Blog Post

What form will the recovery take?

In this column, Jean Pisani-Ferry believes a ‘zombie economy‘ is the worse threat to growth in the coming years. To avoid such an outcome, the author suggests policy measures outline in the policy brief ‘Handle with care! Post-crisis growth in the EU’ written by himself and Bruno van Pottelsberghe: countries should not try to diminish […]

By: Date: April 18, 2009 Topic: Digital economy and innovation

In this column, Jean Pisani-Ferry believes a ‘zombie economy‘ is the worse threat to growth in the coming years. To avoid such an outcome, the author suggests policy measures outline in the policy brief ‘Handle with care! Post-crisis growth in the EU’ written by himself and Bruno van Pottelsberghe: countries should not try to diminish unemployment by driving people out of the labor force but keeping workers close to the labor market through temporary work-sharing schemes to avoid the costly destruction of human capital; the banking sector should be swiftly restructured; and finally, R&D should be supported. A falling R&D today would translate into a lagging productivity tomorrow.

After months where the main concern was to deal with the possibility of an outright collapse of the world economy, there are indications that we are approaching the bottom. The emerging debate between economists about the shape of the recovery is therefore timely. There are reasons for optimism – inventories are low and the resumption of world trade can act as a powerful accelerator – but experience with financial crises leads to circumspection: recent by BIS and IMF economists suggests that credit crunches and house price busts are linked to deeper and longer recessions, and that on average countries are unable to return to their previous growth path.

Taking stock over a smaller sample of four financial sector-induced recessions in OECD countries (Sweden, Finland, Japan and Korea), Bruno van Pottelsberghe and I have observed in a recent Bruegel Policy Brief that countries normally do not return to their earlier growth path. Labor markets hysteresis and the ineffectiveness of the normal Schumpeterian cleansing effect of recessions during financial crises explain this outcome. Importantly, strains in the banking system clog the virtuous reallocation of capital from ailing industries and firms towards new sectors and young growing companies. Productivity can therefore be affected.
However, there is variation in country experiences. It is during the recession that the seeds of future growth performance are sown – or not. Here the comparison between Japan and Sweden is striking: while the latter managed to accelerate its growth after the crisis and the recoup the entire output loss, the latter suffered a long slump often quipped the ‘lost decade’.
Policy therefore matters considerably and this is apparent along five channels:
– the size of the stimulus packages,
– their content,
– labor market policies,
– the restructuring of banks, and
– innovation policy.
While the size of the stimulus has been widely debated, content is also important. In the EU national stimulus packages are often tilted towards the non traded sector. But the fear of ‘trade leakages’ often leads to put too much emphasis on demand to supply-constrained sectors. The Swedish experience also suggests that countries should not try to diminish unemployment by driving people out of the labor force.
Keeping workers close to the labor market, through temporary work-sharing schemes may avoid the costly destruction of human capital. Most importantly, the banking sector should be swiftly restructured.
It took seven years for Japanese banks to recognize half of its losses, but only three in Sweden. A ‘zombie economy’ is the worse threat to growth in the coming years. Finally, R&D should be supported. It is both highly cyclical and important for productivity in the next decade. A falling R&D today would translate into a lagging productivity tomorrow.
While international comparisons encourage more for pessimism than optimism about the speed of the recovery, they also yield important conclusions that should inspire policymakers.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More on this topic
 

Blog Post

GNI-per-head rankings: The sad stories of Greece and Italy

No other country lost as many positions as Greece and Italy in the rankings of European countries by Gross National Income per head, between 1990 and 2017. The tentative conclusion here is that more complex, country-specific stories – beyond the euro, or the specific euro-area fiscal rules – are needed to explain these individual performances.

By: Francesco Papadia and Bruegel Topic: Macroeconomic policy Date: June 18, 2019
Read article More on this topic More by this author
 

Opinion

L’euro sans l’Europe : un projet incohérent

Jean Pisani-Ferry constate que tous les grands partis ne remettent plus en cause l’euro. Il souligne néanmoins que trois vulnérabilités – économique, politique et internationale – menacent la monnaie unique.

