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Europe’s post-crisis response - consisting of a combination of fiscal
austerity, neoliberal structural reforms and expansionary monetary
policies - has unambiguously failed.
In early 2016 - eight years after
the outbreak of the financial crisis - the eurozone’s overall real GDP
was still below the pre-crisis peak (March 2008).
The Greek economy was
27.6% smaller. Spain’s was 4.5% smaller. Portugal’s was
6.5% smaller. Even those countries with above-average eurozone
growth were not performing very well: Germany, for example, was only 5.5% larger than it was in March 2008, while France was only 2.7% larger. Meanwhile, most of the world has returned to, or
surpassed, pre-crisis GDP levels.
Overall, the euro area has experienced a stagnant - below 2% -
annualised growth rate since the beginning of 2012 (following a brief
post-crisis recovery), averaging 1.6% in early 2016. A very
slight acceleration is expected in 2017. Over the same period (2012-16),
various countries - such as Greece, Italy and Portugal - have
experienced near-zero or even negative growth rates.
The ECB’s policies -
quantitative easing, negative interest rates, etc. - have not provided
much of a stimulus, and cannot be expected to do so in the future. What
this means is that the ‘euro crisis’, in purely macroeconomic terms, has
been far worse than the Great Depression of the 1930s, when it took
European countries on average four to five years to return to pre-crisis
In early 2016, industrial production in the euro area was down more
than 10% compared to pre-crisis levels (the EU28 fared only
slightly better). Further, investment (gross fixed capital formation)
remained below 2007 levels in 21 of 28 countries. The Commission argues
for a ‘coordinated boost to investment’, but the proposed investment
plan remains a weak and unconvincing response to the depth of the
‘Deflation’ and deflation
From the beginning of 2013, the euro area’s inflation rate has been
well below the ECB’s 2% inflation target - and in February 2016
turned negative again (for the first time since 2009). In other words,
the eurozone has experienced continuous ‘deflation’ - understood as
performance below the policy level set by the ECB - for at least three
years (and arguably for longer, depending on the methodology used). Over
the same period, most periphery countries have experienced outright
deflation (i.e., negative inflation rates).
The ECB’s asset-buying
program - totalling more than 700 billion euros throughout 2015 and
early 2016 (equal to roughly 7% of the eurozone’s GDP) - has
failed to avert these deflationary tendencies (this is not surprising,
considering that the European economy seems to have fallen into a
so-called ‘liquidity trap’).
Various studies, mostly based on the latest research into the
so-called ‘fiscal multiplier’, have attributed the euro area’s
below-average post-crisis economic performance (compared to the rest of
the world) to the policies of fiscal consolidation of recent years.
One such study concluded that fiscal consolidation in the eurozone over the 2011-13 period reduced GDP by 7.7%. Another study
concluded that, had the peripheral economies of the EMU implemented
fiscal austerity only half as severe over the 2010-13 period, Greek GDP
would be nearly 14% higher, Spain’s GDP would be nearly 10% higher, whilst Portugal’s and Ireland’s economies would have shrunk
by 5.5% and 3.5% less respectively. The study also
concludes that across the five PIIGS,
the number of unemployed would be 1.2m lower if fiscal austerity had
been less severe.
The European Commission’s rhetoric and the
accompanying policy measures suggest no awareness of either the depth of
the problems or the extent of policy change required to tackle them.
There has been a verbal recognition that past policies have failed and
that a big change is needed if GDP and employment growth are to be
restored and maintained, but this has led only to half-hearted and
The key obstacle remains continued adherence to the eurozone’s fiscal
rules. The overall fiscal stance has moved from restrictive to neutral,
meaning that while state budgets are no longer used to depress economic
activity across the EU as a whole, they are not employed to stimulate
expansion either. Moreover, the slight relaxation comes with warnings of
the need for accelerated structural reforms - vaguely defined but
including measures that have cut wages and hence consumer demand - and
‘growth-friendly fiscal consolidation’. In practice that means
continuing a degree of austerity.
In early 2016, the euro area’s unemployment rate stood at 10.5% (17m people), while the youth unemployment rate was 21.5%
(3m) - up from 7 and 15% respectively in 2008. The figures for
the EU28 were respectively 10.6% (22m) and 20% (4.5m).
