Why is the Euro Area Crisis so Persistent? (Part I – Some Benchmarks)

The Euro Area is currently in a tough situation. For the last two years, economic activity is shrinking at an annual pace of –O.15% (from Q4 2010) with a downward acceleration since summer 2011. At the same time there was a moderate recovery in the USA.
That’s what the first chart shows. Divergence from both side of the Atlantic is impressive. As activity is on the upside and the trend linear in the USA this means that Euro Area difficulties are specific since 2011.

USA-EA-GDPQ12006-Q42012We can have a more precise measure on what has happened in the Euro Area by comparing growth in the unemployment rate after the Lehman recession episode (The bank Lehman Brother went bankrupt on September 15, 2008) and since the beginning of the debt crisis.
From October 2008 to spring 2010 unemployment rate went up by 2.4%. Since spring 2011 and the beginning of the debt crisis unemployment rate is up by 2.1%.
The Euro Area economy has had to manage two large negative shocks. The first was common to every country; the second was specific as a risk of a Euro Area dismantling was perceived bringing large uncertainty in the region. Its magnitude is close to what was seen after the 2008 recession that led all governments to put in place very aggressive measures to support economic activity.
This is a simple measure of behavior’s paralysis in front of governments and the European Commission that put rapid public finance equilibrium instead of giving priority to growth.

On this latter point the comparison with the US economy is interesting. Current US unemployment rate is 7.6% and its maximum was 10% in October 2009. These diverging trajectories reflect a very different economic scenario. In either countries or region there was too much private indebtedness before the crisis. Public debt accumulation came after the recession. In the US, the strategy was first to reduce households’ debt even if it is at the cost of higher public debt. The issue was to say that growth comes from the private sector and to favor this issue public debt have to increase temporarily. In the Euro Area public finance imbalances were the main target. All the deficit reduction measures have then not helped to reduce private debt and to revamp economic growth. At the end, private debt is still high, public debt is still growing in the Euro Area and growth is out of the picture. (To be more precise see this paper (here) from the European Think-Tank Bruegel)


This weak dynamic growth in the Euro Area has had a downbeat impact on the world economy as Euro Area contribution to world trade growth is negative since fall 2011.
In the USA, the contribution was small but positive. This shows that US growth came mainly from its internal demand. In the Euro Area private internal demand has never been the support of growth since the beginning of the crisis. See the chart in this article
These two small or negative contributions are at the source of the lower growth seen everywhere since 2011. After a strong recovery led by China, there was no relay no upside impetus from developed countries. Global growth faded then.
The US and the Euro Area contributions to World Trade growth are shown in the chart below.

WorldTrade-2013-january-contribUSEAWe see the blue line in the negative territory since fall 2011. It was a drag to global economic activity and we have to imagine the impact and the contagion effect as Europe is very often the main client for a lot of emerging countries.

 The fourth chart shows that the current situation is really specific and very different from previous out of recession episodes. As data were not available for the Euro Area for all these periods I have used French data (France and the Euro Area are very close economic trajectories. GDP per capita in the current crisis have the same profile).
I’ve looked at three periods: after the first oil shock in 1974, after the European Monetary System crisis in 1992 and since 2007.
Each line on the chart represents GDP per capita and is based at 100 at the peak of the cycle (1974, 1992 and 2007).

In 1974 after the first oil shock and a recession in 1975 the rebound was strong and in 1980 the GDP per capita was 12.6 % higher than in 1974. That’s the blue line on the chart (from 1974 to 1980).
During the EMS crisis consecutive to the German reunification there was a short recession in 1993 but a rapid recovery after. In 1998 GDP per capita was 8.4% higher than in 1992. This is the red line on the chart (from 1992 to 1998)
This upside profile seen after 1974 and after 1992 cannot be perceived in the current episode. There was a recession in 2008 and 2009 and the recovery was weak before a new plunge. In 2012 GDP per capita was 2.5% lower than in 2007. This is the purple line on the chart (from 2007 to 2013 with EU forecasts for 2013)

France-GDPperhead-1974-92-07Looking at the last chart let us think that the Euro economy does not have the capacity to rebound by itself. In other words, there is no endogenous answer to the crisis. In 1992/1993 the Euro Area has a negative contribution to world trade growth, but with a strong rebound after the recession it was not an issue.
Currently this is an issue as the Euro economy is not able to give an endogenous answer, not able to change its mind to find a way to recover. The only recipe is through reduction in public finance imbalances that lead to recession.

More to come….


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  1. Pingback: France: the disturbing path of the Industrial Production Index | Le Blog de Philippe Waechter

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