Why Does the Euro Area Have Such Low Growth and High Unemployment?

Philip Arestis and Malcolm Sawyer

Since the euro was adopted as a virtual currency in 1999 (and the exchange rates between the currencies of the then 11 countries fixed en route to adopting the euro), growth among the euro-area countries has been lacklustre. The euro-area annual growth rate was just under 2% in 2002 to 2007, followed by 0.3% in 2008, -4.5% in 2009, then 2% in 2010, and an average of 0.8% 2011 to 2016. Over the period 1999 to 2016, the average was 1.1%. Unemployment declined through to 2007 down to  7.5%, then rose in the aftermath of the financial crises and the effects of fiscal austerity programmes to 12% in 2013, and has gently declined since to 10% in 2016 and likely to come close to 9% at the end of October 2017. There are notable disparities between different countries’ experiences, with Italy’s growth 1998 to 2016 being an annual average rate of 0.2%, and unemployment in Greece over 23% and Spain close to 20% in 2016.

The economic difficulties of many of the now euro-area counties had been noted in the early 1990s. In the late 1980s, all the talk was of the “single market” and the removal of non-tariff barriers to boost trade between member countries and to stimulate economic activity. The EC forecast a 6% boost to GDP following the single market. The launch of the single currency had a whole range of political forces behind it, but was viewed as enhancing economic integration and giving some boost to trade between member countries. “Structural reforms” of labour and product markets (for which read de-regulation and liberalisation) have been frequently promoted as lowering unemployment and improving economic performance. Writing in 2008, the European Commission (2008, p. 6) claimed that “the bulk of these improvements [in the reduction of unemployment] reflect reforms of both labour markets and social security systems carried out under the Lisbon Strategy for Growth and Jobs and the coordination and surveillance framework of EMU, as well as the wage moderation that has characterised most euro area countries.” The ECB amongst others has been consistent in its calls for “structural reforms,” and the promotion of “structural reforms” have become as a significant part of the “fiscal compact.”

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Leadership Failure Perpetuates Stagnation

Jomo Kwame Sundaram

What kind of leadership does the world need now? US President Franklin Delano Roosevelt’s leadership was undoubtedly extraordinary. His New Deal flew in the face of the contemporary economic orthodoxy, begun even before Keynes’ General Theory was published in 1936.

Roosevelt’s legacy also includes creating the United Nations in 1945, after acknowledging the failure of the League of Nations to prevent the Second World War. He also insisted on ‘inclusive multilateralism’ – which Churchill opposed, preferring a bilateral US-UK deal instead – by convening the 1944 United Nations Conference on Monetary and Financial Affairs at Bretton Woods with many developing countries and the Soviet Union.

The international financial institutions created at Bretton Woods were set up to ensure, not only international monetary and financial stability, but also the conditions for sustained growth, employment generation, post-war reconstruction and post-colonial development.

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Robert Pollin on “Green Growth”

Robert Pollin is professor of economics at the University of Massachusetts Amherst and co-director of the Political Economy Research Institute (PERI).

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The Global “New Normal” Is Not New– But it is still a real concern

 

C.P. Chandrasekhar and Jayati Ghosh

Many different explanations have been proffered for the “new normal” of “secular stagnation” in the global economy ever since the Great Recession. This is supposed to be exemplified by low growth, verging on stagnation, in the advanced economies, now combined with slower growth in the developing world.

Certainly the recovery from the Great Recession of 2008-09 has been anaemic at best, even as it has failed to generate much employment outside of the US (and even there it has created mostly casual, part-time and poor quality jobs). Deflation has persisted in Japan for many years now, and has become evident in the Eurozone and the US as well. Financial markets are febrile and display nervously erratic behaviour, often without proximate cause – such as in the recent collapse in bond yields across the advanced economies.

But purely in terms of GDP growth, are the last five years really so very different from past patterns of global capitalism, even compared to the supposedly more dynamic period of globalisation? Chart 1 tracks annual GDP growth in developed and developing/transition economies from 1990. The period from 2002 to 2007 does show acceleration of growth across economies, but that came to end in the collapse of 2008-09, and since then GDP growth rates have been similar to those of the 1990s.

