FRANKFURT: The eurozone is hurtling back into recession, economists declared this week after official figures portrayed a shrinking economy. But by some measures, the downturn has been under way for years.
With the exception of Germany, none of Europe's biggest economies have returned to the level of economic output they had at the beginning of 2008, before the subprime mortgage crisis in the United States spread across the Atlantic, according to calculations by two US economists, Peter Rupert and Thomas F Cooley.
In contrast, by the end of 2011, the US had regained all of the ground it lost since 2008.
The figures suggest that Europe is well into what could be a lost decade - a period of pernicious stagnation and wasted potential that could have lasting effects on ordinary citizens.
Economic growth that is not realized represents investments in education that were never made, research that was never financed, businesses that failed and careers that ended too early or never got off the ground.
"There are larger implications that people don't think about," said Rupert, a professor of economics at the University of California, Santa Barbara. "There is a huge decline in human capital."
Just what signals the beginning and end of a recession is not always easy to pinpoint. One common definition is two consecutive quarters of falling output. By that standard, the eurozone is technically not yet in a recession.
Most economists agree, though, that a recession is also defined by other indicators like unemployment, industrial production and investment. The closest Europe has to an arbiter on the question is a committee of prominent economists convened by the Center for Economic Policy Research, a research organization in London.
By the committee's estimate, the eurozone's last recession ended after the second quarter of 2009, the point at which the region hit bottom and began to grow again. The panel, known as the Euro Area Business Cycle Dating Committee, has not yet begun to consider whether the eurozone is in recession again. But few people would argue that Europe, stricken by a self-inflicted debt crisis that began in 2010, has basked in prosperity recently.
"This is more than just a regular business cycle," said Carl B Weinberg, chief economist at High Frequency Economics in Valhalla, NY "I can't think of a time in the postwar period in any major industrial countries where we have had a downturn resume before the previous cycle was over."
Only Germany is wealthier than it was in the first quarter of 2008, when economic activity peaked. France is close, according to Rupert and Cooley, a professor at the Leonard N. Stern School of Business at New York University. The two publish a blog that tracks the business cycle, at europeansnapshot.com.
Spain and Italy are both effectively back where they were in the darkest days of 2009, after the collapse of Lehman Brothers set off a financial crisis that undermined the world economy.
Both countries resumed growing in 2009 but stalled in the middle of last year. Since then, Spain's gross domestic product has declined three quarters in a row, while the Italian economy has been shrinking for a year. There is little doubt that they are deep in recession. Some economists predict that France, and even Germany, could follow.
Although the US regained its 2008 footing at the end of 2011, it took twice as long as after any other recession since World War II, according to Cooley and Rupert. They estimate that had the US continued growing at the same average pace as it has since 1950, the country would be more than $1.5 trillion wealthier today.
While economists already knew that the eurozone's GDP was still catching up with 2008, experts like Cooley and Rupert have been parsing the statistics to show how broadly the downturn has affected Europe's largest economies in the form of rising unemployment, declining consumer spending and falling investment.
Weinberg and others warn that the eurozone is on the same path as Japan in the 1990s, when a failure to deal with weak banks led to a decade of stagnation.
"There are some really good analogies," Weinberg said. "The Japanese never fixed their banks. There is a lesson to Europe in this."
The social effects of so many years of poor economic performance are "very worrisome," said Lucrezia Reichlin, a professor of economics at London Business School. "We know that societies lose their cohesion when growth is very subdued."
Comparisons with Japan's lost decade may not go far enough, she said, noting that young Europeans have been particularly hard hit by poor growth. In Spain, more than half of people aged 16 to 24 are jobless.
"That would be a lost generation more than a lost decade," said Reichlin, who is also a member of the committee that tries to determine when recessions begin and end.
Under the best of circumstances, it will be a year or two before the eurozone economy can be expected to recover. And that will happen only if European leaders make the right decisions and demand from Asia and the US strengthens.
Forecasts of eurozone growth are even trickier than usual because the economic pattern is unlike anything Europe has experienced.
For example, Europe typically tracks the US economy with a slight time delay. But now it seems to have decoupled. In addition, the wealthier member states of the European Union used to move more or less in unison. But now Italy is doing much worse than France, not to mention Germany.
Under more pessimistic forecasts, the decline could last for years.
Weinberg of High Frequency Economics warns that even depression cannot be ruled out, if poor policy leads to a string of bank failures.
Some of the decline in eurozone economic output reflects lower government spending, as political leaders struggle to cut national deficits. In countries like Italy and Greece, where governments have a reputation for being wasteful, spending cuts could theoretically benefit the economy in a few years by eliminating bureaucracy that gets in the way of entrepreneurs.
Recessions can even be beneficial, in a way. They punish inefficient business practices and imprudent lending. But that is true only up to a point.
"When people talk about the cleansing effect of recessions," Rupert of the University of California said, "those aren't five-year recessions."
Source :
Economic Times