Europe's Growth Crisis: When and How Will It End?

• DOI: http://doi.org/10.1111/twec.12460
• Author: Dominick Salvatore
• Date: 01 May 2017
• Published date: 01 May 2017

Europe’s Growth Crisis: When and How

Will It End?

Dominick Salvatore

Department of Economics, Fordham University, New York, NY, USA

1. INTRODUCTION

RECOVERY from the recent global financial crisis and ‘great recession’ has been slower

than after previous recessions in most advanced countries and areas, especially Europe.

But Europe’s growth problem is structural in character and started much earlier. This paper

analyses the structural causes of the European growth problem, evaluates the policies that

Europe adopted to overcome it and concludes that even with the appropriate policies, the pro-

spects for accelerating growth in Europe will be difficult, especially in the context of Brexit

and the slowdown of world growth generally.

2. SLOW RECOVERY AND GROWTH AFTER THE GLOBAL FINANCIAL CRISIS

The recent global financial crisis and ‘great recession’ started in the US housing sector in

2007 and quickly spread across the Atlantic. Deep recession in advanced countries then

greatly reduced their imports and financial flows to emerging markets, thereby spreading the

crisis to the rest of the world. Most emerging market economies (such as Russia, Mexico and

Turkey) fell into a deep recession, while China faced a sharp slowdown in its record-breaking

growth. Only in India growth held up.

Table 1 shows that at the depth of the recession in 2009, the fall of real GDP ranged from

5.6 per cent in Germany to 2.8 per cent in the United States among the largest advanced

nations (it was 4.5 per cent for the Euro Area of 17 at the time). Table 2 shows that among

the largest emerging market economies, real GDP fell by 7.8 per cent in Russia, 4.8 per cent

in Turkey and 4.7 in Mexico, while China faced only a sharp growth slowdown starting in

2012 (Salvatore, 2010).

3. POLICIES TO OVERCOME THE CRISIS AND STIMULATE GROWTH

The United States and other advanced nations responded to the great recession by rescuing

banks and other financial institutions from bankruptcy, slashing interest rates, introducing huge

economic stimulus packages and undertaking huge injections of liquidity (quantitative easing or

QE). These efforts, however, only succeeded in preventing the economic recession from bein g

deeper than otherwise and the subsequent recovery being even slower than it has been.

To overcome the crisis, the Fed and the ECB (as well the Bank of England, Japan and

Canada) drastically cut their fund rate starting in 2008, so much so that by early 2014 they

were close to zero in nominal terms and negative in real terms (and subsequently negative

even in nominal terms in the Euro Area and Japan, and also in Switzerland, Sweden and

An earlier version of this paper was presented at the Annual Meeting of the American Economic Associ-

ation in Boston in January 2015. I thank Barry Eichengreen, Martin Feldstein and Dale Jorgenson for

helpful comments, but I alone am responsible for any remaining shortcomings.

©2016 John Wiley & Sons Ltd

836

The World Economy (2017)

doi: 10.1111/twec.12460

The World Economy