Tuesday

17th Oct 2017

Opinion

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

  • Sanctions on and by Russia now pose the greatest downside risk to Europe (Photo: Kelly)

It is the differences in the way the United States and Europe tackled the global financial crisis that explain why the US economy is recovering, whereas the eurozone is in a lost decade.

Why US crisis policies worked

In the United States, the global financial crisis was unleashed by real estate markets and the financial sector, which caused a dramatic contraction and massive mass unemployment.

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.

But even as the Obama administration and the Congress initiated deleveraging and tried to repair the devastation of the subprime markets and the colossal excesses of the too-big-to-fail banks, Washington used substantial fiscal adjustment as a cushion.

The administration’s stimulus package, which was later revised to $831 billion, included spending in infrastructure, health and energy, federal tax incentives, expansion of unemployment benefits and other social welfare provisions. It boosted innovation and supported competitiveness.

Meanwhile, the Federal Reserve, in just weeks, subverted monetary policies that had endured three decades. Under Ben Bernanke, the Fed reduced the federal funds rate to 0-0.25 percent in autumn 2008 and,since that proved inadequate, it turned to non-standard monetary instruments, including rounds of massive large-scale asset purchases.

Most importantly, the United States did not suffer from “institutional deficits.” Through the crisis, it was able to rely on common fiscal and monetary policy. When one state got into trouble, it could turn to others for support. Of course, the crisis supported some states and hurt others, but the common institutions worked.

Then, there were the advantages associated with the US dollar. In autumn 2008, it translated to €0.80. Today, it amounts to €0.74 euro. Currently productivity is increasing 20 percent faster in the US than in Europe. Yet, the US dollar remains 25 percent behind euro.

Mysterious are the ways of the currency markets.

Why European crisis policies did not work

When the 2008/9 crisis hit Europe, the core economies relied on their generous social models, but structural challenges were set aside. That ensured a timeout but boosted threats. In spring 2010, the crisis was still seen as a liquidity issue and a banking crisis. So Brussels launched its €770 billion “shock and awe” rescue package to stabilise the eurozone.

As the consensus view grouped behind Brussels, I argued that the rescue package was inadequate and the austerity policy too strict. Further, it ignored multiple other crisis points. And it was likely to result in demonstrations and violence in southern Europe.

That’s what followed as smaller economies – Greece, Portugal, and Ireland – suffered deep contractions.

In Brussels, the crisis economies were seen as “exceptions” until the eurozone crisis spread to Spain, Italy, and even France. At the same time, the European Central Bank (ECB), led by its then-chief Jean-Claude Trichet, moved too slowly and hiked rates instead of cutting them. When the ECB finally reversed its approach, precious time and millions of jobs had been lost.

Subsequently, Trichet’s successor, Mario Draghi, cut the rates and pledged to defend euro “at any cost.” Markets stabilised, but not without huge bailout packages, which divided the eurozone.

As Barroso and his commissioners began to argue that “the worst was over,” Brussels hoped to reinforce the trust in euro and the EU and deter the rise of the eurosceptics. But hollow promises resulted in a reverse outcome.

What’s worse, both Brussels and the core economies failed to provide adequate fiscal adjustment amidst the global crisis and the onset of the eurozone debt crisis, which made bad mass unemployment a lot worse and continues to penalise demand and investment.

Further, neither liquidity support nor recapitalisation of the major banks has mitigated the worst insolvency risks in the region.

Unlike in the US, many European economies, including Nordic ones, also continued to cut their innovation investments, thus making themselves even more vulnerable in the future.

As the crisis spread to Italy and Spain, which together account for almost 30 percent of the eurozone economy, bailout packages could no longer be used. Rather, structural reforms became vital but since they were seen as a political suicide, delays replaced urgency.

Meanwhile, the euro has been a heavy burden in the eurozone. Although Europe remains significantly behind the US in productivity growth, the euro was 1.45 to the dollar in autumn 2008 and 1.34 today – a third higher than the US dollar.

How has deleveraging succeeded? Well, it hasn´t. General government gross debt as percentage of the eurozone GDP soared from 70 percent to 93 percent in 2013. In Italy, the ratio has increased by a third to 133 percent. In Spain, it more than doubled to 94 percent; in France, by a fourth to 94 percent. In small crisis economies, the debt - Greece (175%), Portugal (129%) – remains at threat levels.

Perhaps it is not coincidental that the eurozone is “changing” its budget accounting method, while Italy is postponing the release of its autumn budget.

The Russian sanctions threat

But it is the sanctions on and by Russia that pose the greatest downside risk to Europe, Russia´s greatest trade partner.

Last year more than 50 percent of Russia’s exports of goods went to EU countries, where Russia also purchased almost 50 percent of its imports. In the financial sector, European banks had some 75 percent of Russia’s foreign bank loans in late 2013.

