Two recent straws in the fair winds enjoyed by the eurozone: Jean-Claude Juncker’s upbeat state of the union speech to the European Parliament last week, and the return of Portugal’s public debt to the “investment grade” division of bond markets. The doom-mongers who claimed Europe was condemned to stagnation unless and until it “completes” its monetary union are being proved more incorrect with each day that brings improved economic news, showing that it was not impossible for euro countries to rack up proper growth after all.
In fact, once the last eurozone downturn ended at the start of 2013, there is nothing to distinguish the eurozone growth experience from the first four years of the post-crisis recovery in the US, the only other comparably large advanced economy. As an academic business cycle dating committee pointed out last month, in 17 quarters since it bottomed out, the eurozone economy grew by just over 7 per cent (including second-quarter data for 2017, this now amounts to 7.8 per cent), not far below the 8.1 per cent the US economy racked up in the same amount of time after its low point in spring 2009 (or 9 per cent after 18 quarters).
In fact, taking into account the different rates of population growth, the eurozone outperformed the US. In the first four years of the current recovery, the population of euro member countries grew 1.5 per cent (from 336m to 341m), while that of the US grew twice as fast, by 3 per cent (from 307m to 316m). If anything, Europe’s monetary union edged ahead of the US in terms of improving GDP per person, which is a better measure of living standards.
A similar story can be told for employment. In four years of recovery, 5.5m more jobs were created in eurozone countries, bringing the total to 143.5m, from 138m at the start of 2013. The US, in contrast, continued to lose jobs at the start of its recovery, and had only added a net 4m jobs after four years: from 140m to 144m civilian employees. Counting four years from when employment bottomed out, the US did better, going from 138m at the end of 2009 to 144m at the end of 2013. But even that does not quite match the eurozone’s rate of jobs growth if you take the US’s faster population growth into account.
We should ask two questions. The first is whether the eurozone can keep up its current pace. Looking at the US example, the answer seems to be “yes”. The American economy has kept growing and adding jobs at an even faster rate since 2013 without fizzling out. It should be quite possible for the eurozone to do the same.
The second is why it took the eurozone so long to start a recovery that it was evidently fully capable of (pace the view of the single currency as a millstone around its members’ necks). The answer comes down to policy. A few years ago, Free Lunch reported on research estimating how much worse the US crisis experience would have been in the absence of its chosen policies in the area of fiscal stimulus, monetary loosening and financial sector policies. We concluded then that the degree to which the eurozone fell short of the US’s policies fits well with the degree to which the euro’s economic performance fell short of America’s.
Conversely, by 2013 the eurozone got its policies right: adopting a neutral fiscal policy in the aggregate, a gradual move towards ever-looser monetary policy and belated action to fix broken banking systems. A recovery as good as that of the US one was the result.
The lesson, then, is that a sustained eurozone recovery was always there for the taking. So, today, is its continuation.
