Saturday

24th Feb 2018

Opinion

Why America is recovering, but Europe is not - Part I

Half a decade after the financial crisis, the United States is recovering, but Europe is suffering a lost decade. Why?

In the second quarter, the US economy grew at a seasonally adjusted annual rate of 4 percent, surpassing expectations.

Thank you for reading EUobserver!

Subscribe now for a 30 day free trial.

  1. €150 per year
  2. or €15 per month
  3. Cancel anytime

EUobserver is an independent, not-for-profit news organization that publishes daily news reports, analysis, and investigations from Brussels and the EU member states. We are an indispensable news source for anyone who wants to know what is going on in the EU.

We are mainly funded by advertising and subscription revenues. As advertising revenues are falling fast, we depend on subscription revenues to support our journalism.

For group, corporate or student subscriptions, please contact us. See also our full Terms of Use.

If you already have an account click here to login.

In the same time period, economic growth in the eurozone slowed to a halt (0.2%), well before the impact of the sanctions imposed on and by Russia over Ukraine. Germany’s economy contracted (-0.6%). France’s continued to stagnate (-0.1%) and Italy’s took a dive (-0.8%).

How did this new status quo come about?

In the United States, real GDP growth showed resilience last year (1.9%), while inflation remained below 2 percent (1.5%). In the ongoing year, the first quarter was far weaker than expected (-2.9%) and caused downgrades as the projected annual growth was re-estimated to less than 2 percent.

However, economic indicators for the second half of the year tell a story of recovery and the outlook for 2015 is optimistically seen as almost 2.5-3 percent.

Mid-term elections will ensue in fall 2014 and presidential elections in 2016. If Democrats want to keep the White House and the Congress, US economy must look strong – at least through the two elections.

The Federal Reserve, (Fed) is likely to end the large-scale debt purchases around October. As a result, the debate has begun when the rate hikes will follow.

The Fed chief Janet Yellen is determined not to raise the policy rates too early and risk hurting the US recovery, which remains fragile. For now, the hikes are expected by mid-2015.

However, Yellen is also a consensus leader and as labour markets are improving, several Fed board members would like to raise borrowing costs sooner; the “hawks” already in the late fall. In the recent Jackson Hole summit, Yellen presented herself between the “hawks” and the “doves".

If the rates are hiked too early, US recovery could be threatened and the spillovers would be negative from Europe to China.

Eurozone woes

Meanwhile, in the eurozone, real GDP growth contracted last year and shrank in the ongoing second quarter, while inflation plunged to a 4.5 year low.

Europe’s core economies performed dismally. In Germany, foreign trade and investment were the weak spots. The country could still achieve close to 2 percent growth in 2014-2016 until growth is likely to decelerate to 1.5 percent by late decade.

In France, President Francois Hollande has already pledged €30 billion in tax breaks and hopes to cut public spending by €50 billion by 2017.

Nevertheless, French growth stayed in 0.1-0.2 percent in the 1st quarter.

Fiscal austerity and falling consumer confidence are preventing domestic demand from rebounding, while investment and jobs linger in the private sector. Pierre Gattaz, head of the largest employers union in France, has called the economic situation “catastrophic.”

As France is at a standstill, Paris has all but scrapped the target to shrink its deficit. Before his resignation, PM Manuel Valls intensified reforms, which in April included additional EUR 11 billion in tax cuts for companies and households.

This is how the reform-minded Valls reshuffled a new government without his left-wing economy minister Arnaud Montebourg, as well as the ministers of culture and education, who have blasted both chancellor Merkel’s austerity doctrine and president Hollande’s economic policy.

By replacing Montebourg with the ex-banker Emmanuel Macron, who helped to draw up Hollande’s pro-business agenda, both Valls and Hollande need results fast.

The new stance is to avoid an explicit confrontation with Germany, but to redefine austerity vis-à-vis budgetary reforms. As a result, Paris hopes to soften eurozone budget rules already next month.

The timing is favourable. After all, Italy has fallen back into recession. To sustain his bold economic reforms, Prime Minister Matteo Renzi now needs a whopping €32 billion to overhaul the labour market, €18 billion for unemployment benefits and €13 billion for infrastructure projects.

While better performance is likely to ensue later in 2014 and thereafter, growth will linger. Indeed, Italy and France are coping with similar ailments. In both, fiscal adjustment is strangling domestic demand, while exports suffer from de-industrialisation, erosion of competitiveness and the strong euro.

In 2014, the eurozone growth is expected to increase to 1 percent, but the recovery is fragile and downside risks have grown elevated. The ageing Europe is breathing heavily before stumbling, or falling down.

What next?

In America, polarised economic growth has endured for three decades.

Ferguson, Missouri is just the tip of the iceberg. However, if Washington can avoid its political stalemates, US growth may accelerate to 2 percent growth in 2014 and could remain around 2.5 percent through the rest of the decade.

It was the plunging consumption and the subprime-market abuses that initiated the crisis in America in fall 2008.

Despite improving wages, it remains the weakened consumption and slower home-price appreciation that continue to penalise growth, along with the ageing population and other secular forces. Further, premature rate hike expectations could cause new economic uncertainty and market volatility.

In 2014, the eurozone growth rate will linger at close to 1 percent and it could remain at less than 1.5 percent through the rest of the decade.

As the European Central Bank chief Mario Draghi recently indicated, persistent disinflation is driving the ECB away from strict austerity policy.

The inconvenient truth is that this happens half a decade too late. Unemployment rate remains 11.5 percent and prohibitively high in Greece (27%) and Spain (25%), respectively.

