THE GREAT Depression in the 1930s was the last time economies of the developed world experienced a peacetime shock of the kind they have suffered since 2008. Most national economies are smaller than they were four years ago.
Taken together, the 17 national economies of the euro area are still 2 per cent smaller than at the beginning of 2008. Given average long-run growth rates of around 2 per cent annually, the European economy is now more than 10 per cent smaller than it would have been if the crisis had not happened.
Although there is a very clear north-south divide in economic performance, none of Europes fully developed economies has been spared, as illustrated in the table which compares GDP and domestic demand (a measure of economic activity which excludes exports and imports) at the end of 2011 with early 2008 before the crisis hit.
The German-speaking countries are the only ones to make up ground lost in the Great Recession of 2008-09, and France is almost there. The strength of the German economy – Europe’s largest – is well known, but that of France is often underestimated. The second largest economy in the bloc may not have grown as rapidly as Germany since exiting recession, but it suffered considerably less during the slump. A strong and highly globalised corporate sector and the absence of large imbalances mean France has the potential for continued solid growth.
The prospects of the euro zone’s third and fourth largest economies are far less rosy. Italy has been at or near stagnation point for well over a decade. If the “sclerotic Europe” label applied to the continent is justified anywhere, it is here.
Despite the absence of the finance-related weaknesses, the Italian economy’s lack of dynamism and innovation is slowly turning it into a backwater. Even if its new reform-minded government manages to introduce real change, it will be some time before the effects are seen in better economic performance.
Spain – the euro zones fourth largest economy – most closely approximated the Irish experience in the decade to 2007. The bursting of a massive credit-construction bubble caused Spain to suffer more than any other large European economy. Domestic demand has fallen by almost 12 per cent.
The effects on employment -intensive sectors, such as retail, combined with mass lay-offs in construction, mean that job losses in Spain have been second only to Ireland across the entire OECD.
These effects along with some serious competitiveness problems give reason to believe that Spain is still a long way from sustainable recovery.
The UK (though not a euro zone country) has been among the worst affected large economies, and this despite a sterling devaluation of around one-third vis à visthe euro and a strongly pro-business operating environment.
Restrictive planning laws prevented its credit bubble inflating a construction bubble, but very high debt levels run up during the good years now have to be paid down. Deleveraging will exert a drag on growth in Ireland’s largest trading partner for some time to come.
