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The Sick Man

The latest IMF World Economic Outlook came out last week. It has lots of interesting remarks on the European austerity. Remarkably enough,  it poses the problem of timing:  fiscal consolidation, if too hasty, may end up being counterproductive. I played a little with the data accompanying the report,  including the forecasts.

First, if we plot GDP by country group, “the double decoupling” story I have been telling about the eurozone is apparent. Just look at the following figure:


Making GDP in PPP (i.e. weighted to account for purchasing power differences) equal to 100 in 2008, we see that the crisis that started in the summer of 2007 has hit the world economy by 2009.  With the exception of East Asia and Sub Saharan Africa, the world economy is in recession during 2009. The eurozone does slightly worse than the others, (mostly because we had very little fiscal stimulus) but overall we may say that it fits in the bunch. The chronically sick Japan does worse than us, meager satisfaction…

The Greek crisis starts in November 2009, and the year 2010 marks the turn to austerity in most EMU countries. The already modest stimulus measures are either phased out, or reversed altogether. Just guess the consequences: the eurozone has the lowest growth rate among macro areas (the same graph in growth rates is  here), in spite of  our trumpeted “success story”, Germany.  2011 is the year in which the vicious circle kicks in: a spiral of austerity-low growth-deficit-austerity (look at Krugman today) that our continent seems unable (or worse, unwilling) to break, trapped in ideological blindness, and choked by weak governance mechanisms. We were lucky that  Japan was there to show that low growth had nothing to do with austerity. Ah, no, wait. Something happened in Fukushima…

2012 will be the year of decoupling. The world economy is on the path of recovery. Unsteady, weak, vulnerable, but clear and present.  In the meantime, we are entering into the double dip recession many of us feared. The global crisis is no more, substituted by the eurozone crisis. According to the IMF (that may even be optimist here), we will not go back to 2008 GDP levels before 2014.  We are the sick man of the world economy…

Will this have consequences, besides the social disruption that we witness every day? Well, yes. For what they are worth, the IMF gives forecasts on GDP up until 2017. And here is another figure I assembled:

The upper quadrant shows GDP shares in 2000 and in 2017. Not surprisingly, the share of emerging economies will strongly increase, at the expenses of all advanced economies; this is somewhat unavoidable, and I would add, welcome. But if we look at the lower quadrant, we can observe that the eurozone will suffer considerably more than the United States or than the other advanced economies: our share of world GDP will contract by 35%, against around 25% for the other advanced economies. And this needs not to be. The euro was created among other things because it was seen as a tool for competing in the global economy with the US, and for contrasting the ascent of emerging economies. I would say the only tool. It did not work, it is not working. And unless we take a move towards a federal structure, it will not work.

I wrote way too much to say a very simple thing. The global crisis cannot be invoked anymore to justify our poor economic performance. We are inflicting the pain upon ourselves, with a flawed doctrine inspiring an ideological leadership.

In the meantime, financial markets roller-coaster, and somebody blames it on a moderate French socialist…

  1. April 24, 2012 at 6:01 pm

    Questo finisce dritto dritto su Keynes Blog.

  1. April 26, 2012 at 8:10 am

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