March 8, 2017

The European Crisis: See I Told You So

Never bark at the big dog. The big dog is always right.

In 2014 I predicted that the European economic crisis would not come to an end until the Europeans chose to abandon the welfare state. They haven't. Three years later, what has changed?


As for government debt, the European Union (28 countries) and the Euro zone (19) are still struggling with debt levels almost identical to where they were at the depth of the crisis in 2012:*

Figure 1

The EU, the ECB and the IMF together forced several EU member states into austerity programs in order to bring down their debts. As I reported in 2014, the hardest-hit economies were Greece, Spain, France, Italy, Cyprus and Portugal. Have those countries been able to reduce their debt levels as a result of austerity? No:

Figure 2:

Greece, in particular, has gone through unending austerity programs. They even made a partial debt default in 2012, unilaterally cancelling almost 20 percent of their debt. Has that saved them? No. The orange-colored part of the columns in Figure 3 adds the defaulted part back to the Greek debt, showing that the partial default only lowered the amount of debt, but did nothing to change its trajectory:

Figure 3

But what about growth? Has not the European economy climbed out of its crisis? Is it not back to "normal" again? No:

Figure 4

As Figure 4 shows, the European economy is barely able to reach two percent growth. I predicted this, too, in my book, explaining that the two-percent growth rate is actually the marker of economic stagnation. An economy that cannot exceed two percent growth is effectively just reproducing a stagnant standard of living. Inability to surpass two percent growth is one of the criteria to classify an economy as industrially poor. 

As for the economies hit hardest by austerity, did austerity help them back to growth? No: 

Figure 5a

And no:

Figure 5b

Looking at GDP growth data, there is one exception, namely Spain. They have actually been able to exceed two percent growth for two years now, 2015 and 2016 (though the trend toward the end of 2016 hints of a decline back into sub-two percent territory). I will return to the Spanish economy later for a more in-depth look at what the forces behind their growth might be; for now, let us note that even as their economy climbs out of the industrial-poverty red zone of sub-two percent growth, their debt-to-GDP ratio is not declining. On the contrary, it remains at record levels:

Figure 6

So long as Europeans choose to keep their welfare states, they will continue to have to choose between budget deficits and growth-crippling austerity programs. Neither is a good path back to prosperity.  

*) Source for all raw data: Eurostat

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