Worse than the 1930s: Europe’s recession is really a depression

[jimmy olsen]

What say you Languish, is he correct, or cherry picking and being overly dramatic.

Lots of embeded links in this article, if you want to explore them, click on the link.

http://www.washingtonpost.com/blogs/wonkblog/wp/2014/08/20/worse-than-the-1930s-europes-recession-is-really-a-depression/

Worse than the 1930s: Europe's recession is really a depression

As I was arguing last week, it's time to call the eurozone what it really is: one of the biggest catastrophes in economic history.

There have been plenty of those lately. And it's not just the Great Recession. It's the way we've struggled to make up the ground we lost since. The United States, for one, has had its slowest postwar recovery. Britain has had its slowest one, period. But, six and a half years later, Europe has distinguished itself by not having much of a recovery at all. And, as you can see above, that's about to make it worse than the worst of the 1930s.

I've taken the chart above from Nicholas Crafts, and extended it a bit to put Europe's depression in, well, even more depressing perspective. Eurozone GDP still hasn't gotten back to its 2007 level, and doesn't look like it will anytime soon. Indeed, it already wasn't clear if its last recession was even over before we found out the eurozone had stopped growing again in the second quarter. And not even Germany has been immune: its GDP just fell 0.2 percent from the previous quarter.

It's a policy-induced disaster. Too much fiscal austerity and too little monetary stimulus have crippled growth like almost never before. Europe is doing worse than Japan during its "lost decade," worse than the sterling bloc during the Great Depression, and barely better than the gold bloc then—though even that silver lining isn't much of one. That's because, at this rate, it'll only be another year until the eurozone is well behind the gold bloc, too.

So how is Europe making the Great Depression look like the good old days of growth? Easy: by ignoring everything we learned from it.

Back then, there were two types of countries: ones that had left the gold standard, and ones that were about to. But that "about to" could take awhile. That's because governments were sentimentally attached to gold, even though, as Barry Eichengreen has shown, giving it up led to recovery. They simply equated the gold standard with civilization, so they were willing to sacrifice their economies for it. And sacrifice them they did. Although there were limits in extremis.

Britain, for example, refused to raise rates to defend the gold standard in 1931, because unemployment was already 20 percent. It devalued instead, and the rest of the "sterling bloc"—Sweden, Finland, Norway, Denmark, Portugal, and Canada—followed suit (silver line). The irony, of course, is that this economic weakness made them stronger. Abandoning gold let them do fiscal and monetary stimulus that jumpstarted rather rapid recoveries.

Then there were the diehards. Countries that had lots of gold, like France, could actually stay on the gold standard if they wanted to—so they did. They pushed through one austerity budget after another as offerings to almighty gold, and, for that, they paid the economic price. Now, they never crashed like the U.S. did, but they never recovered, either (yellow line). The vicious circle of falling prices, rising unemployment, and bigger budget cuts kept them in a never-ending slump. Until, that is, France and the remaining members of the "gold bloc," which, at its peak, included Belgium, Poland, Italy, the Netherlands, and Switzerland, finally gave up their Midas delusions in October 1936. Recovery followed.

As I've said before, the euro is the gold standard with moral authority. And that last part is the problem. Europeans don't think the euro represents civilization, but rather the defense of it. It's a paper monument to peace and prosperity that's made the latter impossible. So the eurocrats who have spent their lives building it are never going to tear it down, despite the fact that, as it's currently constructed, the euro is standing between them and recovery.

Just like the 1930s, Europe is stuck with a fixed exchange system that doesn't let them print, spend, or devalue their way out of a crisis. But, unlike then, Europe might never give it up. It's a fidelity to failure that even the gold bloc couldn't have imagined. And that leaves the ECB as Europe's only hope—which means they're probably doomed.

Now, to be fair, the Draghi-led ECB has done about as much as it can given its legal and political constraints. But you don't grade unemployment on a curve. And those constraints aren't going to go away, not enough anyway, to avoid a lost decade or two. Instead, the ECB will probably keep doing the bare minimum: some half-hearted quantitative easing that will stop as soon as Germany starts to grow faster.

They have made a desert, and called it the eurozone.

[Admiral Yi]

It's pretty dishonest to call it a Great Depression and not include countries which actually went through the Great Depression, namely the US and Japan.  That graph shows a 4% fall in GDP for the eurozone; US output IIRC fell by c. 40% during the Great Depression.

[Martinus]

Would like to see someone with more economic credentials behind their belt than "reporter for Wonkblog" make that argument. Looks like a typical journalist, so probably has no clue.

[Norgy]

If it is a depression, I am hoping for planes dropping tons of citalopram over us.

[Iormlund]

It's pretty dishonest to call it a Great Depression and not include countries which actually went through the Great Depression, namely the US and Japan.  That graph shows a 4% fall in GDP for the eurozone; US output IIRC fell by c. 40% during the Great Depression.

Well the graph does say Europe's Greatest Depression.

[Josquius]

I thought it was over .


And I eagerly await the day people start properly calling the 29 depression the second Great Depression.

[Ideologue]

Would like to see someone with more economic credentials behind their belt than "reporter for Wonkblog" make that argument. Looks like a typical journalist, so probably has no clue.

Krugman posted this the other day, and largely agreed.

[The Brain]

Wake me when we get the second coming of Hitler.

[Razgovory]

It's pretty dishonest to call it a Great Depression and not include countries which actually went through the Great Depression, namely the US and Japan.  That graph shows a 4% fall in GDP for the eurozone; US output IIRC fell by c. 40% during the Great Depression.

What was the fall in GDP for the US in the great depression?

[Admiral Yi]

C. 40%.

[CountDeMoney]

US output IIRC fell by c. 40% during the Great Depression.

