It’s a disturbing situation for the euro zone. Even if everything isn’t rosy in the United States--in fact, it’s far from it--the situation progressively improves while European countries sink into a new recession less than three years after the big crisis.
Of course, the unemployment rate in the U.S. is above 8 percent, an extremely high number for the country (not including all the people that got out of the employment market). But this rate was lowered by about two points. It beat the record in Europe, which is at more than 11 percent. Even if growth falters at around 2 percent, it remains only a question of when the euro zone will go through a new recession in 2012, which one wonders if it will be possible to get out of in 2013.
This situation is paradoxical because the crisis we are going through comes from the world of finance, of which New York is a center (like London and Singapore), and the U.S. housing market’s total collapse. As a result, the recession should theoretically be harsher across in the U.S. than here, and the recovery should be slower. In reality, it’s the opposite. The recession was equally strong on both sides of the Atlantic, and we failed to revive the economy.
The reasons for this Atlantic divergence are numerous. The two main ones are sufficiently obvious. In Washington, one relies on economic recovery to reduce the fiscal deficits, and clear priority is given first to that. In the European capitals, a savage austerity has broken growth in many countries, weakening the fiscal consolidation of their public finances. Paul Krugman and Joseph Stiglitz notably denounced this suicidal austerity.
The Gap Should Be Emphasized
There was an equally big divergence in monetary politics. While the European Central Bank slightly increased its rates a year ago before lowering it, realizing their mistake, the Fed kept them as low as possible. Furthermore, while the European Central Bank helps banks almost exclusively (by notably lending them €1,000 trillion at the beginning of the year), the Fed monetizes the public debt, which pushes down interest rates. In short, their central bank supports a lot more activities than across the Atlantic.
As reported by The Economist in a recent case, the divergence is likely to increase. Indeed, if nothing seems to revive the economic machine on the European side, a lot of positive factors are accumulating in the United States. Household debt went from 133 to 114 percent of income since 2007, reversing half of the accumulated increase since the beginning of the 1990s. The end of debt reduction will help growth.
Subsequently, the maintenance of a cheap dollar helps exporters. The country has reduced its commercial deficit by one-third, which brought 2 points to the GDP since 2006. The housing market seems to have reached its bottom and is turning positive, providing support to growth. The banks have been much more restructured than in Europe. Finally, the country also profits from the windfall of shale gas, which made even the petrochemical industry come back.
This is not about saying that the policy followed in the United States should be used from an example; it’s far from that. However, this allows one to ascertain to which point European countries are cornered in an impasse that is pushing our economies into recession. This impasse has a name: the E.U., the euro and free trade.
Edited by Katya Abazajian