Can Europe Escape a Lost Decade?

by Thomas Cooley, Kellie Forrester, and Peter Rupert

The latest release from Eurostat of GDP for the fourth quarter of 2013 showed the Euro Area GDP up by 0.3% and the EU28 up by .4%. This is encouraging news for a continent that has been battered by the Financial Crisis and a debt crisis for six years now. It may well be that they can escape the possibility of a decade of economic decline that we discussed in the last post (here). Real GDP increased slightly in the major economies with the strongest upward trend appearing to be in the U.K. Even some of the small, worst performing, economies where the crisis has been felt most acutely show very slight signs of a turnaround. But that is the optimistic view. A more realistic view would argue that the slight upward ticks in France, Spain, the Netherlands and Italy are too timid still to declare recovery. Indeed, the fact that 0.4% is seen as good news underscores the severity of the current situation.

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But, the European picture is very much a tale of two Europes, with Southern Europe showing tremendous weakness and the Northern European Economies and the U.K. showing morobust signs of recovery. This becomes apparent when we look at consumption, capital formation and the labor market.

Only Germany and France show consumption above its prior peak and for many of the periphery countries it remains at least 5-10 % below its prior peak.
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Capital formation ( Fixed Investment) tells an even more discouraging story.  For all but Germany and France  it remains severely depressed and the periphery countries show no recovery at all. Indeed many of them continue to trend lower.

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The employment to population ratio is an interesting indicator of the impact of the Great Recession and recovery.  With the exception of Spain, the larger European economies declined but not as severely as  the U.S..  Germany, a country that undertook significant structural reforms of its labor markets, has actually improved in the aftermath of the Great Recession. But again, this is a tale of two Europes. Employment in the periphery countries has declined dramatically, some as much as 10%.  This is a staggering blow to these economies and it means they are going to have lost generations of workers.  It is very hard to know what the long term impact of that might be.

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So will the little green shoots of growth save Europe from a lost decade?  Our previous post argues that there are many factors – the Balkanized banking system, the failure to reform labor market institutions – that weigh against an optimistic view.

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