Almost a lost decade

by on February 12, 2016 at 6:12 pm in Current Affairs, Economics | Permalink

The 19-country eurozone, the core of Europe’s economy, grew at an annual rate of 1.1 percent in the last quarter of 2015. But total economic output remained just slightly lower than when the global economic crisis began, in 2008.

Here is Jack Ewing from the NYT.  Here is the blog, run by Thomas Cooley among others, European Economic Snapshot.  And from the FT:

Gross domestic product in Italy — the eurozone’s third-largest economy — rose by just 0.1 per cent in the fourth quarter, missing economists’ expectations of a 0.3 per cent increase and raising concerns that the tepid return to growth that begun in 2015 after three years of recession is already fading.

“Italy is struggling to emerge from the great recession and despite some encouraging signs in the first part of 2015, growth lost momentum in the second half,” says Lorenzo Codogno, a visiting professor at the London School of Economics.

That is why I do not understand the common view that the eurozone crisis is over.  Greece, by the way, has returned to a state of recession.

1 Michael F. Martin February 12, 2016 at 6:15 pm

So in other words, we’re about where one would expect after a credit bubble burst 10 years ago…

2 TMC February 12, 2016 at 6:32 pm

With 1930’s economic policies. I would expect that to be cut in half, or less, today.

3 Cliff February 13, 2016 at 12:52 am

Uh no

4 dearieme February 12, 2016 at 6:28 pm

Why do people focus on GDP rather than GDP per capita? Or perhaps per person aged 16-65?

5 JWatts February 12, 2016 at 7:13 pm

“Why do people focus on GDP rather than GDP per capita?”

Because they’re trying to look on the good side?

6 Mark February 13, 2016 at 7:46 am

Agree. GDP changes are a function in part of working age population changes which are not much a function of current or recent economic policy.

7 osual February 12, 2016 at 6:32 pm

You do not repay debts with gdp per capita

8 TMC February 12, 2016 at 6:34 pm

Actually, I do. I care what I make, not what everyone makes.

9 Mike February 12, 2016 at 6:55 pm

A good point. Ultimately, both metrics matter. In the Eurozone, I believe GDP per capita has actually declined over the last 10 years. That’s terrible.

10 Todd K February 12, 2016 at 11:41 pm

GDP/capita is what makes sense for measuring a sense of standard of living and the EU GDP/capita has increased a bit over the past 10 years from US$32,900 in 2005 to US$34,700 (2014) or an average of 0.5% a year growth.

11 Mike February 13, 2016 at 8:23 am

The EU and Eurozone aren’t the same thing, but I don’t think we are really disagreeing. Depending on the specific set of countries and GDP calculation methods you can get slightly different answers, but the bottom line is they have not grown materially.

12 Todd K February 13, 2016 at 9:50 am

The EU and Eurozone are close with the latter growing a little faster. Europeans are better off materially than they were a decade ago but the growth has been very slow.

13 dearieme February 13, 2016 at 7:49 am

“You do not repay debts with gdp per capita”. Indeed; you repay debts with new debts if you are a government.

14 prior_test February 13, 2016 at 1:35 pm

Stupid Germans – they keep not making new debts and using current tax revenue to pay off the old. No wonder Germany is in such wretched shape.

15 Stephan February 12, 2016 at 7:03 pm

Italy’s economy is un-competitive . Since 1990 ( a 25 year period) GDP growth has only been above 2% for a total of 3 years ( 1994,1995 and 2000)

16 Aaron J February 12, 2016 at 7:11 pm

Sounding like Krugman. Which I applaud.

17 JWatts February 12, 2016 at 7:17 pm

I don’t recall Krugman ever crediting GW Bush & Congress for stepping in quickly with a large and effective stimulus package.

18 RS February 12, 2016 at 8:24 pm

Krugman thinks that the US response while better than Europe was inadequate and he thought that it was inadequate in 2009

19 JWatts February 12, 2016 at 9:12 pm

Yes, that’s the Krugman I remember!