Today, even successful performers, such as Germany, are no longer immune to adverse turns, and others, such as Finland, are navigating to uncertainty.

The writer is a researcher at the India, China and America Institute in the US and a visiting fellow at the Shanghai Institute for International Studies in China

Greek government's steady steps to exit bailout programme

Growth predictions are positive, exports increasing, unemployment dropping and credit-ratings up, says the head of Greece's Syriza delegation to the European Parliament. Now the government in Athens is looking to design its own reform programme.

Analysis

We are not (yet) one people

Talks on the next EU budget will start on Friday. Brussels wants to do much more than before – and needs a lot more money. But arguing about funds won't be enough.

Intellectual property protection - the cure for Europe's ills

The European Commission is considering rolling back medical research incentives, on the faulty assumption they are somehow driving higher drug prices. But not only is that premise flawed – the proposed fix will do nothing to benefit ordinary health consumers.

News in Brief

  1. EU calls for immediate ceasefire in Syria
  2. UK's post-Brexit vision is 'pure illusion', Tusk says
  3. EU leaders express solidarity with Cyprus in Turkey drill row
  4. EU to double funding for Sahel forces
  5. EU parliament president: 'The immigration problem is Africa'
  6. May to unveil EU departure strategy next week
  7. Pregnant workers may be dismissed, EU court rules
  8. Romanian minister demands anti-corruption prosecutor fired

Stakeholders' Highlights

  1. ILGA EuropeAnkara Ban on LGBTI Events Continues as Turkish Courts Reject NGO Appeals
  2. Aid & Trade LondonJoin Thousands of Stakeholders of the Global Aid Industry at Aid & Trade London
  3. Macedonian Human Rights Movement Int.European Free Alliance Joins MHRMI to End the Anti-Macedonian Name Negotiations
  4. Mission of China to the EUChina-EU Tourism Year to Promote Business and Mutual Ties
  5. European Jewish CongressAt “An End to Antisemitism!” Conference, Dr. Kantor Calls for Ambitious Solutions
  6. UNESDAA Year Ago UNESDA Members Pledged to Reduce Added Sugars in Soft Drinks by 10%
  7. International Partnership for Human RightsUzbekistan: Investigate Torture of Journalist
  8. CESICESI@Noon on ‘Digitalisation & Future of Work: Social Protection For All?’ - March 7
  9. UNICEFExecutive Director's Committment to Tackling Sexual Exploitation and Abuse of Children
  10. Nordic Council of MinistersState of the Nordic Region 2018: Facts, Figures and Rankings of the 74 Regions
  11. Mission of China to the EUDigital Economy Shaping China's Future, Over 30% of GDP
  12. Macedonian Human Rights Movement Int.Suing the Governments of Macedonia and Greece for Changing Macedonia's Name

Latest News

  1. EU agrees budget to focus on defence, security and migration
  2. EU leaders nix transnational lists, cool on 'Spitzenkandidat'
  3. Regions chief: calls for smaller EU budget are 'impossible'
  4. Election fever picks up This WEEK
  5. EU-Morocco fishing deal casts doubt on EU future foreign policy
  6. EU leaders put 'Spitzenkandidat' on summit menu
  7. European far-right political party risks collapse
  8. The key budget issues on EU leaders' table

Stakeholders' Highlights

  1. Swedish EnterprisesHarnessing Globalization- at What Cost? Keynote Speaker Commissioner Malmström
  2. European Friends of ArmeniaSave The Date 28/02: “Nagorno-Karabakh & the EU: 1988-2018”
  3. European Heart NetworkSmart CAP is Triple Win for Economy, Environment and Health
  4. European Free AlllianceEFA Joined the Protest in Aiacciu to Solicit a Dialogue After the Elections
  5. EPSUDrinking Water Directive Step Forward but Human Right to Water Not Recognized
  6. European Gaming & Betting AssociationGambling Operators File Data Protection Complaint Against Payment Block in Norway
  7. European Jewish CongressEJC Expresses Deep Concern Over Proposed Holocaust Law in Poland
  8. CECEConstruction Industry Gets Together to Discuss the Digital Revolution @ the EU Industry Days
  9. Mission of China to the EUChina-EU Relations in the New Era
  10. European Free AlllianceEnd Discrimination of European Minorities - Sign the Minority Safepack Initiative
  11. Centre Maurits Coppieters“Diversity Shouldn’t Be Only a Slogan” Lorant Vincze (Fuen) Warns European Commission
  12. Dialogue PlatformWhat Can Christians Learn from a Global Islamic Movement?

Stakeholders' Highlights

  1. European Jewish CongressEJC President Warns Europe as Holocaust Memory Fades
  2. European Free AlllianceNo Justice From the Spanish Supreme Court Ruling
  3. Nordic Council of MinistersNordic Solutions for Sustainable Cities: New Grants Awarded for Branding Projects
  4. Mission of China to the EUTrade Between China, Belt and Road Countries up 15%
  5. Nordic Council of MinistersOresund Inspires Other EU Border Regions to Work Together to Generate Growth
  6. Mission of China to the EUTrade Between China, Belt and Road Countries up 15%
  7. AJC Transatlantic InstituteAJC Calls on EU to Sanction Iran’s Revolutionary Guards, Expel Ambassadors
  8. ILGA EuropeFreedom of Movement and Same-Sex Couples in Romania – Case Update!
  9. EU2017EEEstonia Completes First EU Presidency, Introduced New Topics to the Agenda
  10. Bio-Based IndustriesLeading the Transition Towards a Post-Petroleum Society