Europe Grows Apart

by Thomas Cooley, Ben Griffy, and Peter Rupert

Second Quarter data for 2015 are now trickling out of Eurostat. What we see is encouraging evidence of recovery for the major producing countries but a continent that is moving apart. Prior to the financial crisis and the Great Recession the economies were largely growing together but the performance since the crisis has been strikingly different. Even leaving out the tragedy of Greece, the economic fortunes of the European partners have been very mixed.

If we focus in on some of the larger economies there is at last cause for optimism about a European recovery…even Spain and Italy have returned to growth in the most recent data, although they remain far below their previous levels.

The so-called PIIGS–the periphery economies–are a different story but also an improving one. Ireland, Spain, and possibly Portugal are showing signs of growth.

Consumption shows much the same picture, but most countries have not returned to anything like their previous peak levels.

Investment has been very slow to recover in most of the countries and seems to be a major obstacle to recovery in the weakest economies, with several still 20-40% below the 2010 peak.

Government spending is equally varied across these economies. There is however a notable pattern of austerity throughout the continent (and in the U.S.) judging from the pattern of spending.

Exports are showing strong signs of recovery everywhere–strongest in the periphery countries–helped by a weakened Euro.

Euro-USD Exchange Rate-1_raw

Imports are quite varied across the economies reflecting the strength of the recovery in the various countries.

Overall, the tragedy of Greece does not seem to be impeding a gradual European recovery. Although the countries are improving at very different paces the fact that growth has returned more broadly has damped a lot of the dire speculation about the future of the EU.


Employment in Europe reflects what we saw for GDP growth. For the stronger economies employment has begun to rebound a bit, although the legacy of the Great Recession is a generation of young workers who never entered the labor force in their prime and are permanently impaired as a result.  In the weak economies unemployment remains high and job growth is weak or non-existent.

Employment (15 to 64)-12 Employment (15 to 64)-6 Employment (15 to 64)-5

A European Rebound?

by Zach Bethune, Thomas Cooley and Peter Rupert

The recent news from Europe has been much more optimistic about a budding recovery for most Europe and the Eurozone. The dramatic decline in the value of the Euro against the dollar and the beginning of  the ECB’s program of quantitative easing has sparked optimism about the prospects for recovery. With complete data for 2014 now in we can begin to see some uptick in European growth. Whether this will prove to be a robust recovery remains to be seen – for now it qualifies only as little green shoots and the problems of Greece will weigh heavily in the months to come.useuro-2015-04-08
Europe is a story of diverging economic fortunes and those diverging fortunes are leading to political unrest in many countries. The growing influence of more extreme parties is one of the results as countries resist the economic orthodoxy that seems to be imposed by Germany and the wealthier countries. The following chart is based on OECD Data – we have been forced to abandon Eurostat as a data source as they seem incapable of updating the national accounts data for their member countries in a timely way. This shows that, since 2010, U.S. GDP has increased by 10% – slower than we might have wished. Ireland, the U.K. and  Germany have increased by 7-8% while others have been much more stagnant…and then there is Greece. Even those economies that have been stagnant, aside from Greece and Italy, show some signs of improvement.


Consumption show much the same picture but most countries have seen an uptick in late 2014.  Investment is more of a concern as it has been slow to recover. Exports are improving across Europe aided by a sharp fall in the value of the Euro beginning in early 2014.  The improvements in the economies will be further aided by the continued fall in the the first quarter of 2015.






How robust can this recovery be? Clearly the ECB is determined to stimulate the economy and address the issue of deflation with its program of quantitative easing and the attendant impact on the value of the Euro. The problems of Greece, however, cast a long shadow over the whole Eurozone. Absent a solution that addresses the structural flaws in the Eurozone economy, and given the diverging economic fortunes, any solution to the Greek crisis will be short lived. Were Greece to exit, attention would shift to the other vulnerable economies, most notably Italy and Portugal. It will take more time to assess how effect the ECB can be on its own as the driving force of Eurozone recovery.

The European Economy Continues To Flat Line.

by Thomas Cooley, Austin Jones, and Peter Rupert

The flash estimates of third quarter output in Europe released by Eurostat the EU Statistical Agency last week showed EU  Area GDP grew by .2% in the Euro Zone and .3% in the EU 28.  The Italian economy shrank by .1% and Germany grew by only .1%.  The one sign of strength was the U.K. economy which grew at a relatively robust .7%.

We should note that the graphs that follow are based on the most recent data available but do not include all third quarter data because Eurostat is notoriously inept at making timely data publicly available.

The chart below shows GDP growth for the major economies compared to GDP growth for the U.S.


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.





Capital formation ( Fixed Investment) seems to be in decline everywhere except in the UK.  The periphery countries continue to be flat well below pre-crisis levels and even the Scandinavian Countries have turned south.



