In a SAFE Policy Center Lecture on 25 March, Lorenzo Bini Smaghi, Chairman of the Board of Société Générale and former ECB board member, addressed the question of why the recovery after the financial crisis has slowed down in the Eurozone compared to the United States. The talk was hosted and moderated by Hans-Helmut Kotz, Program Director of the SAFE Policy Center.
Bini Smaghi outlined that real GDP per capita developed very similar in both areas between 2007 and 2011. Only since 2011 a divergence could have been observed. While real GDP per capita has been growing in the U.S., it has been slightly decreasing in the Eurozone. According to Bini Smaghi, this suggests that the euro area reacted quite well at the beginning of the crisis whereas something must have gone wrong afterwards.
Which factors hindered growth in Europe?
One assumption would be that the austerity measures taken in Europe have hindered growth. However, Bini Smaghi explained that, while the U.S. had indeed a more expansionary fiscal policy than the Eurozone between 2008 and 2010, since then, fiscal policy has been more expansionary in the euro area. So, austerity seems not to be the problem, Bini Smaghi deduced.
A more important factor is bank lending. In the U.S., banks have started lending to the non-financial corporate sector again within a few years after the crisis so that a credit crunch could be avoided, Bini Smaghi said. In contrast, bank lending is still very low in the euro area. According to Bini Smaghi this is because governments reacted too late to the crisis and they only used public money to save banks when they feared systemic consequences for the banking sector. Also, capital markets in the U.S. are more developed and started functioning quite quickly after the crisis. So, the corporate sector was able to raise capital without having to wait for the banks to recover.
A further explanation is that the interest rates for ten-year bond yields in the U.S. were below the nominal GDP growth rate since 2011 which made deleveraging much easier. In the euro area, the opposite occurred which has made the reduction of debts more difficult. One exception in the euro area is Germany where long-term interest rates have been below the growth rate since 2011 because of large capital inflows.
Furthermore, whereas the U.S. Fed introduced quantitative easing (QE) programs already in 2008, the QE program of the European Central Bank has just recently started. In Bini Smaghi’s opinion, the QE program in Europe was necessary but should have come earlier to foster growth.
Bini Smaghi showed that, in contrast to the rest of the Eurozone, Germany performed even better than the U.S. in terms of real GDP per capita. This suggests that some countries in the euro area also have structural problems and that structural reforms are needed to make these countries competitive again. Reforms that were implemented in some countries have already helped them to catch up again, Bini Smaghi said. For example, the forecast for Spain shows that real GDP per capita will increase over the next two years.