The specter of recession in the US and Europe

Of Costa Rapti

“Principle of wisdom, names you visit”? Or just a play on words to embellish a difficult reality?

The US economy is slowing down, but not in recession. At least that’s what the Biden administration claims, focusing on two economic indicators: the fairly good state of the labor market and consumer spending. On the other hand, the Republicans choose (in view of the mid-term elections in November) to counterargument based on the economic textbooks, which technically describe the recession as a second consecutive quarter of GDP contraction. And in the midst of this idiosyncratic short- and medium-term battle for the American economy, a series of issues with global ramifications arise.

Definitions and contradictions

On one side of this political tug-of-war is Biden’s own chief of economic staff, Janet Yellen, and prominent liberal (in the American sense) economists, such as Nobel laureate Paul Krugman. Their main argument is that the recession should, beyond statistical data, correspond to a holistic and not piecemeal contraction of economic life.

“How is it possible that a strong labor market produces almost half a million [400.000, για την ακρίβεια] jobs per month to be in recession?” is the motto monotonously repeated by these circles and supplemented by quoting two more facts. One concerns the resilience of the US dollar, which despite all the turmoil remains the dominant currency in the financial world The second, which is also embraced by rating agencies of the caliber of Moody’s, has to do with the fact of the increase in consumer spending by households.

On the contrary, those who question the good image that the White House is trying to convey insist on clarifying that the increase in consumer spending is not related to the (shrinking) consumption of goods, but to the consumption of services.

In support of the above, they also cite an alternative narrative on the unemployment issue, according to which Initial Jobless Claims have been increasing since April. At the same time, they note that although the number of jobs created each month remains high, it has also been on a downward trajectory in the last two months.

Comparisons

But the recession talk is not just about the US. An attempt to compare what is happening on the other side of the Atlantic with the European case raises questions about who within the family of the “collective West” is in a worse position: the USA, which is theoretically already in recession, or statistically developing Europe?

And if one could argue that the Eurozone records positive (albeit within the limits of statistical error) growth rates, it only takes a minimal adherence to any methodological honesty to recognize the limited resilience of the Old Continent compared to the US.

A first element of American supremacy is the energy factor itself. The USA, unlike the countries of the European continent, has achieved energy independence and does not have the constant headache of supplying (Russian) natural gas that torments Europeans, keeping the nightmare of stagflation alive. The occupant of the Kremlin, Vladimir Putin, seems prepared for this scenario, knowing that any alternative of the EU member states. will fall short of Russia’s – a valuable weapon in Moscow’s hands that can threaten to cut off the flow at any time, pushing up commodity prices and thus driving European economies into recession.

Moreover, unlike the European crisis, the American one is largely desired by the Federal Reserve Banks who, in their anxiety to put a “brake” on inflation, have raised the cost of money – a trend complemented by the strong dollar, which slows American exports.

The European Central Bank follows the same line, increasing lending rates. This is, however, a measure of dubious effectiveness, given that the German “steam engine” is facing the risk of recession.

While a recession in Berlin does not automatically translate into a recession across the Eurozone, it is not difficult to imagine how strong the economies of a number of countries linked to Germany might remain. Moreover, the news of the sharp drop in consumption in Germany fuels German decision-makers with even more pessimism. There is certainly hope that economies less exposed to global supply chains, such as Italy (which recorded positive growth rates last quarter, which is expected to continue in the third due to tourism) will be able to offset the damage. But fears about the resilience of the Eurozone are exacerbated by the slow transition to new, “greener” technologies, which for now seem to have been sacrificed in favor of traditional recipes, such as lignite.

The lure of creative destruction

There are certainly history buffs too. As some economic analysts point out, the shock caused by the war in Ukraine and the accompanying “odins” of the global childbirth, from inflation to the energy crisis, accelerate the need to transition to the post-industrial model, which includes a wide field of technological applications, from robotics and virtual reality to food technology and artificial intelligence.

In this sense, the Ukrainian crisis acts as the catalyst for the transition to a new economic and social paradigm within the capitalist field, in a confirmation of what Josef Schubeter described about a century ago as “creative destruction”. In this context, the upheavals the planet is experiencing are very likely to create a new model that will replace the older one.

There are, however, two unpleasant parameters that come to question the legality of this cycle. The first concerns the particular social and political dynamics of the current situation which may divert any certainties of the analysts. The second concerns the speed of the effects of the climate crisis which, in an inversion of Subeterian concepts, leave room for “destructive creation” rather than the other way around.