Abstract
In this chapter, we briefly illustrate the two “crises”—the global financial crisis (with the consequent Great Recession of 2008–09) and the sovereign debt crisis—causing a second recession and whose impact is long lasting in Europe. In particular, we focus on the impact of the crises on the collapse of aggregate demand—with particular reference to investment—and we present new evidence on output and (un)employment gaps. Our opinion is that the austerity measures undertaken in the area, especially in the peripheral countries, have caused stagnation and persistent unemployment. Thus, the short-run policy implication is that the Eurozone needs an “aggregate demand shock”, e.g. a massive investment plan (much bigger than the unsatisfactory “Juncker plan”). A more definite solution for the long-run problems is to realize some vital reforms in EMU’s construction and in the governance of the EU, in particular to guarantee a viable monetary union and favour a real convergence of its economies.
Earlier and partly different versions of this chapter have been presented at the 80th Conference of the International Atlantic Economic Society (Boston, 8–11 October 2015) and at the International Economic Seminar “Villa Mondragone” (Rome, 23–24 June 2016).
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Notes
- 1.
The same authors emphasize that, out of 100 financial crisis episodes recorded in 150 years, the Italian crisis has been less severe only of the Greek one (and also the Irish one, that has however recovered well in the most recent years). They compute a severity index, based both on the depth of the recession and on number of years necessary to return to pre-crisis levels. A comparative investigation of three modern financial crises (Argentina, the US and Europe), focusing also on policy implications, is in the book by Moro and Beker (2016).
- 2.
A visual picture of the relative contractions in the different components of aggregate demand, as well as of the increases in the recovery period, is provided by the Figs. 1, 2, 3, 4 and 5 in the Appendix. The comparison is made between the four largest EU economies (Germany DE, France FR, Italy IT and UK), four peripheral economies (Spain ES, Portugal PT, Ireland IE, Greece EL), in addition to the EU and Euroarea (EA) averages. The recession period goes from the max. value—for each variable—preceding the crisis (2007 or 2008) to the subsequent min.; the recovery period from the min. to the last available data (2015Q3). Quarterly Eurostat data have been used.
- 3.
The Piigs include Portugal, Ireland, Italy, Greece and Spain, i.e. the countries most affected by the sovereign debt crisis in 2010–12, with the highest “spread” levels; all the Piigs, but Italy, received financial assistance under the supervision of the “troika” (EU Commission, ECB, IMF).
- 4.
Now, however, export cannot be a primary source of demand because international trade is slowing down (as a consequence of the deceleration originated in many emerging economies since 2014).
- 5.
See also Bundesbank (2016). According to this report, in 2015 the gap vs. pre-crisis levels was still 70% in Greece and Cyprus, 30% in Italy, Spain and Portugal, 10% in France (only Germany returned to pre-crisis levels). In the construction sector, gaps of 90% are reported for Greece, 70% for Ireland, 50% for Spain.
- 6.
For example, in the Italian case near 60% of the increase in unemployment would be structural (with the structural unemployment rate rising from 7% in 2007 to almost 11% in 2014). In Spain the structural unemployment rate resulted higher than 20%.
- 7.
The authors also conclude that—paradoxically—if the impact of the recession on potential growth is actually of the huge size described by the model agreed at the European level, this would suggest a much more gradual fiscal consolidation than that recommended by the European Commission.
- 8.
- 9.
It should also be noted that this indicator could underestimate the “employment gaps” with respect to pre-crisis values, at least for some countries, due to working hours reductions as a strategy (labour hoarding) for reducing firings. This is for example true in some economies more hit by the crisis and with a higher diffusion of short-time work-agreements.
- 10.
There has also been a long discussion on the value of the fiscal multipliers; it is not possible to fully discuss this issue here: we just point that underestimating their value has led authorities to set unachievable debt (and deficit) targets (see, among many others, Eyraud and Anke 2013). Therefore, fiscal adjustment should be rebalanced and made more “growth-friendly” (Cottarelli and Jaramillo 2012).
- 11.
As a matter of fact, economic recovery in the Eurozone, already feeble in 2014 and 2015, was weakened at the beginning of 2016 by new downsize risks: deceleration of emerging economies, very low price of oil, volatility in financial markets, uncertainty caused by the terroristic attacks, difficulties in managing migration flows, undefined scenario related to the possible Brexit from the EU.
- 12.
In general, banks are hoarding the additional money supply in the form of excess reserves, rather than lending it; this is, according to Roubini (2016), one of the features of the global economy’s “new abnormal”.
- 13.
For peripheral countries, it is better to improve competitiveness by upgrading their industrial structure and specialisation, product differentiation and technological content, rather than just exploiting “internal devaluations”, that squeeze wages, perpetuate deflation and depress consumption.
- 14.
In fact, if all Eurozone countries adopt restrictive policies, who will provide the necessary source of demand? All world regions cannot have a surplus at the same time. The US recovery has been satisfactory, but many emerging economies and even China in 2015–16 exhibited a slowdown in economic growth. A “beggar-thy-neighbour” policy cannot be a proper solution.
- 15.
At the beginning of 2016 some projects were authorised, concerning both “infrastructure and innovation” projects approved by the European Investment Bank (EIB) and financing agreements for small and medium sized firms approved by the European Fund for Strategic Investment.
- 16.
- 17.
For example, investments in local transport, school building/renovation and social housing, energy efficiency, environmental protection, health, tourism, sports infrastructure, museums and cultural resources, social welfare, and many others (see also Marelli 2015).
- 18.
- 19.
The mutualised bonds would surely have a lower average interest rate and a lesser overall interest expenditure, mainly due to a large secondary market and the Eurozone level security. In order to reduce the political opposition of some countries, the burden of interest payment would (proportionally) remain on the national budgets.
- 20.
See also the document of the Italian Government: Ministero dell’Economia e Finanze, (2016).
- 21.
Brexit was also a consequence of wrong EU policies beyond the economic sphere, including migration policies.
- 22.
At the end, a monetary union cannot be maintained without continuous progress toward an economic and political union (O'Rourke and Taylor 2013).
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Appendix
Appendix
GDP changes in the recession and recovery periods
Exports in the recession and recovery periods
Government consumption in the recession and recovery periods
Consumption of households in the recession and recovery periods
Gross Fixed Capital Formation in the recession and recovery periods
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Marelli, E., Signorelli, M. (2017). Eurozone: Crises, Wrong Policies and the Needed Reforms. In: Paganetto, L. (eds) Sustainable Growth in the EU. Springer, Cham. https://doi.org/10.1007/978-3-319-52018-6_10
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