Europe’s $13 trillion economy — nearly a fifth of world GDP — failed to grow in the second-quarter, losing whatever smidge of momentum it had after escaping a double-dip recession. (Germany actually shrank.) Private consumption and investment are still below 2007 levels. French unemployment is at an all-time high, and a desperate and unpopular President Francois Hollande just formed a new government. Meanwhile, prices climbed just 0.4%, year over year, in July. And, as Business Insider’s Myles Udland recently noted with the following chart, “expectations of Eurozone inflation are at their lowest levels since the depths of the financial crisis in 2009.”
So what the the heck went wrong in Europe, and what continues to go wrong? Yes, the region has many structural, supply-side problems. But it wasn’t a debt crisis that caused what is, really, a long depression. That was a result, not a cause. Here is a really great explainer from Scott Sumner:
The ECB tightened monetary policy sharply in 2011. This caused NGDP growth to plunge, and the eurozone fell into a double-dip recession. Whenever you have a demand-side recession, some people will look at specific industries, and/or specific regions, to see what caused it. This is mistake. The US housing industry was hit hard in the recent recession, but didn’t cause it. The PIIGs were hit especially hard after 2011, but did not cause the eurozone recession. In any recession, there will be regional and industry variation in intensity, due to supply-side factors. But those specific factors cannot explain a generalized decline in NGDP growth for an entire currency zone. Only monetary policy can explain that. …
The ECB caused the double-dip recession—even new Keynesian models will tell you that. (After all, the ECB raised rates twice in 2011, so this wasn’t one of those zero bound issues.) Odd that Mario Draghi doesn’t understand that the ECB caused the NGDP growth collapse, and that debt crises are the result of NGDP growth crashes. That doesn’t make me very hopeful that the eurozone’s long nightmare will end anytime soon.
And, again, here is a favorite chart demonstrating the impact of those 2011 rate hikes:
Just like the Fed’s untimely 2008 tightening help turn a moderate US downturn into the Great Recession, the ECB did the trick in Europe. Except while the Fed eventually took extraordinary action to try and reverse its mistake, the ECB continues to dither.