Britain is Circling the Drain: The Hidden Eurozone Crisis

It’s a famous piece of medical vocabulary. In hospitals, when a patient is dying and they are on their way out, doctors sometimes write “CTD” on their charts – Circling The Drain.

The British economy is Circling The Drain. And the circles are getting smaller and faster.

According to recently published data from the Office of National Statistics, the UK is entering an historically unprecedented triple-dip recession. A recession is defined as two consecutive quarters of contraction.

The British economy is officially worse than it was during the Great Depression. It has not been this bad since at least the 1830’s, according to researchers at the Royal Bank of Scotland.

Why is the economy this bad? As Woroni readers may already know, much like the Wall St bailouts in the United States, the United Kingdom also bailed out their banks in the City of London.

The United Kingdom has one of the worlds largest derivatives markets, possibly the largest. Derivatives are financial instruments that played a key role in triggering the Global Financial Crisis. And as such, the UK was especially hard hit by the GFC.

How much exactly the bank bailouts cost the UK in lost output is difficult to say. But best estimates from the Bank of England put the cost somewhere between $2.8 -$11.6 trillion USD.

Making matters worse is the UK’s current Conservative coalition government. Today’s government, led by Prime Minister David Cameron, assumed power in 2010 and inherited a train-wreck economy.

When they came to power, the Conservatives knew just how bad things were. The Oxford-educated Prime Minister knew the history of the Great Depression. He knew that when you cut government spending during a recession, you only make the recession worse.

But they went and cut government spending anyway: they privatised, in large part, the National Health Service, increased university fees almost 300% and sacked public sector workers, as well as other things.

The reason the Conservatives offered for cutting government spending was Britain’s debt levels. Britain had spent too much money and the belt had to be tightened, the Conservatives claimed.

“We are paying down Britain’s debts,” crowed David Cameron. “I see nothing moral about leaving our children with our enormous debts,” he said.

The claims of a debt crisis were always dubious to begin with: Britain has been in debt for over 350 years and current debt levels are low by historical standards.

Furthermore, to the extent that debt had risen the past five years, it was owing to the enormously expensive bank bailouts and the recession they caused. How is it fair to pay for a crisis bankers and hedge fund managers caused by firing public sector workers?

In any event, it is becoming increasingly clear that the approach taken has failed even on its own terms. British debt has in fact increased the past three years – which is almost inevitable when an economy slides into recession. Let alone a triple-dip recession.

Debt is even forecasted to grow all the way up to 2018, according to the Government’s official budgetary watchdog.

Senior economists at Goldman Sachs now warn that if things continue, the UK may face a “lost decade” of economic growth, Just like Japan did during the 1990’s.

But the consequences of a recession are broader than just increased debt. There are also particularly nasty social effects, such as the damage to the career prospects of young people.

Recessions make finding work harder, particularly for the young. And evidence shows that when young people’s careers start slowly or start late, the stalled beginning leaves effects that last a lifetime.

Last week, a study by the Work Foundation found that UK youth unemployment was the third worst of the 33 OECD nations. The only countries worse of were Greece and Spain, both of which are in the midst of the Eurozone crisis.

There is also something of a sad irony to this. When Conservatives were in opposition in 2009, they in fact admitted that young people would bear the brunt of a recession. Yet since coming to power, such candour seems largely to have disappeared.

As well as career prospects, intergenerational progress is at issue. For 100 years, each generation of Britons have been wealthier, on average, than their parents. The triple dip recession may very possibly undermine this century long trend, if it has not done so already.