NOT BULLISH: The euro area is back on the brink of recession, Japan’s exports fall, U.S. recession probability raising

Economist: The euro area is back on the brink of recession

The euro has been an economic fiasco. GDP growth in the euro area has lagged behind that in other advanced economies, and in the European Union as a whole, throughout its life—before the financial crisis, during the global recession and its euro-area encore, and even during the recent #euroboom. Perhaps the area would have done as badly without the single currency. But attempts to estimate euro-zone performance relative to a counterfactual world sans euro suggest not. The past decade has been especially brutal. A list of the world’s worst performers in terms of real GDP per person since 2008 contains places suffering geopolitical meltdowns—plus the euro-area periphery. Greece has been outgrown by Sudan and Ukraine. Cyprus and Italy have been beaten by Brazil and Iran; France and the Netherlands by Britain.

The price of German support for crisis-addled economies was a revision to the “stability and growth pact”, which is intended to keep budgets in line. The new fiscal compact struck in 2012 requires governments to keep net borrowing to no more than 3% of GDP. Though that may not seem particularly onerous, it also requires them to maintain a structural budget deficit (adjusted to take account of the business cycle) of no more than 1% of GDP if debt is “significantly” below 60% of GDP, and no more than 0.5% of GDP if debt is above that level. Governments with debt above 60% must also take steps to bring it back below that threshold; those approaching it can no doubt expect stern warnings. Countries in egregious violation of these rules are subject to penalties. In Italy, which has public debt of around 130% of GDP, populists were carried into office by frustration with the status quo, but cowed into budget sobriety last year after the EU threatened to impose such penalties.

In effect, Europe has denied governments the ability to use their budgets to boost demand. These fiscal shackles would be less worrying if the ECB were better positioned to boost private spending by easing monetary policy. But its effective interest rate is already negative. The slowdown in 2018 came despite the ECB asset purchases continuing, albeit more slowly than in 2016 and 2017. Foreign spending could keep the euro-area economic engine turning over. But it is fickle, as the currency bloc is learning. It was only a matter of time until an ill wind caused the euro area’s sails to slacken, exposing its inability to maintain domestic demand without external help. The shift from boom to gloom was inevitable.

It need not be permanent. Europe could loosen its fiscal restraints. Better still, it could make use of its combined fiscal potential by mutualising some debt and creating a euro-area budget big enough to offer meaningful stimulus. These reforms would require a big shift in the balance of power and thinking within Europe. Such shifts have occurred before, in the throes of crisis. But if the past ten years of #eurogloom did not demonstrate the pressing need to maintain an array of demand-boosting tools, it is difficult—and frightening—to contemplate what ultimately will.