No end to the West’s economic stagnation as the climate crisis worsens

Trouble for the West

Indicators of business dynamism, entrepreneurship and innovation remain bleak in major Western economies. The "Ossified Economy", as I termed this in my 2022 Cambridge Journal of Economics paper, will face particular challenges over the coming years. Three recent developments are of concern.

First, the EU's largest economy, Germany, seems set to continue its deindustrialization and degrowth trajectory. In 2017, a colleague and I published a paper detailing the decline in German innovation. It was met with incredulity. How could we argue that Germany, the powerhouse of Europe that is keeping the Euro alive, is anything but a bastion of innovativeness? Even though we showed, using a wide array of innovation and entrepreneurship measures that Germany’s golden period of innovation was in the late 19th century – consistent with Jonathan Huebner’s analysis that global innovation peaked in the 1870s – the message was difficult to swallow. Today, five years after our first analysis, Germany – and Europe’s – economic and innovation stagnation is deepening.

The shockwaves of the Russian invasion of Ukraine hit the German economy especially hard, costing the economy already more than €100 billion, with its resilience probably at its lowest point since unification. According to Peter Zeihan, “We’re looking at the end of the entire German manufacturing base within two years.” A recent article quotes Marcel Fratzscher, head of the DIW institute as declaring that "Germany has nothing to offer in any of the most important future-oriented sectors, [...] What exists is old industry.” This is consistent with extensive evidence of Germany's innovation decline that I documented in a recent IZA Institute of Economics paper.

Second, new research from the US Federal Reserve shows the share of firms in financial distress in the USA to have "reached a level that is higher than during most previous tightening episodes since the 1970s." They conclude that the recent monetary tightening in the USA will hence have more pronounced effects on the economy and that "these effects might be most noticeable in 2023 and 2024." 

It is not only the USA and Germany, two of the West’s largest economies that are facing further economic stagnation. The UK and France are not only struggling to keep their stuttering economies running, but their socio-political realities are shattering. Derek Thompson described the UK’s impoverishment reflected in “lurid headlines”:

Energy prices are soaring. National inflation has breached double digits. The longest-serving British monarch has died. The shortest-serving prime minister has quit […]. Behind the lurid headlines, however, is a deeper story of decades-long economic dysfunction...

And France, the country of the gilets jaunes, is after yet another fortnight of riots being described as “broken” and “fractured.” During these latest riots, it deployed 45,000 police officers, almost as many as the USA’s occupation force in Iraq since 2011.

The end of easy oil

Third, on top of the recessionary conditions in the USA and the largest economies in Europe, a new report by natural resources firm G&R has found that peak oil is being reached: 

"The most crucial development in global oil markets is depletion in the Permian basin. We first warned about this in 2018, predicting the Permian would peak in 2025. In retrospect, our analysis was too conservative. We now believe the basin could peak within the next twelve months. The implications will be as profound as when United States oil production peaked in 1970, starting a chain of events ultimately sending prices up five-fold over ten years." 

Misdirection

These three bits of bad news come as the world suffers a multitude of extreme weather events, with the northern hemisphere experiencing its hottest July on record. And to top off the bad news, both renewable energies and decarbonisation have been facing tough headwinds lately. The Green Growth paradigm, a political compromise selling the idea that faster economic growth and profits are to be made from investments in green technology, has failed to deliver both on economic growth and on the ecological crisis. 

As these realities sink in, political disintegration in the USA, UK and EU will accelerate. There are already many bad ideas out there to tackle the polycrisis - expect these to proliferate in coming years. Tech billionaires are investing in doomsday bunkers. The modern clerisy is advocating Degrowth, a form of ecological iatrogenic rooted in Marxism. Others want to accelerate and deepen the use of fossil fuels. Some are creating wholly fantastical new threats, such as malevolent AI and the presence of aliens and their UFOs on earth, perhaps to enjoy some reassurance that at least some existential risk can be solved, even if they are imagined risks.

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