The Two crisis in the Euro Area

The chart below shows the two shocks that have hurt the Euro Area since 2007.

In red is the period following the Lehman bankruptcy. For the Euro area it was a strong exogenous shock on its economic activity and on its unemployment rate. From October 2008 to April 2010 unemployment rate was up by 2.4% from 7.8% to 10.2%. The impact was long lasting but all the plans that were put in place in 2009 by governments were able at the end to support activity and to stabilize the Euro Area unemployment rate.

In blue is the impact of the Euro crisis. From May 2011 to April 2013, unemployment rate was up by 2.3% from 9.9% to 12.2%. This shock was endogenous. It came from the Euro Area. Uncertainties due to governance and institutions were a strong driver to the recession. But there is also the strong impact of austerity policies that have restrain demand that could be addressed to companies. GDP trend is downward since the pick of the first quarter of 2011 (see the chart here). It has had a strong impact also on the world economy as it was shown here (fifth chart). Euro area recession was a strong drag on world growth. We cannot see a break in another part of the world that could better explain the Euro area recession than Euro Area behavior itself.

The current increase in the unemployment rate is now very close to the impact of the Lehman crisis. This comes from our decision in Europe to constrain behavior by austerity policies and trying at the same time to implement structural reforms. This is too much and contradictory. The higher unemployment rate is the consequence of this decision to follow two targets that are not necessarily compatible. The hierarchy between the two targets is not clear but on a practical approach bends to austerity nonetheless.

The risk is that it continues this way for still a long period of time.