However only in Britain was this stagnation a matter of domestic political choice.
Policy choices and stagnation
Of the three large stagnating economies, Spain had a much milder recession than either Britain or Italy. Spanish GDP contracted by a severe 4.9 per cent in the course of the recession, but this was exceeded by both Britain and Italy, which experienced contractions of 7.1 per cent and 6.9 per cent respectively, despite the fact that neither British nor Italian policy-makers had to cope with any problems on the scale of Spain's debt-fuelled construction boom.
The reason for the less severe downturn in Spain, despite arguably worse circumstances, is that the initial response of the Spanish government was the most effective of any of the leading European economies in combating recession. While the scale of the initial stimulus measures was only slightly above the EU average of 2 per cent of GDP, Madrid overwhelmingly concentrated its stimulus on public investment, especially in infrastructure projects. These are widely and authoritatively recognised as producing the most effective bang for buck in terms of government spending (technically speaking, they have by far the largest oscal multipliers attached). (1) In addition, at no oscal cost at all, the minimum wage was raised - and transfers to the poor are regarded as the next most effective means of stimulating the economy, since the poor are obliged to spend by far the greater proportion of their incomes (in Keynesian terms, the poor have the greatest marginal propensity to consume).
As a result, the recession was less severe in Spain, even though its construction boom had been far greater: in the years 1997 to 2007, investment in Spanish construction expanded by 90 per cent in real terms, nearly twice the rate of the economy as a whole; by contrast the British construction boom saw an expansion of 50 per cent, and growth in Italian construction over the same period was a much more modest 26 per cent.
Prospective recovery has been halted in Spain, however, because of a combination of actions by financial markets, ratings agencies and the European Central Bank, which together conspired to drag Spain into the debt crisis. The initial actions of Spain's socialist government were enough to cushion the effects of the recession. But its subsequent capitulation to the pressures for a bail-out of its creditors and the accompanying cuts to public spending have since consigned it to the economic doldrums.
Italy represents an altogether different case. Italy is the Japan of Europe. While Japan is now widely described as having lost decades in the form of negligible growth since 1990, Italy's economic performance has been marginally worse over that period. …