By now it’s pretty clear something has gone wrong in the European economy, which is dipping again, even as the US appears to be gathering steam.
The obvious culprit is the Big Bad Beast of Austerity – tax hikes and spending cuts that mean that public and private sectors are trying to save simultaneously. However, that doesn’t really appear to fit the facts.
Source: IMF Fiscal monitor
The chart in the left shows the adjustment of the primary balances across the two economies, adjusted for the fact that recessions tend to make deficits bigger. The chart on the right is to show that I’m not just using adjusted data because it supports my argument. Over 3 years, the total excess EU adjustment is 0.8% of zone GDP. Over four years – assuming that hikes and cuts passed but not enacted affect how people behave – the difference is even smaller. These seem awfully small gaps to have caused such a pronounced gap between the two economies.
So how to explain it? Here’s a candidate.
These two series are a long way from directly comparable but they’re close enough that the divergence is interesting. US firms are borrowing again, European ones aren’t. This looks like a clear-cut job for monetary policy.
Here ends the simple bit. If you’re the sort of person who says ‘neoliberal’ a lot you may wish to stop reading here. There may be nuance.
The numbers for the Eurozone are an average. Clearly Greece’s depression is linked to massive fiscal cuts (even if I’m the sort of person who distinguishes between austerity and not having any money). But on the other hand, on average Eurozone citizens haven’t faced much tighter fiscal policy than the Americans. (Brits on the other hand, clearly have).
It’s an awful lot easier to say “the ECB should do something” than suggest exactly what it should do. In terms of cutting rates, it’s all but impossible to argue that they’ve done much less than the Fed. US banks are much smaller (relative to GDP) and the US has deeper and healthier non-bank capital markets to help when the banks are in trouble (see I warned you there was neoliberal apologia here). The US has a unified banking system – the fragmentation within Europe (German banks flooded in liquidity, peripheral ones treading carefully) is extremely difficult to address when sovereigns can’t recapitalise banks to the point where they’re happy to lend again. Fixing the banks is a job beyond pure monetary policy. Still, even bearing this in mind, it’s hard to argue that the ECB has done everything it can. Advantage Bernanke and the horse-waterboarders.