It is for this reason that Germany’s Chancellor Angela Merkel recently rushed to Kiev to pave the way for peace talks between president Putin and Ukrainian president Petro Poroshenko.

Her balancing act was designed to sustain Europe’s positive economic development, despite sanctions. While Moscow does not want to see Ukraine in Nato, Merkel indicated that she did not see “membership” on the agenda but that Kiev could continue its “co-operation” with Nato.

Then came reports from Kiev suggesting a “Russian invasion” is under way.

As the eurozone core economies – Germany, France, and Italy – began to ponder extra sanctions on Russia, Nato said Ukraine can pursue membership. As Merkel’s cautious recalibration was undermined by real and alleged events, EU leaders opted to wait how Russia will respond to Poroshenko’s new “peace plan.”

If the West will tighten current sanctions incrementally, global economic prospects remain tolerable. If, however, the West takes the sanctions to still another level, the downside risks could push Europe into a triple-dip recession – and the weakest euro countries into the shadow of the abyss.

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

The new Greek crisis: Time for compromise

“Greece wants a lot but has very little money to do that. That’s really a problem," Eurogroup chief Djisselbloem said recently. But Brussels is not in a winning position either.

Left flirting with antisemitism in EU parliament

It is outrageous that Leila Khaled, a member of a group listed by the EU as a terrorist organisation, was given a platform in the EU parliament, a body representing democracy and peaceful cooperation.

News in Brief

  1. Spanish Court declares Catalan referendum law void
  2. EU to keep 'Dieselgate' letter secret
  3. No deal yet on Mediterranean alliance for EU agencies
  4. EU Commission condemns Maltese journalist's murder
  5. Poland denies wrongdoing over forest logging
  6. Risk to asylum kids in EU increasing, says charity
  7. Schroeder warns of Turkey and Russia drifting towards China
  8. EU parliament wants equal pay for posted workers

Stakeholders' Highlights

  1. EU2017EENorth Korea Leaves Europe No Choice, Says Estonian Foreign Minister Sven Mikser
  2. Mission of China to the EUZhang Ming Appointed New Ambassador of the Mission of China to the EU
  3. International Partnership for Human RightsEU Should Seek Concrete Commitments From Azerbaijan at Human Rights Dialogue
  4. European Jewish CongressEJC Calls for New Austrian Government to Exclude Extremist Freedom Party
  5. CES - Silicones EuropeIn Healthcare, Silicones Are the Frontrunner. And That's a Good Thing!
  6. EU2017EEEuropean Space Week 2017 in Tallinn from November 3-9. Register Now!
  7. European Entrepreneurs CEA-PMEMobiliseSME Exchange Programme Open Doors for 400 Companies Across Europe
  8. CECEE-Privacy Regulation – Hands off M2M Communication!
  9. ILGA-EuropeHealth4LGBTI: Reducing Health Inequalities Experienced by LGBTI People
  10. EU2017EEEHealth: A Tool for More Equal Health
  11. Mission of China to the EUChina-EU Tourism a Key Driver for Job Creation and Enhanced Competitiveness
  12. CECENon-Harmonised Homologation of Mobile Machinery Costs € 90 Million per Year

Latest News

  1. EU rejects UK claim it's slowing Brexit talks
  2. Nepal troops arrive in Libya to guard UN refugee agency
  3. Is Banking Authority HQ the Brexit 'booby prize'?
  4. EU-Russia trade bouncing back - despite sanctions
  5. No sign of Brexit speed-up after May-Juncker dinner
  6. EU defence strategy 'outsourced' to arms industry
  7. EU privacy rules tilt to industry, NGO says
  8. Malta in shock after car bomb kills crusading journalist

Stakeholders' Highlights

  1. ILGA-EuropeMass Detention of Azeri LGBTI People - the LGBTI Community Urgently Needs Your Support
  2. European Free AllianceCatalans Have Won the Right to Have an Independent State
  3. ECR GroupBrexit: Delaying the Start of Negotiations Is Not a Solution
  4. EU2017EEPM Ratas in Poland: "We Enjoy the Fruits of European Cooperation Thanks to Solidarity"
  5. Mission of China to the EUChina and UK Discuss Deepening of Global Comprehensive Strategic Partnership
  6. European Healthy Lifestyle AllianceEHLA Joins Commissioners Navracsics, Andriukaitis and Hogan at EU Week of Sport
  7. Nordic Council of MinistersNordic Council Representative Office Opens in Brussels to Foster Better Cooperation
  8. UNICEFSocial Protection in the Contexts of Fragility & Forced Displacement
  9. CESIJoin CESI@Noon on October 18 and Debate On: 'European Defence Union: What Next?'
  10. Nordic Council of MinistersNordic Innovation House Opens in New York to Support Start-Ups
  11. ILGA EuropeInternational Attention Must Focus on LGBTI People in Azerbaijan After Police Raids
  12. European Jewish CongressStrong Results of Far Right AfD Party a Great Concern for Germans and European Jews