Among the member states, the highest unemployment and youth unemployment
rates were recorded in Greece (24.6 and 49.5%) and Spain (21.4
This has been accompanied by a rise in the rates of
long-term unemployment, implying that a large number of unemployed face
increasing difficulty in finding a job, while the danger of their
sliding into poverty and material deprivation correspondingly increases.
This is complemented by a lack of public sector opportunities. On the
contrary: cuts in public spending are accelerating this trend.
Moreover, poverty (including in-work poverty) and at-risk-of-poverty
rates have increased significantly in all European countries since 2008,
reflecting an overall decline in terms of social justice. In early
2016, nearly one-quarter of EU citizens (24.6%) are regarded as
being at-risk-of-poverty or social exclusion - an extremely high and
worrisome value. Measured against today’s total EU population, this
corresponds to approximately 122m.
The gap between northern European and
southern European countries remains enormous. In Greece, 36% of
the total population is at-risk-of-poverty or social exclusion. In
Spain, this figure was above 29%. For children and youths, these
shares were even higher. In Portugal, the poverty rate within the total
population is 27.5%. By contrast, Sweden, Denmark, Finland and
the Netherlands stand at the top of the overall index.
have concluded that the increase in poverty, at-risk-of-poverty and
social exclusion rates is a direct result of the policies of fiscal
austerity and internal devaluation pursued in recent years. Research has also shown
that austerity has increased inequality by fattening the tail of the
income distribution, implying a redistribution from workers to asset
owners (i.e., from the bottom majority of the distribution to the top
Debt still rising …
Austerity fails most spectacularly, even on its own narrow terms,
when the effect on debt is considered. In early 2016, the euro area’s
debt-to-GDP level stood at a record-high 93%, compared with a
pre-austerity level of 79.3% at the end of 2009. As a result,
interest payments tend to absorb a high and sometimes increasing share
of GDP despite the extremely low-level of interest rates. In the event
of future interest rate increases this will mean a further futile
Private debt is still very high in several member states as well,
partly because the ongoing crisis has hampered the private sector’s
‘deleveraging’ process. This is has resulted in the growth of
non-performing loans (NPLs) across the continent. NPLs are particularly
elevated in some southern countries, such as Italy, Greece, Portugal and
Cyprus. And they are generally concentrated in the corporate sector,
most notably among small and medium-sized enterprises (SMEs). This is
reflected in the fact that, despite the cost of borrowing falling quite
substantially since 2008, total loans to households and non-financial
institutions remain stagnant.
This has worrying implications not only
for the financial stability of the euro area but also for the prospects
of economic recovery, given that ‘higher NPLs tend to reduce the
credit-to-GDP ratio and GDP growth, while increasing unemployment’, a study has found.
This is also attributable to the austerity policies, which have
exacerbated the recession in a number of countries, further
deteriorating the balance sheets of families and corporates and, in
turn, those of banks. These developments further underline the fact
that, under the current circumstances, monetary policy alone is unlikely
to bring about recovery and that what is needed instead is a
coordinated fiscal expansion in the EU, with an emphasis on public
As for intra-EMU current account imbalances, arguably one of the
leading causes of the crisis, the rebalancing has been significant but
the adjustment has been shouldered entirely by deficit countries
(through decreased imports, not increased exports). That is, deficit
countries have sharply reduced their current account deficits, but
surplus countries have not reduced their current account surpluses, with
Europe’s overall adjustment essentially premised on demand emanating
from outside Europe.
The result has been that the EMU as a whole, which
had an overall balanced external position in 2007, in early 2016
registered a record-high - and growing - current account surplus of 3.7% of GDP. The net result has been a deflationary bias for the
euro area (and particularly for periphery countries), as well as for the
world economy. As global demand experiences a dramatic slowdown, an
export-led solution to the crisis appears more unlikely than ever.
About Thomas Fazi
Fazi is a writer, activist and award-winning filmmaker. He has also
translated into Italian the works of authors such as Christopher
Hitchens, George Soros and Robert Reich. His book, The Battle for
Europe: How an Elite Hijacked a Continent - and How We Can Take It Back
is published by Pluto Press. His website is www.battleforeurope.net