I'm sure everybody's doing their best to get there soon enough.

[CountDeMoney]

Would like to see someone with more economic credentials behind their belt than "reporter for Wonkblog" make that argument. Looks like a typical journalist, so probably has no clue.

Krugman posted this the other day, and largely agreed.

The Languish Association of Esoteric Economic Assclowns consider Krugman a hack.  He's simply not esoteric enough.

Unless you mean that he agreed that Wonblog looks like a typical journalist, so probably has no clue.

[Sheilbh]

Here's a round-up of economics hacks writing about the Eurozone, on the basis of last weeks figures:
http://www.bruegel.org/nc/blog/detail/view/1414/

Blogs review: The forever recession
-as the recovery takes hold in the US, Europe appears stuck in a never-ending slump
by Jérémie Cohen-Setton on 18th August 2014 41 17

What's at stake: As the recovery takes hold in the US, Europe appears stuck in a never-ending slump. With the ECB systematically undershooting its inflation target and recent signs that inflation expectations could become de-anchored, the bulk of commentators in the blogosphere are again calling for more monetary actions. Noticeably, some have completely lost hope in the ability of the European institutions to turn this situation around and are now calling for countries to simply break away from the EMU trap.
The greater depression
The Economist writes that this week's figures for the euro-zone economy were dispiriting by any measure. An already feeble and faltering recovery has stumbled. Output across the euro area was flat in the second quarter. The new GDP figures are yet more evidence that the euro-zone economy is in a bad way. It is not only that growth is evaporating; inflation is also extraordinarily low. 
Matt O'Brien writes that it's been six-and-a-half years, and eurozone GDP is still 1.9 percent lower than it was before the Great Recession began. It "only" took the U.S. economy seven years to get back to where it'd been before the Great Depression hit. Eurointelligence writes that until earlier this year, the eurozone's macroeconomic development was a core vs. periphery story. If that had continued, the eurozone would have gone through a somewhat painful adjustment. But with core economies growth and inflation also low and falling, this is not happening. Brad DeLong writes that in the middle of 2011 it was possible to say that Germany had recovered from the crisis, that the remaining problems of southern Europe were the result of their own fecklessness, and that German growth was about to resume–it was wrong to say that, but it was possible. But we will soon have three years of no industrial production growth in Germany.

Source: Philippe Waechter
Ambrose Evans-Pritchard writes that it takes spectacular policy errors to bring about such an outcome in a modern economy. Eurointelligence writes that this is a recession caused by policy failure. It was not a financial crisis that has damaged the eurozone as much as the policy response to it: obsessive deficit cutting in a poisonous conjunction with obsessive central bankers (who obsess about everything, except meeting their own inflation target).
Jeffrey Frankel writes that the peculiar way individual European economies define a recession makes it harder for the public to see that the same wrong policies have been followed throughout the crisis. Under U.S. standards (where the start and the end of a recession is determined by a cycle dating committee) Italy would, for example, probably be treated as having been in the same horrific six-year recession ever since the shock of the global financial crisis in 2008. Citizens in Italy have now been given the impression that they have entered a new recession.  Voters may draw the conclusion that their new political leaders must have done something wrong.   But the picture is different if Italy has been in the same recession for six years.  The implication may be that the leaders have been doing the same wrong things throughout that period.

Source: CEPR Euro Area Business Cycle Dating Committee Committee
Structural reforms, the ECB and the EMU trap
Antonio Fatas writes the central bank should, as in the US, communicate its view on how close the economy is to potential output, how much slack there is in the economy and how they plan to use their economic tools to address that gap. Otherwise, by always invoking structural reforms, the ECB sounds defensive as if they feel too much pressure to lift growth rates and they want to explain to the public at large that the low economic performance is not really their fault but the fault of governments' failure to reform.
Wolfgang Munchau writes that if the ECB continues blaming eurozone governments for not implementing structural reforms and continues missing its own targets, the eurozone will end up looking like Japan, but with one difference. Countries whose policy goes off track have nowhere to go. The member states of a monetary union have alternatives. By failing to deliver on its inflation target, the ECB could give member countries a good reason to leave the eurozone: they could have a better central bank.
Ambrose Evans-Pritchard writes that there is no point negotiating. The European institutions have failed to ensure a symmetric adjustment that compels both North and South to take equal steps to close the intra-EMU divide from both ends, befitting their equal responsibility for mismanaging the EMU joint venture in its early years. Italy must look after itself. It can recover only if it breaks free from the EMU trap, retakes control of its sovereign policy instruments and redominates its debts into lira, with capital controls until the dust settles.
Matt O'Brien writes that the euro is the gold standard with moral authority. And that last part is a problem. Both are fixed exchange rate systems that can turn a recession into a depression, because they make countercyclical policy impossible. But people are even more attached to the euro today than they were to the gold standard then. Now, in the 1930s, people equated the gold standard with civilization itself, and were willing to sacrifice their economies for it. The euro doesn't just represent civilization, but the defense of it, too. After all, the past 60 years of civilization have all been about making sure it never happens again. Europe's leaders aren't going to give that up because of a little thing like a never-ending slump.
| Read more at Bruegel http://www.bruegel.org/nc/blog/detail/view/1414/

[MadImmortalMan]

I'm not sure they really even had much growth in the 2000s, and that the Euro effect bubble basically overshadowed it completely. How do we know the new 2013-2014 part of the trendline isn't the real one and the earlier parts of the graph all bubble?

[alfred russel]

Lots of embeded links in this article, if you want to explore them, click on the link.

It is tough to explore them on my smartphone. Why don't you post them, with a separate thread for each embedded link?

Then we can explore together, with you leading the way as the forum's Magellan. I'll be Lapu-Lapu.