De Grauwe, P. (2014) “The wrong medicine, The Eurozone’s remedies against sluggish growth rates aren’t working. The problem: a misdiagnosis of the illness“, The European Magazine, 26 August.
At the start of 2014 there was some hope that the economic recovery in the Eurozone would gather momentum. This hope has dissipated as the year has progressed. The slow growth in the Eurozone has become endemic since the start of the sovereign debt crisis in 2010, which contrasts the growth experience of the Eurozone with the non-Eurozone EU member countries. We observe the bifurcation in growth rates that occurred soon after the start of the sovereign debt crisis. As a result, economic growth in the Eurozone has tended to drop by 1.5 to 2% relative to the non-euro member countries since 2012.
What has happened since the start of the sovereign debt crisis that has led to a systematic divergence of economic growth in the Eurozone in comparison to the non-euro EU members?
The answer lies in the nature of macroeconomic policies pursued within the Eurozone. Since 2010, macroeconomic policies in the Eurozone have been dominated by two ideas: First, Eurozone policymakers took the view that the sovereign debt crisis should be fought by restoring budget balance as quickly as possible so as to stop the government debt accumulations. Second, in order to stimulate economic activity, structural reforms should be implemented, i.e. a series of institutional changes should be introduced, aiming at making the supply side of the economy more flexible.
Relevant posts:
- Ekkehard Ernst (2014) “Backing the wrong horse, The solution to ease mass unemployment is at hand, but policymakers across Europe are too blind to see it“, The European Magazine, 02 September.
- Cline, R. W. (2014) Managing the Euro Area Debt Crisis, Washington: Peterson Institute for International Economics, June.
- Brender, A., Pisani, F. & Gagna, E. (2013) The Sovereign Debt Crisis: Placing a curb on growth, Brussells: Centre for European Policy Studies (CEPS).