The European Commission’s grim economic forecast
The economic forecast of the European Commission for 2012-14 is sobering, but its tone obscures crucial human truths.
The distinguished economist J. K. Galbraith once joked that the main function of economic forecasting was to make the science of astrology look respectable. Although a few individual economists predicted the crash of 2009, no major institutions seem to have done so, however elaborate their statistical apparatus and methodology. This failure is not surprising, given the constraints under which institutions operate, and the double function that official forecasts fulfil.
Their primary purpose is to support rational economic policies rather than guesswork. In this light, the European’s Commission’s new economic forecast, a document of almost 200 pages covering the two years to the end of 2014, is enlightening.
Take the concise but devastating sections on Greece and Spain. In Greece, in the second quarter of 2011, unemployment stood at slightly over 16%. By the same period in 2012 it had risen to over 23%, and overall employment had fallen to 53% of the working age population. The report then notes, ‘Continued wage reductions [are] set to eventually be reflected in price declines’. (Much lies in that word ‘eventually’.)
In Spain, ‘deep adjustment continues’, ‘rebalancing is underway in the midst of recession’. House prices will continue to fall, unemployment has reached 24.6%, more than half of which is long-term. Simultaneously inflation rose to 3.5% in September driven by, for example, ‘discretionary measures, such as the increases in co-payments for medicines, higher VAT rates, higher university tuition fees and an increase in electricity and gas prices’.
Some policies are articulated, at least in general terms. ‘Bold reforms are needed to prevent a prolonged period of high unemployment, which would bring social hardship and a destruction of human capital detrimental to longer-term growth.’ (So perhaps the Commission has in mind to tax profits more and jobs less; approve a Financial Transactions Tax; insist that our new giant multinationals - Amazon, Apple, Google, Starbucks - pay rates of taxation comparable with their local competitors.)
The second function of such official documents - one which can never be explicitly acknowledged - is distinctly unscientific. One responsibility of the European Commission is to promote Europe’s recovery. This duty entails communicating confidence, since loss of confidence can be fatal to an economy: negative forecasts by the ratings agencies about Greece’s precarious finances were self-fulfilling, by drastically raising the cost of Greece’s borrowings on the international market.
Here lies a genuine dilemma. Forecasting a crisis will make it even more likely: but if honest clarity is not permitted, what is the point? The Commission’s forecast bears the signs of this dilemma. It has revised sharply downwards its previous forecast. But the possibility that its next report will be even gloomier emerges only in a few careful remarks about ‘downside risks’, always balanced by an ‘upside’. By contrast, as this document was released, the chief of the Swiss Army described the European economic crisis, and the arrival of migrants fleeing the worst affected countries, as the principal risk to his country’s current security.
Unfortunately, the tacit obligation to avoid stirring up fear has doomed this forecast document to employ a dehumanised language: its constant euphemisms deny actual experience.
The Editorial begins, for example, by speaking of a ‘difficult post-crisis correction’ rather as if the crisis were now overcome. According to the ‘Overview’, households, banks and others are ‘simultaneously reducing their leverage’. Indeed, ‘domestic demand has made negative contributions to GDP growth for more than a year’. The words ‘adjustment’ (as in the case of Spain) and ‘confidence’ each occur more than 100 times: ‘inequality’ (or ‘inequalities’), ‘anger’, ‘protest’ or ‘poverty’ not even once. Even the word ‘poor’ itself appears only in the title ‘Standard and Poors’; and ‘unrest’ is used just once, applied strictly to markets, even though massive social unrest is deeply relevant to economic forecasting.
We neither expect nor desire moral outrage in a technical report. But a little more plain speaking would be helpful.
Frank Turner SJ
Jesuit European Social Centre