Great Recession Restored Pre-1999 U.S.-Minus-Ezone Growth Differential

February 25, 2014

The EU Commission’s 2014 Forecast, which was released earlier today, projects growth in the euro area of 1.2% this year followed by 1.8% in 2015, and it summarizes the region’s economic outlook in cautiously optimistic terms:

Rebalancing of the European economy has been progressing and external competitiveness is improving, particularly in the most vulnerable countries. The worst of the crisis may now be behind us, but this is not an invitation to be complacent, as the recovery is still modest. To make the recovery stronger and create more jobs, we need to stay the course of economic reform.

The report provides useful historical data of GDP growth in the EU, euro area, and member states not only since the common currency was launched in 1999 but for the five previous years.  U.S. and Japanese data are provided, too, for comparative purposes.  These data reveal an interesting finding.  In the run-up to the end-1998 birthing of the common currency, the U.S. enjoyed a wide growth differential vis-a-vis the euro area.  That advantage narrowed considerably during the first decade of Ezone life (1999-2008).  However, that relative improvement in Euroland growth prior to 2009 was erased entirely by the Great Recession.  That’s ironic since a bust in the U.S. housing market bubble produced the trigger for the global financial crisis and ensuing recession.  This diversity stemmed to a large extent from the more hawkish initial fiscal response to the crisis in Europe than in the United States.  Hindsight suggests that America’s policy response was more appropriate than Europe’s from the standpoint of economic result.  It is a second irony, even greater than the first, that the political lesson learned from the experiences of Europe and the United States has seen imitation in the U.S. of what Europe did poorly, rather than by European officials choosing to modify its poor actions to more closely resemble the original U.S. strategy that went comparatively well. 

The table below showcases per capita real GDP growth in the euro area and the United States since 1994 as the differential between those two trends.  The first, second, third, fourth and final columns are expressed as percent per annum.  The “f” suffix in the right-most columns indicates that they are the EU Commission’s forecasts.  The growth spread was halved in 1999-2003 from what such had averaged in the prior five years, and it narrowed sharply further to a mere 0.2 percentage points (ppts) in 2004-08.  The growth spread after 2008 sprang back to what had been experienced in the pre-Ezone launch years, a period characterized by considerable fiscal austerity in order to meet entry fiscal requirements for joining the common currency area.  The U.S. has reacquired the economic growth advantage with a considerably lower growth rate than it had in 1994-98.  GDP in Euroland actually advanced at a marginally softer rate in the first decade of existence than the members had collectively grown in 1994-98.  There was then a net contraction of 0.7% per year in 2009-13, and projected growth in 2014-15 will be still clearly worse than what was experienced over the fifteen years through 2008.

  1994-98 1999-03 2004-08 2009-13 2014f 2014-15f
U.S. 3.9% 2.9% 2.3% 1.2% 2.9% 3.0%
Ezone 2.3% 2.1% 2.1% -0.7% 1.2% 1.5%
U.S.-EZ 1.6 ppts 0.8 ppts 0.2 ppts 1.9 ppts 1.7 ppts 1.5 ppts


2009-13 were a real killer for many countries trapped in the common currency bloc, which prevented officials in them from either running an appropriate interest rate policy customized for the severity of their recessions or devaluing their currencies to recoup competitiveness vis-a-vis Germany.  In the five years between 2008 and 2013, real GDP plunged about 23% in Greece and between 6% and 9% in Spain, Cyprus, Latvia, Portugal, and Italy.  In Germany, meanwhile, where GDP had risen 2.0% per year in 2004-08, such advanced just 3% cumulatively during 2009-13, and but the EU pencils in projected growth of 1.9% per year in 2014-14, almost the same as in the pre-crisis 2004-08 period. 

The ECB Governing Council meeting of March 6 is highly anticipated for, among other reasons, revealing for the first time the central bank staff’s initial forecasts of 2016 growth and inflation.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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