20 Bill February 12, 2016 at 8:29 pm

They just needed more austerity.

What wonders austerity can do.

21 MC February 12, 2016 at 10:27 pm

Quite right. Just look across the Channel. UK unemployment is at 5.1% and GDP growth last year was 2.2% (sorry, Krugman, et al).

22 cowboydroid February 12, 2016 at 11:37 pm

What “austerity?”

23 Nathan W February 13, 2016 at 12:02 am

He’s being sarcastic, I think.

Like, if there was more austerity growth would have been lower. Whether the extra debt is worth it is an open matter of discussion, but I think it’s a pretty uncontroversial point that fiscal stimulus would increase economic output over that sort of timeframe.

24 Cliff February 13, 2016 at 12:55 am

It’s very controversial, considering the ECB has been busy attempting to offset any fiscal stimulus and several EU nations have teetered on the verge of default

25 Nathan W February 13, 2016 at 5:01 am

Are you misintpreting me intentionally or by accident?

The uncontroversial aspects refers to the debate of whether fiscal stimulus will increase growth. Is it uncontroversial (as a matter of academic questions) that the impact on growth will be positive in the short run.

Yes, obviously it will be controversial in other ways for a great diversity of reasons, many of which you might be happy to expound upon.

26 Cliff February 13, 2016 at 12:40 pm

No I am interpreting you correctly. Obviously the EU is not the U.S. but surely you know about monetary offset? Surely you realize that growth will not improve if the country defaults on its debt?

27 Nathan W February 13, 2016 at 12:53 pm

Cliff, I’m not talking about the long run.

If the government spends $1 trillion additional this year, GDP output will expand. This is not controversial as an assertion.

I am not discussing the question of whether the county might go bankrupt the next year. I am not talking about that sort of controversy.

28 Cliff February 13, 2016 at 1:26 pm
29 OK February 12, 2016 at 8:33 pm

Yes, “a lost decade”, since time spent not increasing your economic output per year is truly time lost.

30 Quite Likely February 12, 2016 at 10:03 pm

What a cutting rebuff to capitalism.

31 prior_test February 13, 2016 at 5:06 am

Actually, more like a rejection. In favor, for example, of more free time outside of a workplace.

Oh wait, the Europeans have been doing that for several generations at this point.

32 JWatts February 13, 2016 at 11:48 am

Hmmm, yes and it seems to be working out poorly for the Greeks and Italians. But hey they aren’t the superior Germans, so maybe they don’t matter so much to you.

33 prior_test February 13, 2016 at 1:40 pm

Or the Swiss, the Dutch, the Danes, the Swedes, the Finns, the Austrians, and even the UK for that matter. Along with the Poles, the Czechs, the Hungarians, the Estonians, and even Serbia, for that matter.

The laws concerning vacation time are basically European wide, and neither the cause for ‘superior’ Germans being superior, nor the reason for ‘inferior’ Greeks being inferior. Basically, it is not a variable to compare any of the above mentioned economies.

34 JWatts February 13, 2016 at 2:39 pm

“neither the cause for ‘superior’ Germans being superior, nor the reason for ‘inferior’ Greeks being inferior.”

Ok, so what makes the Germans so superior to the Greeks in your mind?

35 msgkings February 13, 2016 at 3:17 pm

The Germans (VW) and Greeks (debt levels) seem pretty equally matched in dishonesty, hard to say who’s superior there.

36 cowboydroid February 12, 2016 at 11:41 pm

In a market economy, if you’re not realizing some gradual gain from production effiencies, you’re actually impoverishing yourself.

37 Nathan W February 12, 2016 at 11:59 pm

The only way I can remotely construe that as sensible is if you assume that we NEED NEED NEED things to always be getting better in order to feel OK.

If things stay precisely the same, isn’t it a lot more like staying the same than changing? How is stasis which fails to move in the positive direction equated to somehow therefore moving in the opposite direction.

