Blog Post

Is Europe sliding into a double-dip recession? – Focus on the long term

It is difficult now to see how Europe and the euro area in particular could avoid at least two consecutive quarters of negative growth in 2012 (possibly starting in the fourth quarter of this year) and hence a “double dip.” The more troubling fact is that this is likely to be followed by a relatively […]

By: Date: November 12, 2011 Topic: Macroeconomic policy

It is difficult now to see how Europe and the euro area in particular could avoid at least two consecutive quarters of negative growth in 2012 (possibly starting in the fourth quarter of this year) and hence a “double dip.” The more troubling fact is that this is likely to be followed by a relatively long period of slow growth as most European economies continue to draw down their public and private-sector debt, which is likely to fuel unemployment.

There are a number of concerning developments. First and foremost, the sovereign debt crisis is dragging on — and slowly reaching the core of the euro area. This will force national governments to retrench further, sometimes making long-overdue structural reforms but also sometimes cutting blindly into their expenditures and social safety nets.

A double dip would be painful, but a prolonged period of slow growth afterward could be even worse.

Second, the banking crisis is also deepening as very little has been done over the last three years to address it. It is now crystallising and forcing European banks to raise capital rapidly and to shrink their balance sheets, setting in motion a credit crisis that will not only affect European businesses and consumers but that is also likely to weigh on international trade and global infrastructure financing, in which European banks are very involved.

What is striking nonetheless is that from a pure macroeconomic standpoint, the euro area is in a relatively better shape than other advanced economies — unequivocally better than the U.S., Britain and Japan. If we look beyond short-term cyclical developments, the real question is whether Europeans will eventually find a political resolution to their crises in order to avert fragmentation and whether these moments of hardship will, in the end, impair Europe’s potential growth.

There are some signs of hope. The process of resolving the crisis is slow and erratic, but it is progressing. Despite contagion and acute pressure, there is enough political will to prevent disruptive events like a break-up of the euro zone or a hard and disorderly sovereign default. A few elements of the crisis response seem to be coming together. In the next few weeks, the European Central Bank will certainly come to play a greater role and ease financing conditions, under the cover of providing leverage to the European Financial Stability Facility and liquidity to its banks. European governments will finally set in a motion a far-reaching recapitalization of their banks. And the G-20 will seek to bolster the resources of the International Monetary Fund, allowing it to play a bigger role in Europe for countries that require extra financing as a precaution. Finally, European leaders will sooner or later start the discussions on a treaty change to create the type of economic governance architecture that will allow some form of fiscal federalism.

The changes that Europe is enacting, in an extraordinarily short period of time, will eventually improve its economic governance and make its single market more effective and its labor force more competitive. But this process depends on the ability of European leaders to see through this economic crisis, safeguard the essential benefits of the welfare state and the European Union, and use the crisis as a stepping stone to reinvent Europe. This is a tall challenge, but one that can be met.

A version of this op-ed was also published in the NY Times


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 More by this author
 

Podcast

Podcast

Taming inflation?

What are the implications of prolonged inflation?

By: The Sound of Economics Topic: Macroeconomic policy Date: May 25, 2022
Read about event More on this topic
 

Past Event

Past Event

How can we support and restructure firms hit by the COVID-19 crisis?

What are the vulnerabilities and risks in the enterprise sector and how prepared are countries to handle a large-scale restructuring of businesses?

Speakers: Ceyla Pazarbasioglu and Guntram B. Wolff Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 25, 2022
Read about event More on this topic
 

Upcoming Event

May - Jun
31-1
10:30

MICROPROD Final Event

Improving understanding of productivity, its drivers and the way we measure it.

Speakers: Carlo Altomonte, Eric Bartelsman, Marta Bisztray, Peter Bøegh Nielsen, Italo Colantone, Maria Demertzis, Wolfhard Kaus, Javier Miranda, Steffen Müller, Verena Plümpe, Niclas Poitiers, Andrea Roventini, Gianluca Santoni, Valerie Smeets, Nicola Viegi and Markus Zimmermann Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event
 

Past Event

Past Event

[Cancelled] Shifting taxes in order to achieve green goals

[This event is cancelled until further notice] How could shifting the tax burden from labour to pollution and resources help the EU reach its climate goals?

Speakers: Niclas Poitiers and Femke Groothuis Topic: Green economy, Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 12, 2022
Read about event More on this topic
 

Past Event

Past Event

How are crises changing central bank doctrines?

How is monetary policy evolving in the face of recent crises? With central banks taking on new roles, how accountable are they to democratic institutions?

Speakers: Maria Demertzis, Benoît Coeuré, Pervenche Berès, Hans-Helmut Kotz and Athanasios Orphanides Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 11, 2022
Read article Download PDF More by this author
 

Book/Special report

European governanceInclusive growth

Bruegel annual report 2021

The Bruegel annual report provides a broad overview of the organisation's work in the previous year.

By: Bruegel Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: May 6, 2022
Read article Download PDF
 

Policy Contribution

European governance

Fiscal support and monetary vigilance: economic policy implications of the Russia-Ukraine war for the European Union

Policymakers must think coherently about the joint implications of their actions, from sanctions on Russia to subsidies and transfers to their own citizens, and avoid taking measures that contradict each other. This is what we try to do in this Policy Contribution, focusing on the macroeconomic aspects of relevance for Europe.

By: Olivier Blanchard and Jean Pisani-Ferry Topic: European governance, Macroeconomic policy Date: April 29, 2022
Read article Download PDF More on this topic
 

Working Paper

The low productivity of European firms: how can policies enhance the allocation of resources?

A summary of the most important policy lessons from research undertaken in the MICROPROD project work package 4, related to the allocation of the factors of production, with a special focus on the weak dynamism of European small and medium-sized enterprises (SMEs).

By: Grégory Claeys, Marie Le Mouel and Giovanni Sgaravatti Topic: Macroeconomic policy Date: April 25, 2022
Read article More on this topic
 

External Publication

What drives implementation of the European Union’s policy recommendations to its member countries?

Article published in the Journal of Economic Policy Reform.

By: Konstantinos Efstathiou and Guntram B. Wolff Topic: Macroeconomic policy Date: April 13, 2022
Read article Download PDF More on this topic More by this author
 

Working Paper

Measuring the intangible economy to address policy challenges

The purpose of the first work package of the MICROPROD project was to improve the firm-level data infrastructure, expand the measurement of intangible assets and enable cross-country analyses of these productivity trends.

By: Marie Le Mouel Topic: Macroeconomic policy Date: April 11, 2022
Read about event More on this topic
 

Past Event

Past Event

Macroeconomic and financial stability in changing times: conversation with Andrew Bailey

Guntram Wolff will be joined in conversation by Andrew Bailey, Governor of the Bank of England.

Speakers: Andrew Bailey and Guntram B. Wolff Topic: Macroeconomic policy Date: March 28, 2022
Read article
 

Opinion

European governance

How to reconcile increased green public investment needs with fiscal consolidation

The EU’s ambitious emissions reduction targets will require a major increase in green investments. This column considers options for increasing public green investment when major consolidations are needed after the fiscal support provided during the pandemic. The authors make the case for a green golden rule allowing green investment to be funded by deficits that would not count in the fiscal rules. Concerns about ‘greenwashing’ could be addressed through a narrow definition of green investments and strong institutional scrutiny, while countries with debt sustainability concerns could initially rely only on NGEU for their green investment.

By: Zsolt Darvas and Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: March 8, 2022
Load more posts