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The North Atlantic crisis

Recession worsens. Will crisis managers learn?

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In April, the S&P 500, a capitalisation-weighted index of the largest companies listed on the New York Stock Exchange and on Nasdaq, registered its first monthly decline this year. This comes after it posted a four-year high earlier that month, at the height of optimism that the global economy was recovering. Since then, observers and investors have been battered by bad news and gloomy data. The released data that personal spending rose only 0.3 per cent in March, lower than expected; another widely scrutinised index, of manufacturing activity in the Midwest, fell in April from the previous month. All eyes are on Friday’s report on the number of new US jobs created last month; March saw a significant slowdown from the high numbers posted between December and February.

Meanwhile, across the North Atlantic, things were even more dire. This week unemployment levels hit their highest in 15 years. On Monday, the Spanish government announced that the country’s troubled economy contracted in the last quarter, as harsh austerity measures and downgrades to its banking sector dragged down growth. The euro zone crisis is “less than half over”, said United Kingdom Prime Minister David Cameron, as partial justification for the UK’s joining the list of countries in recession — which now, besides Spain, includes Italy, Portugal, Ireland, Greece, Belgium and the Netherlands. The UK, however, is not even in the euro; the Conservative-led government has not tried hard enough to insulate the country’s economy from an over-dependence on the City of London’s financial sector. The governing coalition between the finance-friendly Conservatives and the nominally anti-City Liberal Democrats may not, therefore, stay as strong as many would hope. Already, it is open season on centre-right coalitions across Europe, from both left and right, as anger against austerity grows. The Romanian and Dutch governments fell last week; and, over the weekend, there will be crucial elections in France and Greece. In France, a defeat for incumbent President at the hands of long-time Parti Socialiste leader would overturn the comfortable dyarchy that has ruled Europe since the crisis hit. The newly combative Mr Hollande visible on Wednesday’s TV debate will not be as willing to stand with German Chancellor in demanding sacrifices across Europe. In Greece, anger over the austerity required by that country’s sustained overspending has spilled over into ugly anti-immigrant rhetoric that will be closely watched by those concerned about the rise of the European far-right.

The European Central Bank met on Thursday, and chose to take an optimistic view, insisting recovery was underway. It also chose to do nothing to stimulate growth. However, most observers expect additional liquidity for the continent’s banks eventually. The has so far refused to directly support bonds issued by troubled countries, but it is open to question whether that firmness will survive a political upsurge across Europe against the contractionary effects of austerity. Meanwhile, the US presidential election cycle is beginning, and the pressure is on Barack Obama. Austerity’s most eloquent foe, the columnist and economist Paul Krugman, has argued that the ECB’s policies have unnecessarily prolonged recession. He has now turned this argument squarely towards his former Princeton colleague Ben Bernanke, now governor of the Federal Reserve, and his “reckless” inflation-fighting. As the gets worse, the pressure on the crisis managers to change course will only intensify.

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