Or are you thinking about competition, market share, etc?

38 HL February 12, 2016 at 8:44 pm

more immigrants should fix the problem

39 cowboydroid February 12, 2016 at 11:42 pm

Alternatively, less Western funded war in the middle East should fix a lot of problems, including the refugee crisis.

40 Nathan W February 12, 2016 at 11:56 pm

Would carpet bombing solve anything?

It could help us negotiate with the Russians before we …. oh, I don’t like the way THAT story could end up leading, if it becomes necessary to legitimize carpet bombing an entire region as OK.

Let’s value lives and be sad when people die. Even the crazy brainwashed terrorists. Be sad that they got brainwashed and there was no choice but to meet them with violence.

But make sure that you’re always in the midst of pursuing non-violent strategies, whether or not violence is “needed” in the meantime.

41 MC February 13, 2016 at 2:42 am

Yes, let’s speak loudly and carry a toothpick. Brilliant!

42 Nathan W February 13, 2016 at 5:06 am

How is dual pursuit of military and non-violent strategies from a position of overwhelming strength by virtually any calculus imaginable similar to asking for trouble when you can’t defend yourself?

I mean, we could literally bomb them into nothing. We ARE that powerful. Republican candidates are literally debating doing precisely that, so it’s not as though it’s even unrealistic to suggest that it could happen.

What I’m saying is that, if we want to be half decent about things, in the process of trying to maintain a regional stalemate while looking for a better solution, this “looking for a better solution” stuff could involve strategies that don’t 100% revolve around shooting people, bombing people, or training others to do the same.

Toothpicks? Really? You’re talking about the most powerful military force in the history of the planet by basically any imaginable calculus. But if loud talk and toothpicks will do the job, then why call for the death star?

43 Cliff February 13, 2016 at 12:56 am

Yes, if only the “West” was not “funding” the war in Syria. Of course.

44 anon February 12, 2016 at 10:23 pm

Hard to argue that negative rates are a panic move AND people think the crisis is over.

45 Horhe February 12, 2016 at 10:48 pm

James Goldsmith had identified this European malaise in the early 90s and quite accurately predicted the problems of economic integration and a single currency without a fiscal union.

One example of his thinking

46 Nathan W February 12, 2016 at 11:45 pm

True genius or just lucky? After all, SOMEONE was bound to take this sort of position. Has he proven otherwise brilliant?

47 prior_test February 13, 2016 at 5:12 am

Let the commenters decide –

‘Goldsmith believed Britain had been victim of a socialist conspiracy and that communists had infiltrated the Labour party and the media.[18] In the mid-1990s, Goldsmith was a financial backer of a Euro-sceptic think tank, the European Foundation. In 1994 he was elected in France as a member of the European Parliament, representing the Majorité pour l’autre Europe party. Goldsmith became leader of the eurosceptic Europe of Nations group in the European Parliament. He then founded and funded the Referendum Party in the UK, on the lines as Majorité pour l’autre Europe, which stood candidates in the 1997 general election. Goldsmith mailed five million homes with a VHS tape expressing his ideas. It has been suggested he planned to broadcast during the election from his offshore pirate Referendum Radio station.’

and this –

‘Goldsmith’s estate has provided finance for the JMG Foundation[21] which supports a diverse range of non-governmental organisations campaigning against GMO foodstuffs.’

This is the sort of place where cognitive dissonance on binary issues is easily ignored, so I’m sure that everyone will just pick and choose what they wish.

48 Horhe February 13, 2016 at 7:33 am

I’m not seeing your point. The man was politically active and he railed against the growing hivemind in politics and the media on questions of national importance, which he saw as socialism/communism (you have to admit that Britain at least was full of them, even though some recanted in the meantime, like Christopher Hitchens). His idea of Europe was not an aye or nay, but somewhere in between, where community preference is maintained and environmental protection is part of the agenda, but the Commission is just a civil service answering to the collective heads of state in Europe. Honestly, I think a better point would have been made if you had pointed out that he was such a notorious corporate raider that he got turned into a character in the movie Wall Street.

