Europe has subcontracted its economic fate to the rest of the world yet again. It is gambling that America and China will lift global demand enough to pull the eurozone out of stagnation, before this downturn tips into something closer to a protracted depression.

The strategy worked badly after the Lehman crisis in 2008. It is likely to be even less successful this time.

America is spreading its largesse behind the wall of Joe Biden’s protectionism, and China is caught in a Keynesian liquidity trap with the paralysing symptoms of debt deflation.

The European Central Bank has raised rates by 450 basis points in barely more than a year, and into the teeth of an industrial recession, now spreading to services across the eurozone big four.

“The ECB is committing the crime of overtightening,” said Emmanuel Sales, president of Financière de la Cité in Paris.

The eurozone money supply is contracting. So is lending to firms and households, which is slow suffocation for an economy with thin capital markets and high reliance on bank finance.

Mortgage lending is close to the lowest ever recorded. The new twist is that business credit is drying up much more quickly in Italy and Spain than in Germany. “Fragmentation is the theme raising its ugly head again,” said Barnaby Martin from Bank of America.

Work by the Bank for International Settlements shows that the eurozone also imports monetary tightening from the US Federal Reserve through the effects of vanishing dollar liquidity and the repricing of global dollar debt contracts.

That is why the ECB’s latest quarter point rise in rates last week to 4pc is more than it looks.

At the same time, a whole machinery of budget surveillance in Brussels is pushing eurozone countries into varying degrees of fiscal austerity. The worse it gets, the more austerity is needed under the eurozone’s Ordoliberal fiscal rules – mimicked, regrettably, by the UK’s Treasury.

The full impact of this triple-barrelled tightening will not hit until 2024 and beyond. Yet the ECB insists that the elusive economic recovery is just around the corner, merely postponed until the first half of next year.

The working assumption seems to be that Europe can trade its way back to health by scavenging demand from other countries. This is spelled out in the forecasts of three leading German institutes (IFO, IWH, IfW).

They expect exports to roar back and lift Germany’s current account surplus from 4.2pc of GDP last year to 7pc this year, returning to mercantilist business as usual.

Their view matters because Germany currently sets eurozone policy: through finance minister Christian Lindner at the Eurogroup, the real government of Europe; and through the ECB’s Isabel Schnabel, who wants monetary overkill as an “insurance” policy against lingering inflation risks. But has she overlooked the opposite risk that the world will not oblige?

This reliance on somebody else’s fiscal stimulus is the mindset of a mid-sized country. It is a recipe for stagnation in a large monetary union that conducts most trade within its own currency bloc.

The lessons from the lost decade from 2008 to 2016 have been forgotten, if ever learned.

China’s property bust is probably close to touching bottom but there will be no V-shaped recovery and no return to the old reflexes of extreme credit leverage.

The central bank (PBOC) is trickling out stimulus to prevent defaults by property developers from setting off a chain-reaction through the shadow banking system.

State control over credit allocation by the big banks ensures – or should ensure – that China can always avoid a financial Minsky Moment along the lines of the Lehman crisis.

It cannot avoid the long-dragging damage of balance sheet repair from a deflating credit boom. Capital Economics thinks China’s trend growth rate has already fallen to 3pc based on proxy measures, and will slide further to 2.4pc in the second half of the decade.

Chinese savers squirrelled away $760bn in the first quarter in certificates of deposit, evidence of cosmic pessimism bordering on fear. Others are repaying debt as fast as they can. “It’s like money falling into a black hole,” said Fan Gang, former rate-setter at the PBOC.

This collective belt-tightening raises the risk of an intractable slump, and raises pressure on China to export the slump by means of currency devaluation and a beggar-thy-neighbour trade policy.

Michael Pettis, from Beijing University, says this would backfire badly, setting off capital flight and further eroding demand.

China’s leaders are holding the line for now, traumatised by the currency crisis of 2015-2016, when the PBOC burned through a trillion dollars of reserves defending the yuan. But the chorus of voices calling for a weaker yuan are growing.

Shang-Jin Wei, ex-chief economist at the Asian Development Bank, says China risks a “dangerous spiral” unless it takes radical action. 

“Once the combination of debt and deflation becomes entrenched, it can generate a vicious cycle that leads to lower investment, lower output, lower income, and thus even lower demand,” he wrote on Project Syndicate.

He advises the central bank to monetise fiscal stimulus directly – ie, helicopter money – and let go of the currency, tolerating capital flight as the lesser poison.

That would imply a tsunami of cut-price Chinese goods flooding into Europe next year. This process has begun, hence the anti-dumping probe of Chinese electric vehicles unveiled by Brussels.

At current exchange rates, Chinese carmakers can produce mass market EVs for €10,000 less than European rivals. The euro may be weak against the dollar but it has soared in real terms against the yuan and the Asian currency nexus over the last year.

America is in better cyclical shape than China, as it should be given that Biden is pump-priming the economy with a fiscal deficit running near 8pc of GDP.

But the Buy American clauses of his $1 trillion infrastructure plan mean that everything from steel, to glass, lumber, and fibre-optic cables must be made in the US in order to qualify. 

His $8,500 subsidy for EVs only goes to models manufactured in the US under the Inflation Reduction Act. Even the EV chargers must be home-made. Europe hardly gets a look-in.

The Fed may pull off a soft-landing and stretch this ageing business expansion for another two years.

Even if it does, the trickle down to Europe may not be enough to lift it out of a bad equilibrium. But there must be a high risk that the ferocious tightening that has already occurred – both rate rises and a net $2 trillion annualised swing from QE to QT – will push the US economy into recession by early 2024.

Economic data almost always looks deceptively strong just as the cycle turns.

Europe’s political class cannot afford to make another colossal error in economic policy. The post-Lehman lost decade lasted longer and was worse in aggregate than Europe’s performance in the 1930s.

A second lost decade would test political consent to breaking point. It would surely combine with the culture wars to unleash something close to political revolution, and probably of fascist hue. The EU is insuring against the wrong risk.

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