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, actually improved in the aftermath of the Great Recession. But again, this is a tale of two Europes. The employment/population ratio in some of the periphery countries declined by 10% or more but some have begun to recover a bit. Unemployment rates particularly among young workers remains almost unimaginably high and is causing lasting damage to these economies.

epr.082014-10-26epr08piigs2014-10-26epr08scan2014-10-26Where is The Policy Response?

Given the dire state of the European Economy where is the policy response? Unfortunately the fragmented nature of the Union means there is no coordinated fiscal stimulus.  Mario  Draghi has promised a program of monetary stimulus in the form of asset purchases but unlike in the U.S. there is no risk-free government asset that is suitable for a program of quantitative easing.  Our friends at show the following picture that underscores how different the ECB’s policy has been from the Fed’s.


ECBIt is time to do more.


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.

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.



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.



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.




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.

Europe’s Lost Decade?

by Zach Bethune, Thomas Cooley, Espen Henriksen, and Peter Rupert

Is Europe about to repeat Japan’s lost decade? Six years after the Great Recession began, the Euro area has shown little sign of sustained growth. Japan’s so called lost decade began in 1991 after several decades of rapid economic progress and sustained increases in asset prices that were suddenly reversed. The average growth rate of real GDP per-capita declined from about 3.5% per year in the 1980s to about 0.5% per year in the 1990s and was accompanied by rapidly decreasing equity and real-estate valuations. But, when we compare the performance of Japan’s economy with the European economy since the beginning of the Great Recession it is clear that Europe is in far worse shape than Japan ever was.

The following Snapshot-style comparative charts show the paths of key economic variables in Japan after the peak of its equity and real-estate valuations and contrasts these with the paths of these variables in the U.S. and Europe in the years since the onset of the Great Recession. For Europe and the U.S. we set time “0” at the peak before the Great Recession. Judging from this and the charts that follow, halfway into the decade following the onset of the Great Recession, the performance of the U.S. and, in particular, the European economy are substantially weaker than Japan’s economy was halfway through its lost decade.


Japan’s growth rate slowed dramatically at the beginning of their lost decade – GDP rose only 10% in the first six years and then flat-lined more or less completely. Europe, by contrast fell by six percent in the first six quarters and then flat-lined at a level three percent below their peak. The U.S. stands in contrast to both of these stories – after falling by nearly four percent in the first six quarters U.S. growth has been steady at a rate slightly less than before the collapse.

Consumption paints an even more dire picture for Europe. During the lost decade in Japan consumption expenditures never really slowed down. In the Great Recession, U.S. consumption fell initially for about 6 quarters and has been rising ever since. Europe on the other hand started out similar to the U.S. for the first 6 quarters but then consumption growth stalled and has not improved since. It has not returned to its 2008 peak.


The labor market picture for Europe is even more discouraging and strongly reinforces the message of a lost decade. The unemployment rate in individual countries like Spain and Italy has been widely noted. But, here we focus on aggregate employment and the data are for the EU-28 which includes some countries, like Germany, where the labor market has not really declined. Japan, Europe and the U.S. showed remarkably similar paths of employment up until the inflection point following which there was a sharp contraction in both the U.S. and Europe. In Japan, employment like output, simply stagnated. In terms of a recovery, the U.S. labor market, after a sharp decline, is showing slow growth while Europe looks to be stuck at a permanently lower level.


While the declines in employment were steep in both the US and Europe, the path of labor productivity has been very different. In the US the recession had a negligible effect on labor productivity, which has only recently started to show signs of slowing down (see here for instance). Europe on the other hand experienced a sharp drop in productivity at the beginning of 2008, when it fell by nearly five percentage points. Data until 2010 suggest that European productivity hasn’t shown any signs of ‘catching up’ to its previous growth trend. Measuring labor productivity is particularly difficult for Europe because one needs a measure of total hours worked. Ohanian and Raffo (2011) do the heavy lifting by constructing this series for many European countries, although it is only available until 2010.


Why the Lost Decade?

Economists have offered a range of different explanations for Japan’s lost decade: (i) the government failed to deal with undercapitalized banks that were allowed to carry “zombie” loans on their books and did not have the capacity to finance new investment, (ii) a sharp drop in productivity caused desired investment to be low, (iii) frictions caused by labor law amendments in the late 1980s resulted in declining work weeks, (iv) the monetary policy response was too timid (something Abenomics is finally trying to remedy), and (v) Japan’s prospects for recovering were seriously hampered by persistent deflation. While it is not clear that there is one compelling account, all of these elements undoubtedly played some role and all of them loom large in the current European experience.

As in Japan, European banks are most likely under-capitalized and carrying loads of overvalued (“Zombie”?) sovereign debt on their balance sheets as well as other assets of dubious quality. The European Central Bank has only gingerly approached the problem of looking at asset quality in European banks, promising to deliver results later this year. But then what? There is no plan for dealing with under-capitalized banks. In contrast to Japan and the U.S., there is no common bank regulation or resolution mechanism and there has been only tentative progress toward creating it.