49 prior_test February 13, 2016 at 1:45 pm

‘you have to admit that Britain at least was full of them’

In the 1990s? Well, OK.

The point of dissonance being that for most commenters (not to mention the web site owners) being opposed to GMOs is a sign of being a dedicated leftist. Which he most certainly was not.

50 msgkings February 13, 2016 at 3:19 pm

Being opposed to GMOs doesn’t make you a leftist, it makes you startlingly stupid.

51 Horhe February 13, 2016 at 8:38 pm


I oppose the GMO business model where farmers are not allowed to keep non-hybrid GM plant seed to use in the next growing season through IP and tangible property laws. I think it’s reckless to create a seed bottleneck in a few companies and their production facilities, when a disruption in international trade or other threats means that farmers might miss the planting season, with devastating results. We are setting ourselves for a hiccup to cause a collapse.

52 Horhe February 13, 2016 at 8:42 pm

@ everyone:

Regarding the GMO issue, is there any state that has nationalized intellectual property (whatever it was) or used some form of eminent domain on it to support some national interest? Maybe jet engine technology in WW2 UK (Frank Whittle’s Power Jets company) can be classified as a roundabout form of IP nationalization.

53 Tom February 15, 2016 at 9:10 am

Yes, look for that AIDS medication case in South Africa. (Though it seems to have ended up at ‘compulsory licensing’ rather than nationalisation.)

54 Horhe February 15, 2016 at 3:29 pm

@Tom: Thanks.

55 Mark February 13, 2016 at 7:53 am

Others have been identifying structural grounds for Europe’s economic malaise since the 1960s. It’s one of the things Ned Phelps won his Nobel for. Little has changed. Don’t cherrypick.

56 Tom Warner February 12, 2016 at 11:01 pm

As the big difference between Italy and the EU average suggests, Europe is multi-speed. Recent US and North European productivity growth rates are not dramatically different from each other or their historical averages.

The effects of slower population growth on real public debt service costs seem to be a wash: nominal growth slows, but nominal interest rates also fall. Where problems arose was in the bubble when nominal GDP growth was inflated by unsustainable credit-driven demand. Then GDP and nominal growth rates collapsed, and debt stocks and debt service costs that had appeared inexpensive were exposed to be very expensive. The time “lost” was to misinvestment during the bubble.

All accounted, Germany can still raise public debt about as cheaply as the US, but Italy pays dearly for its debt service, to its own wealthy. And that crowds out investment, on top of all Italy’s other problems.

For what it’s worth, according to the Greek government’s count, consolidated public expenditure was down 3.4% in 2015, consolidated public revenues down only 1.1%. All the anti-austerity theater only increased the inevitability of austerity.

57 Nathan W February 12, 2016 at 11:51 pm

I don’t understand why crowding out should be such a big deal at the macro level if the small open economy principle applies.

Are there sufficient barriers to foreign investment, including financial sector access to make loans in the economy, which prevent capital from accessing opportunity in Italy, for the fact of so much savings being tied up in holding national debt?

I would be more concerned about misallocations of other resources, such as skilled labour or prime land, due to the natures of Italian law and public spending, than crowding out in finance. I’m just not convinced that the logic of crowding out is relevant for capital, in a world where billions of dollars can be sent across the world with a few clicks and entire factories can be delivered to order from one side of the planet to the other.

58 Tom Warner February 13, 2016 at 3:52 am

When interest rates on public debt are high relative to returns on private investment, the national savings rate is depressed, as savings flows to government consumption and debt service rather than private investment. Low domestic investment makes a country less attractive to foreign investment, not more, and foreign capital is just as influenced as domestic capital by relative real rates of return public on debt versus private investment. A country with higher growth potential like Turkey can to some extent get away with high real rates on public debt and dependence on foreign investment, but even there it’s the biggest macro weakness that every Turkey macro analyst spends at least half his time on. For Italy the big public debt is murder. They spend more than 5% of GDP on debt service and need to run a primary surplus of around 3.5% just to avoid growing their debt/GDP further.

