From the FT's Lex blog
Political leaders insist that economic growth will ease the pain of fiscal adjustment and attendant austerity measures. This is said more in hope than in confidence, however, since economic growth has practically vanished across the developed world.
Rich nations had a horrible second quarter. The annualized percentage growth rates for gross domestic product -- 1.3 for the U.S., 0.8 for the euro zone and U.K., 0.5 for Germany, 0 for France, minus 1.2 for Japan -- are well below the 1.5-3 per cent regarded as sustainable over the long term.
This stagnation looks worse in historical context. A deep recession should be followed by a strong recovery as the labour and capital that lay fallow during the bad years are put to work. That is not happening. Four years without economic growth qualify as a sort of Lesser Depression.
For governments with excessive debt burdens, this creates a painful paradox. Spending cuts and tax increases would reduce deficits, but they would also reduce growth, so increasing deficits. The latter effect has predominated over the former in Japan. Big fiscal deficits in the years after its financial collapse led only to bigger deficits in the medium and long term. More than two decades on, the debts keep mounting and growth remains slow.
The paradox is particularly dangerous in the euro zone, where a slowing economy is adding to the difficulty of solving the sovereign debt crisis. The absence of growth makes it likely that Germany and other creditor nations will be even more reluctant to continue bailing out Greece and other debtors.
All rich nations face something of the same dilemma, however. The addition of ever more government debt through short-term stimulus might only prolong their Lesser Depressions. If growth does not pick up strongly fairly soon, it may be necessary to start thinking about a more radical financial reset -- such as higher inflation or large debt writedowns. Such policies are objectionable and risky, but the alternatives could be worse.