US and European Post Recession Recovery Comparison

January 16, 2014 Share Print 0

If we compare the economic recovery of the United States since the Great Recession with that of Europe – or more specifically the eurozone countries – the differences are striking, and instructive. The US recession technically lasted about a year and a half – from December 2007 to June 2009. (Of course, for America’s 20.3 million unemployed and underemployed, and millions of others, the recession never ended – but more on that below.) The eurozone had a recession of similar length from around January 2008 to April 2009. But it then fell into a longer recession in the third quarter of 2011 that lasted for another two years, and may only be exiting that recession currently.

This makes a big difference in people’s lives. In the eurozone, unemployment is at near record levels of 12.1%; while in the US, it is currently 6.7%. Despite the incompleteness of these measures, these numbers are comparable. And, of course, in Spain and Greece unemployment is 26.7 and 27.8%, respectively, with youth unemployment at an intolerable 57.4 and 59.2%.

How are we to explain these differences? The United States was, after all, the epicenter of the world financial crisis and recession in 2008. But US policy-makers responded to the recession with different policies. Most important was monetary policy: the Federal Reserve lowered short-term interest rates to about zero in 2008 and has kept them there since. The Fed also signalled its intention to keep these interest rates at these levels for a long time. And venturing into uncharted territory, the Fed engaged in three rounds of “quantitative easing”, or more than $2tn of money creation. This enabled the Fed to stimulate the recovery by lowering long-term interest rates, including the crucial home mortgage interest rate, which helped recovery in the housing market. After some stimulus in both areas, the eurozone governments also engaged in more and earlier budget tightening than the United States did; and the International Monetary Fund (IMF) has shown a clear relationship (Figure 6) between this fiscal tightening and reduced GDP growth.

Now the question is why our European brothers and sisters have been so unfortunate as to be subjected to much more brutal economic policy than what we have experienced in the United States. While there are many nuances, there are also some simple but critically important reasons. Most vital is the accountability, or lack thereof, of the people and institutions making the decisions. In Europe you have the so-called “troika” – the European Central Bank (ECB), the European Commission, and (more recently recruited) the IMF. These are much less accountable to eurozone residents – especially but not limited to those of the most victimized countries (Spain, Greece, Portugal, Ireland, and Italy) – than even the relatively unaccountable Federal Reserve and US Congress and executive branch are to Americans.

via theguardian.com

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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Alfonso Esparza

Senior Currency Analyst at Market Pulse

Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.