59 Nathan W February 13, 2016 at 5:25 am

“When interest rates on public debt are high relative to returns on private investment, the national savings rate is depressed”

Then why not invest elsewhere? Also, if there are profitable opportunities in the Italian economy, then what’s to stop foreign companies from providing that capital? The answers will differ depending on the regulatory framework, mostly. But in short hand, one might say “in the given regulatory framework, to what extent does the small open economy apply”? Most economists treat it as all or nothing to make some assumption for an equation in the modelling.

But is it really so hard for foreign capital to make its way to Italy, in the case the there are profitable opportunities for investment? Mafias. Regulations. Maybe it’s a similar outcome, but then the problems are the mafias and the regulations, not crowding out, per se.

I mean, you’re standing on some really sound logic, and I’ve had to prove this logic on plenty of exams, etc. But I don’t think the logic of crowding out is particularly relevant for financial capital under a small open economy assumption. You have to have a lot of barriers to financial markets before potentially profitable Italian ventures will fail to create employment and production, for the fact of financial resources being “overused” by the public sector.

” Low domestic investment makes a country less attractive to foreign investment”

This is both intuitive and counterintuitive depending on the context. I think you might find some empirical support for this, but i assume that the main effect is in fact that a domestic environment where there are few profitable opportunities for ANY investment also do not attract foreign investment.

“foreign capital is just as influenced as domestic capital by relative real rates of return public on debt versus private investment”

I’m pretty sure that this is only possible if the domestic misallocations include misallocations of non-financial resources, such as labour and land. Otherwise, the fact of whatever returns pain on public debt should have zero impact on the yield of some private sector project. The crowding out hypothesis suggests that less loans are available to the private sector if the public sector “uses up” all the loans (for practial pruposes on supply and demand for money/credit this means higher interest rates). But the open small economy hypothesis suggests that, for practical purposes, there is an infinitely sized capital market. So … doesn’t that infitinitely (for practical purposes) sized capital market imply that crowding out is irrelevant for finance, but perhaps not for other production factors?

In the end, you refer to debt service, which is clearly of concern for a number of reasons, but I think still basically not related to crowding out.

Anyways, the thing about crowding out not being relevant, for financial inputs, in a small open economy, just crossed my mind. I’m not too sure, but I’m pretty sure it’s sound. The main contrary point I can think of is that in fact a lot of local knowledge is important, and this fact implies that Italian banks with less access to Italian capital will have less resources if there is high lending to the government. But can’t Italian banks borrow as much money as the market will bear on international markets, thus negating this?

60 Tom Warner February 13, 2016 at 4:37 pm

You’re not making a lot of sense. I think you need a basic primer on the issue. Try this:

Re: low domestic investment discouraging foreign investment, even in the most globalized of worlds the vast majority of investment will always be local, and if public authorities are discouraging that by paying relatively high real rates on public debt issues, growth will be slower.

Re: foreign investors being just as influenced by high real rates on public debt, what I’m saying is that with high real rates on public debt, both domestic savings and whatever foreign investment there is will flow into sovereign public debt. This isn’t really happening in Italy as foreigners have much lower levels of comfort with perceived bailout support. But it has for a long time been a big issue and cause of occasional crises in Turkey, and was the cause of a big issue in Greece before 2009, Russia in the 1990s, etc etc.

