Why the European Economy Has Done So Much Worse Than That of the United States
If we compare the economic recovery of the United States since the Great Recession with that of Europe – or more specifically the eurozone countries – the differences are striking, and instructive. The U.S. recession technically lasted about a year and a half – from December 2007 to June 2009. (Of course, for America’s 20.3 million unemployed and underemployed, and millions of others, the recession never ended – but more on that below.) The eurozone had a similar-length recession from about January 2008 to April 2009; but then it fell into a longer recession in the third quarter of 2011 that lasted for about another two years; it may be exiting that recession currently.
This makes a big difference in people’s lives. In the eurozone, unemployment is at near record levels of 12.1 percent; while in the U.S. it is currently 6.7 percent. Despite the incompleteness of these measures, these numbers are comparable. And of course in Spain and Greece unemployment is 26.7 and 27.8 percent, respectively, with youth unemployment at an intolerable 57.4 and 59.2 percent.
How are we to explain these differences? The United States was, after all, the epicenter of the world financial crisis and recession in 2008. But U.S policy-makers responded to the recession with different policies. Most important was monetary policy: the Federal Reserve lowered short-term interest rates to about zero in 2008 and has kept them there since. The Fed also signaled its intention to keep these interest rates at these levels for a long time. And venturing into uncharted territory, the Fed engaged in three rounds of “quantitative easing,” or more than $2 trillion of money creation. This enabled the Fed to stimulate the recovery by lowering long-term interest rates, including the crucial home mortgage interest rate, which helped recovery in the housing market.
After some stimulus in both areas, the eurozone governments also engaged in more and earlier budget tightening than did the United States; and the International Monetary Fund (IMF) has shown a clear relationship (Figure 6) between this fiscal tightening and reduced GDP growth.
Now the question is why our European brothers and sisters have been so unfortunate to be subjected to much more brutal economic policy than what we have experienced in the United States. While there are many nuances, there are also some simple but deadly important reasons. Most vital is the accountability, or lack thereof, of the institutions making the decisions. In Europe you have the so-called “troika” – the European Central Bank (ECB), the European Commission, and (more recently recruited) the IMF. These are much less accountable to eurozone residents – especially but not limited to those of the most victimized countries (Spain, Greece, Portugal, Ireland, and Italy) – than even the relatively unaccountable Federal Reserve and U.S. Congress and executive branch are to Americans.
Even worse, the European authorities have pursued a political agenda, and this involved actually using the crisis to promote certain “reforms” that the citizens of the victimized countries would never vote for. This is not a conspiracy theory: Exhibit A is a review of 67 IMF reports on the 27 European Union countries during the four years from 2008-2011. These reports, based on consultations with the respective governments, show a remarkably consistent pattern: reduce the size of government, reduce the bargaining power of labor, cut spending on pensions and health care, and increase labor supply.
Some examples: in all 27 countries, the IMF recommended budget tightening, with spending cuts generally favored over tax increases. In 15 countries there were recommendations on health care: 14 were to cut spending. In 22 of the 27 countries there were recommendations to cut pensions. In half the countries, the Fund also gave advice on employment protection; in all of them, the recommendation was to reduce employment protections. Reducing eligibility for disability payments or cutting unemployment compensation, raising the retirement age, and decentralizing collective bargaining were also recommended.
The IMF is not an independent entity, and the European directors at the Fund hold sway on matters of European policy. So these papers tell us the political agenda of the troika, not just the IMF.
So it is not surprising that these are the kinds of policy changes that we have seen during the last few years in the weaker eurozone countries like Greece, where real health care spending has been cut by more than 40 percent; or Portugal, where the number of private sector workers covered by union contracts has shrunk from 1.9 million to just 300,000.
But perhaps even more remarkably, this evidence tells us why the ECB allowed repeated and severe financial crises in the eurozone to take their toll on the eurozone and world economy for nearly three years. Not until July of 2012 did ECB President Mario Draghi utter those famous three words – “whatever it takes” – which, backed up a few weeks later by the new “Outright Monetary Transactions” program, put an end to the threat of financial meltdown.
Until then, the European authorities saw the crisis as an opportunity to implement their favored “reforms.” As the IMF put it in a 2009 report, “historical experience indicates that successful fiscal consolidations were often launched in the midst of economic downturns or the early stages of recovery.”
All this is not to hold up the U.S. recovery as an example; it is disgraceful that we have fewer people employed than we did six years ago, and a lower proportion of employed workers than we had at any time going back to the 1980s. And unnecessary: the media is filled with nonsense about cutting deficits and debt, and our government is also slowing growth with unnecessary budget cuts. And all this when our Federal debt has a net interest burden of less than 1 percent of our national income, about as low as it has been in the post-World War II era. But the eurozone experience shows how much worse it can be when people lose most of their control over their government’s most important economic policies.
After more than 20 European governments have fallen during the prolonged crisis, the pace of the destructive budget tightening there is finally winding down: from about 1.5 percent of GDP in 2012, to 1.1 percent in 2013, to 0.35 percent in 2014. But who knows how many more years it will take to reach normal levels of employment. That is what democracy, on economic issues, looks like in the eurozone: operating, barely, in painful slow motion.
Mark Weisbrot is co-director of the Center for Economic and Policy Research, in Washington, D.C. He is also President of Just Foreign Policy ( www.justforeignpolicy.org ).