As the picture below shows, investment / capital formation stagnated in Japan, both consistent with the slower growth in total factor productivity and insolvent banks that deterred lending. The picture also shows that investment in both the United States and Europe fell relatively more at the onset of the Great Recession than investment in Japan did at the onset of the “lost decade”. In contrast to both Japan and Europe, U.S. capital formation has rebounded after an initial collapse. Again, the European situation looks more alarming than the situation in the United States and Japan.


Whatever the reasons may have been for Japan’s ‘lost decade’, one thing is certain: more than halfway into the decade following the start of the global recession in 2008, the European economy is far worse and deteriorating. Even though economic growth in Japan stagnated in 1991, the economy continued to grow. In contrast, the economy in Europe has contracted and is, according to all measures of economic activity surveyed in this post, at a lower level than they were five years ago. Unless economic growth in Europe rebounds within the next couple of years, Europe is headed for a substantially worse decade than Japan’s. Surprisingly, there has been recent optimism about a European recovery, but the data do not seem to support it except for possibly Germany and the U.K.

Just as there were no quick fixes for Japan during its “lost decade”, most likely there are no quick fixes for Europe’s economy. The challenges lie in fostering economic institutions that create individual incentives and market structures that both discourage rent seeking and encourage and allow people to use their efforts to develop and produce goods and services other people value. On this score Europe has failed. They have not reformed institutions sufficiently to make their markets globally competitive and adaptable. Until they do, Europe will continue to face the possibility of an entire decade of lost income, consumption, and jobs.

A European Recovery? Not Exactly!

There has been much celebration in the media of the fact that several European economies showed positive growth in the Second Quarter of 2013 based on the most recently released data from Eurostat. If this upward trend was widespread and robust this would indeed be encouraging news because virtually all of Europe has been suffering from a double-dip recession (Germany, UK, and France being moot) following the financial crisis of 2007-2009.

The latest data from Eurostat shows Real GDP increasing for the biggest economies – Germany, France, and the U.K.  The flash estimates of quarter-to-quarter growth rates also suggest an up-turn in Portugal. But Spain Italy and The Netherlands are still declining, suggesting that the optimism should be seriously moderated.

In this post we also show the path of the percentages changes in Real GDP for the so-called PIIGS or GIPSIs. The picture for these economies is decidedly more bleak.  Only Iceland is showing signs of recovery while the others continue to contract with little sign of moderation. Also worth noting is the scale of the graph for the smaller economies which underscores how much deeper the contraction in these economies was.

Looking at all of these economies together it would take a colossal leap of the imagination to see this as a picture of recovery, as was widely reported last week.
GDP Components
The pattern of consumption in the major European Economies pretty much mirrors the pattern of GDP. One exception is France, where consumption fell very little during the recession and has since recovered. The decline in consumption in the GIPSIs has been deep, reflecting the tremendous toll of the continuing fiscal crisis. Perhaps more alarming is the continued double-dip decline in capital formation in all of the European economies. This hardly seem like a signal of impending recovery.

If it is difficult to see signs of recovery in the data for GDP and its components, it is equally difficult to see it in labor markets. Perhaps the good news is that the unemployment rate is no longer rising in Spain, the U.K. and France. It is also falling somewhat in Ireland and Portugal. But many of these countries are now stuck at levels of unemployment that will take a generation to moderate given the sclerotic state of European labor markets.  The employment/population ratio is also falling across the board. Some of this reflects the changing demographics of the population but mostly it reflects the state of the post-crisis European Economy.

European Woes

Weakness Across the Board

Real GDP has declined in all of the European countries shown below for the last quarter of 2012; and, all countries except Germany remain below the level of real GDP five years ago. German real GDP declined after relatively solid growth over the past several years.  Real GDP in Spain and Italy is now actually lower than it was at the depths of the recession in 2009-2010.

Real private consumption expenditures have collapsed in Italy, Spain, and the Netherlands–about 6% below where they were in 2008. Capital formation has also seen a disheartening decline in all countries except the UK. While Germany had seen a comeback in gross capital formation, getting back to its 2008 pre-recession level in the middle of 2011, German capital formation is now 10% below that level.

Despite contracting output across the Eurozone economies, there are no signs of (increased) turmoil in labor markets. The unemployment rate for Germany, Italy, and the UK maintained a slow downward trend. Spain’s unemployment rate decreased for the first time since the peak of the cycle. France and the Netherlands maintained a slow upward trend.


Spending Differences of Government

Government spending in both Italy and Spain have fallen considerably as has the U.S. In most of the other countries government final consumption expenditures continue to rise. However, as a fraction of GDP, government expenditure is approximately flat, except in the U.S., where it is falling and is now below its level since the previous peak.

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