By: Jean Pisani-Ferry Topic: Macroeconomic policy Date: May 28, 2019
Read about event More on this topic
 

Past Event

Past Event

Can the euro area weather the next crisis?

Is the euro area strong enough to make it through another crisis? What reforms are still needed. Klaus Regling will join us for this roundtable event in Washington DC to discuss these questions.

Speakers: Masood Ahmed, Klaus Regling, Maria Demertzis and Guntram B. Wolff Topic: Macroeconomic policy Location: 2055 L Street NW, Washington DC 20036 Date: April 11, 2019
Read about event More on this topic
 

Past Event

Past Event

Diverging narratives: European policies and national perceptions

Who tends to get the blame for the Euro crisis in national media? What do national politicians think about the EU and EMU?

Speakers: Pierre Boyer, Juha Pekka Nurvala, Giuseppe Porcaro and Laura Shields Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 27, 2019
Read article Download PDF More on this topic More by this author
 

Policy Contribution

High public debt in euro-area countries: comparing Belgium and Italy

This Policy Contribution looks at the evolution of public debt in Belgium and Italy since 1990 and uses the debt dynamics equation to explain the contrasting evolution in the two countries in the run-up to the introduction of the euro, during the early years of the euro and since the beginning of the crisis, arguing that the euro could have been used also by Italy to undertake sufficiently large fiscal adjustment.

By: André Sapir Topic: Macroeconomic policy Date: September 6, 2018
Read about event More on this topic
 

Past Event

Past Event

Euro tragedy: a drama in nine acts

This event featured a presentation by Ashoka Mody of his new book, which argues that the Euro is at the root of the problems the European Union faces today.

Speakers: Maria Demertzis, Ashoka Mody and Guntram B. Wolff Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 27, 2018
Read article More on this topic
 

Blog Post

Don’t put the blame on me: How different countries blamed different actors for the Eurozone crisis

Why did the eurozone have such difficulties coming to terms with its own shortcomings? The authors believe they have found part of the answer, through an algorithm-based cross-country media analysis.

By: Henrik Müller, Gerret von Nordheim and Giuseppe Porcaro Topic: Macroeconomic policy Date: March 1, 2018
Read article More on this topic
 

Blog Post

Clouds are forming over Italy’s elections

While the prospect of a gridlock reassured investors about the short-term risk of an anti-establishment government, Italy still needs a profound economic shake-up and is in no position to afford months or years of dormant governments.

By: Alessio Terzi and Bruegel Topic: Macroeconomic policy Date: February 28, 2018
Read article Download PDF More on this topic
 

Policy Contribution

Tales from a crisis: diverging narratives of the euro area

Who gets the blame for the crisis? How did narratives of the crisis develop since 2007? The authors of this paper tried to identify the key crisis-related topics in articles from four opinion-forming newspapers in the largest euro-area countries.

By: Henrik Müller, Gerret von Nordheim and Giuseppe Porcaro Topic: Macroeconomic policy Date: February 15, 2018
Read about event
 

Past Event

Past Event

Unfinished business: The unexplored causes of the financial crisis and the lessons yet to be learned

At this event Tamim Bayoumi will present his upcoming book on the financial crisis, showing how the Euro crisis and U.S. housing crash were, in fact, parasitically intertwined.

Speakers: Tamim Bayoumi, Maria Demertzis and Aerdt Houben Topic: Global economy and trade, Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 28, 2017
Read article More on this topic
 

Blog Post

Italian economic growth and the Euro

While the Euro has frequently been blamed for the poor growth performance of Italy over the years, a long-term analysis shows deteriorating growth before the introduction of the Euro. Additionally, Italy has shown worse performance than other euro-periphery countries, such as Spain, implying deeper structural reasons for Italy’s economic malaise.

By: Francesco Papadia and Bruegel Topic: Macroeconomic policy Date: July 26, 2017
Read about event More on this topic
 

Past Event

Past Event

Lessons for the future governance of financial assistance in the EU

On 14th June, Randall Henning will present his latest book on the Euro crisis and we will discuss how financial assistance should be governed in the euro area in the future.

Speakers: Servaas Deroose, C. Randall Henning, Rolf Strauch, Guntram B. Wolff and Bruegel Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 14, 2017
Load more posts