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 by this author
 

Opinion

European governance

Can the EU fiscal rules jump on the green bandwagon?

By and large, setting a new green golden rule would be a useful addition to the existing EU fiscal framework.

By: Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: October 22, 2021
Read article
 

Blog Post

European governance

Germany’s post-pandemic current account surplus

The pandemic has increased the net lending position of the German corporate sector. By incentivising private investment, policymakers could trigger a virtuous cycle of increasing wages, decreasing corporate net lending, which would eventually lead to a reduction of the economy-wide current account surplus.

By: Lionel Guetta-Jeanrenaud and Guntram B. Wolff Topic: European governance, Macroeconomic policy Date: October 21, 2021
Read about event
 

Past Event

Past Event

Monetary policy in the time of climate change

How does climate change influence monetary policy in the eurozone? What potential monetary policy measures should be taken up to address climate risks?

Speakers: Cornelia Holthausen, Jean Pisani-Ferry and Guntram B. Wolff Topic: Green economy, Macroeconomic policy Date: October 20, 2021
Read article More by this author
 

Podcast

Podcast

Rethinking fiscal policy

A look at the past, present and future of fiscal policy in the European Union with Chief economist of the European Stability Mechanism, Rolf Strauch.

By: The Sound of Economics Topic: European governance, Macroeconomic policy Date: October 20, 2021
Read about event More on this topic
 

Upcoming Event

Nov
4
14:00

European monetary policy: lessons from the past two decades

This event will feature the presentation of “Monetary Policy in Times of Crisis – A Tale of Two Decades of the European Central Bank."

Speakers: Grégory Claeys and Wolfgang Lemke Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article
 

External Publication

European Parliament

Tailoring prudential policy to bank size: the application of proportionality in the US and euro area

In-depth analysis prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Alexander Lehmann and Nicolas Véron Topic: Banking and capital markets, European Parliament, Macroeconomic policy Date: October 14, 2021
Read article More by this author
 

External Publication

Global Economic Resilience: Building Forward Better

A roadmap for systemic economic reform calling for step-change in global economic governance to increase resilience and build forward better from economic shocks, prepared for the G7 Advisory Panel on Economic Resilience.

By: Thomas Wieser Topic: Global economy and trade, Macroeconomic policy Date: October 14, 2021
Read article More on this topic More by this author
 

Opinion

Letter: Declining investment may explain why rates are low

Perhaps an analysis of the causes of the declining investment rate would bring us closer to explaining why real interest rates are so low.

By: Marek Dabrowski Topic: Macroeconomic policy Date: October 1, 2021
Read article More by this author
 

Podcast

Podcast

A green fiscal pact

How can the European Union increase green public investment while consolidating budget deficits?

By: The Sound of Economics Topic: European governance, Macroeconomic policy Date: September 29, 2021
Read article More on this topic More by this author
 

Blog Post

Monetary arithmetic and inflation risk

Between 2007 and 2020, the balance sheets of the European Central Bank, the Bank of Japan, and the Fed have all increased about sevenfold. But inflation stayed low throughout the 2010s. This was possible due to decreasing money velocity and the money multiplier. However, a continuation of asset purchasing programs by central banks involves the risk of higher inflation and fiscal dominance.

By: Marek Dabrowski Topic: Macroeconomic policy Date: September 28, 2021
Read article More on this topic More by this author
 

Opinion

The pandemic’s uncertain impact on productivity

The pandemic has certainly permanently affected our way of working. Whether this is for the better remains to be seen.

By: Maria Demertzis Topic: Macroeconomic policy Date: September 28, 2021
Read about event More on this topic
 

Past Event

Past Event

How to strike the right balance between the three pillars of the pension system?

In this event panelists will discuss the future of European pension schemes.

Speakers: Elsa Fornero, Svend E. Hougaard Jensen and Suvi-Anne Siimes Topic: Macroeconomic policy Date: September 23, 2021
Load more posts