61 Mark February 13, 2016 at 8:09 am

Tom’s comment and the ones below it are very astute and by far the most insightful on this post. I disagree however that there is any crowding out of capital in the EZ. I have worked with too many hedge and private equity funds who explore ways to put money to work and cannot find any opportunities for alpha. Principally due to the poor business regulatory conditions on the continent, the large contingent obligations to the workforce, the bureaucratic hurdles to entrepreneurial action, all of which sustain managerial complacency, and exacerbate the underlying demographic issues and transcend the geocultural complexities. So instead investors look elsewhere. That is not to say they always invest elsewhere, often they just give up and stay in cash. There is, however, no crowding out in the current loose money environment; and the. Don’t forget the extent to which European financial institutions hold other nations’ surpluses. I suspect there are hundreds of billions of capital that could be put to work in Europe were it more dynamic.

62 JWatts February 13, 2016 at 12:01 pm

“Principally due to the poor business regulatory conditions on the continent, the large contingent obligations to the workforce, the bureaucratic hurdles to entrepreneurial action, ”

It’s a shame that kind of item is hard to quantify. At least simply enough that you can get a majority of people to agree to the results.

63 Tom Warner February 13, 2016 at 4:55 pm

I appreciate what you’re saying, but those low borrowing rates aren’t available to any but the best and biggest businesses in Italy. Also, high real rates on public debt are a big incentive to “stay in cash”, which for a big company is likely to mean directly holding public debt, and for others is likely to mean a bank deposit that’s invested by the bank in public debt. High real rates on public debt are also a disincentive to reform the bureaucratic obstacles and managerial complacency etc. In an economy everybody’s success is dependent on everybody else’s. Global investors with access to cheap financing don’t look at Italy and think: well, it stinks now but if I and ten thousand like me invest we can turn it around. Foreign investors will always be a small group deciding whether or not they like a locally driven situation.

64 Larry February 13, 2016 at 12:03 am

The only thing that has really changed in Europe since the panic is the absence of panic, ended by Draghi’s “whatever it takes” comment. Panic will only return when somebody runs out of money and the rescuer doesn’t show up (Lehman II).

Until ECB goes beyond bandaids, their problems will fester. With the slowdowns in China and elsewhere, reflected by the crash of commodities and trade, and the continuing unwillingness of most central banks to get inflation back on track, the prognosis is not great.

The US is still the one-eyed man in the land of the blind, despite the Fed’s absurd rate raising stunt. They should end IOR now and prepare to go negative later this year. That would be less necessary if they adopted a proper NGDP targeting regime.

65 The Other Jim February 13, 2016 at 8:22 am

>I do not understand the common view that the eurozone crisis is over.

Really? Because it couldn’t be simpler in NYT-world.

Obama is President, so everything is either great or well on the way to being so.

You can expect the Eurozone crisis to return in 11 months. Bank on it.

66 chuck martel February 13, 2016 at 8:57 am

A crisis can’t go on forever. If the conditions that constitute a crisis persist they become the status quo.

67 JWatts February 13, 2016 at 12:05 pm

“Really? Because it couldn’t be simpler in NYT-world.”

Lol, I share your skepticism, but in this case it’s not fair. The linked story is from the NYT’s.

68 Art Deco February 13, 2016 at 12:18 pm

They have godawful elites, who have insisted on vesting a great deal of discretion in an unaccountable bureaucracy, who have foisted a wretched monetary system on the whole continent to the detriment of the Mediterranean states in particular, who are quite devoid of patriotism and have foisted on their peoples a seven digit population of feral young men from the Near East and North Africa while attempting to punish politicians who will not go along with such a scheme (e.g. Victor Orban) and to harass various and sundry parties who’ve broken ranks and published information on the criminal behavior of such feral young men. The general public has been reproducing below replacement level for a generation, insists they must retire at age 60, and insists on tenure-protections in employment so cumbersome that double-digit unemployment is perfectly normal.

69 LR February 14, 2016 at 12:33 pm

Is zero real gdp per capita growth really a crisis for rich countries? Especially as gdp probably is an underestimate of overall welfare increases due to technology?

70 Floccina February 15, 2016 at 1:03 pm

That is a good point and I believe it. but I also believe that more growth is better than less growth.

Comments on this entry are closed.

Previous post:

Next post: