Why the eurozone's recovery has been weaker than the US's

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Why has the eurozone’s recovery been weaker than the US’s? by Philip Whyte

The eurozone and the US were never going to enjoy strong, ‘V-shaped’ recoveries after 2009. The reason lies in the nature and scale of the shock that they suffered. History suggests that recessions caused by financial crises are unusually severe, and that recoveries from them are more sluggish than those which follow more run-of-the-mill downturns. Its transatlantic scale, moreover, made the shock exceptionally large. It is no surprise, then, that the US and the eurozone have experienced weaker recoveries than normal since 2009. What is surprising, and does need explaining, is why, five years after being hit by a largely common shock, the eurozone’s recovery has been so much weaker than the US’s. Consider the contrasting positions in which the US and the eurozone now find themselves. At the end of March 2013, GDP was 3.2 per cent above pre-crisis levels in the US, but 3.2 per cent below them in the eurozone. (Relative to pre-crisis levels, US output was also higher than in Germany, the eurozone’s best performer since 2009.) In the US, the unemployment rate has dipped below 8 per cent, whereas in the eurozone it has edged up above 12 per cent (and higher in Southern Europe). These divergent positions are mirrored in the fiscal and trade accounts. The eurozone’s structural budget deficit is small compared with the US’s; and in contrast to the US, the eurozone now runs surpluses on its trade and current accounts. What explains these very different outcomes? The obvious answer is that policy diverged. But why

did it do so? It is tempting to look at the respective points of arrival and conclude that these just reflected different preferences on the two sides of the Atlantic. The US chose to support growth and employment, while the eurozone opted to focus on adjustment (by consolidating public finances and promoting external ‘competitiveness’). The trouble with this story is two-fold. First, it is far from clear that Americans have a stronger attachment to John Maynard Keynes than do Europeans. Second, economic policy on the two sides of the Atlantic was relatively well aligned in 2009 and only started to diverge in 2010. In late 2008, the policy consensus in the G20 was to avoid repeating the mistakes of the 1930s. This meant throwing both Keynes and Milton Friedman at the crisis in hand (a policy mix briefly supported by Germany and the


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Why the eurozone's recovery has been weaker than the US's by Centre for European Reform - Issuu