There was one post on Saturday, and none yesterday. Saturday’s post was “When Europe Stumbled:”
Doing some homework on the European economy, and I found myself dissatisfied with many of the comparisons between the US and Europe since the crisis, including this one. Why? For the same reason I think you need to be careful when writing downbeat pieces about Japan: demography.
In Japan’s case, the working-age population has been shrinking since the late 1990s; when you correct for that, Japan’s performance doesn’t look nearly as bad as a raw growth-rate comparison suggests. Well, the euro area has had a (slightly) shrinking population aged 15-64 since 2008, while the US has not (although our growth is slowing). How does this affect the picture, and what changes?
Europe still does badly, but not by as bad a margin as the raw numbers say:
Furthermore, the shortfall doesn’t start right away. Things really go off track only in 2011-2012, when the U.S. recovery continues but Europe slides into a second recession. That’s also when the euro area inflation rate slips definitively below target, where the US rate doesn’t to the same degree:
What was happening in 2011-2012? Europe was doing a lot of austerity. But so, actually, was the U.S., between the expiration of stimulus and cutbacks at the state and local level. The big difference was monetary: the ECB’s utterly wrong-headed interest rate hikes in 2011, and its refusal to do its job as lender of last resort as the debt crisis turned into a liquidity panic, even as the Fed was pursuing aggressive easing.
Policy improved after that, with Mario Draghi’s “whatever it takes” stabilizing bond markets and a leveling off of austerity. But I think you can make the case that the policy errors of 2011-2012 rocked the euro economy back on its heels, pushed inflation down by around a percentage point, and created enduring weakness — because it’s really hard to recover from deflationary mistakes when you’re in a liquidity trap.
Oh, and America might have turned European too if the Bernanke-bashers of the right had gotten what they wanted.