European economies are faltering. The German economy contracted in the second quarter, as did those of France and Italy. Growth in Spain and the Netherlands was not enough to offset the slowdown in the Eurozone’s largest members. An escalation in the confrontation with Russia would send shockwaves rippling from the Ukraine westwards that world worsen the situation.
The continuing slump confirms Jay C. Shambaugh’s observation (which appears in his paper in the new volume, What Have We Learned? Macroeconomic Policy After the Crisis) that much of what happened during the global financial crisis was consistent with standard international macroeconomics. For example, countries with flexible exchange rates were able to adjust more easily to the shock than those with fixed rates. Shambaugh also compares unemployment rates in the Eurozone with those across the U.S., and notes that while both the range and standard deviation of unemployment rates began to fall in the U.S. in 2010, the dispersion of national unemployment rates continued in the Eurozone. Labor conditions improved in some countries, but not others. Shambaugh cites this as evidence that there is a lack of adequate shock absorbers, such as labor mobility, within the Eurozone.
These structural problems have been exacerbated by fiscal austerity policies. Governments have sought to reestablish fiscal balance despite the impact on economic performance. The latest announcements of lowered growth have led to calls for relaxing fiscal constraints. But the incoming head of the EU Commission, Jean-Claude Juncker, shows little interest in relaxing the limits on fiscal policies, nor does German Chancellor Angela Merkel.
This leaves (once again) Mario Draghi and the European Central Bank as the focus of hope and attention. The central bank is waiting for the impact of policy measures announced in June to take place. But the disappointing economic news only reinforces calls for the ECB to enact a European version of quantitative easing.
