14

The Great Disconnect

PARIS – Since the second half of 2012, financial markets have recovered strongly worldwide. Indeed, in the United States, the Dow Jones industrial average reached an all-time high in early March, having risen by close to 9% since September. In Europe, European Central Bank President Mario Draghi’s “guns of August” turned out to be remarkably effective. Draghi reversed the euro’s slide into oblivion by promising potentially unlimited purchases of member governments’ bonds. Between September 1 and February 22, the FTSEurofirst index rose by almost 7%. In Asia, too, financial markets are up since September, most dramatically in Japan.

Even the Italian elections in late February seem not to have upset markets too much (at least so far). Although interest-rate spreads for Italian and Spanish ten-year bonds relative to German bonds briefly jumped 30-50 basis points after the results were announced, they then eased to 300-350 basis points, compared to 500-600 basis points before the ECB’s decision to establish its “outright monetary transactions” program.

But this financial market buoyancy is at odds with political events and real economic indicators. In the US, economic performance improved only marginally in 2012, with annual GDP rising by 2.3%, up from 1.8% in 2011. Unemployment remained high, at 7.8% at the end of 2012, and there has been almost no real wage growth over the last few years. Median household income in the US is still below its 2007 level – indeed, close to its level two decades ago – and roughly 90% of all US income gains in the post-crisis period have accrued to the top 1% of households.

Indicators for the eurozone are even worse. The economy contracted in 2012, and wages declined, despite increases in Germany and some northern countries. Reliable statistics are not yet available, but poverty in Europe’s south is increasing for the first time in decades.