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The Financial Sector is Too Big

Philip Arestis and Malcolm Sawyer

Has the financial sector become too large, absorbing too many resources, and enhancing instabilities? A look at the recent evidence on the relationship between the size of the financial sector and growth.

There has been a long history of the idea that a developing financial sector (emphasis on banks and stock markets) fosters economic growth. Going back to the work of authors such as Schumpeter, Robinson, and more recently, McKinnon, etc., there have been debates on financial liberalisation and the related issue of whether what was relevant to financial liberalisation, namely financial development, “caused” economic development, or whether economic development led to a greater demand for financial services and thereby financial development.

The general thrust of the empirical evidence collected over a number of decades suggested that there was indeed a positive relationship between the size and scale of the financial sector (often measured by the size of the banking system as reflected in ratio of bank deposits to GDP, and the size of the stock market capitalisation) and the pace of economic growth. Indeed, there have been discussion on whether the banking sector or the stock market capitalisation is a more influential factor on economic growth. The empirical evidence drew on time series, cross section, and panel econometric investigations. To even briefly summarise the empirical evidence on all these aspects is not possible here. In addition, the question of the direction of causation still remains an unresolved issue.

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The Slow Burn

The Washington Consensus and Long-Term Austerity in Latin America

Raul Zelada Aprili and Gerald Friedman, Guest Bloggers

This article originally appeared in the July/August issue of Dollars & Sense.

For over thirty years after World War II, Latin American governments promoted economic growth and development through policies that favored domestic industrialization. Capital controls (restrictions on international capital mobility) and trade protections helped promote “import substitution”—producing goods domestically that previously had been imported—rather than exports. Most Latin American countries—including those, like Chile and Brazil, where democratically elected leftist governments were overthrown in the 1960s and 1970s—reversed course to adopt “neoliberal” economic policies. Rather than stimulating growth through import substitution, the new policies sought to promote export-led growth by exploiting the region’s main “comparative advantage,” low-wage labor. Labeled the “Washington Consensus” by British economist John Williamson, these policies failed to promote economic growth, but did dramatically widen the gap between rich and poor. In recent years, the return of democratic governance has led most Latin American countries to abandon the failed neoliberal experiment, bringing renewed growth and narrowing inequality.

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Looking to the U.S.

C.P. Chandrasekhar and Jayati Ghosh

All eyes are focused on the US economy and its performance. The explanations as to what motivates this are residual. With growth in China slowing, India’s economic performance disappointing, Japan still in recession and the uncertainty in Europe resulting from EU brinkmanship with respect to Greece, growth in the US seems to be the only immediate hope for the long awaited recovery from the six years of sluggishness that have followed the 2009 crisis. So, only the US can help.

Chandrasekhar-Ghosh Chart 1

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China and India in the World Economy

C.P. Chandrasekhar and Jayati Ghosh

Indian media – as well as several official representatives of the government – are full of excitement at the possibility that in the coming year India’s rate of growth of economic activity might actually be higher than that of China. It is not just that the extremely rapid growth of the giant Asian neighbour is slowing down substantially, but also that India’s GDP growth is projected to be higher than before, and the CSO’s latest revisions to the GDP estimates suggest that the recent deceleration was less sharp than generally perceived.

Chart 1: China overtook India in terms of share of world GDP only from 1979 onwards

ChandrasekharGhosh China India 1

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Is All Growth Good? The Case of China

Sara Hsu

Since the seventies, with the assertion by Gunnar Myrdal that economic development should prioritize equality, economists have increasingly come to believe that not all types of growth are wholly “good.” Growth that ignores human well-being and equality are viewed as problematic.  Certainly growth that results in severe environmental destruction, as in the case of China over the past twenty years, cannot be classified as good, either, despite the country’s much-lauded successes during this period.

Real-world views of growth depicted in the mainstream media do not fall in line, however, with the economic development literature. The focus on China’s growth in the news has distracted from a more balanced view of the looming inequality problems or polluting production methods in the world’s most populous nation.  As China’s growth has slowed, headlines have read, “China’s Economic Growth at Stake,” “China’s Economic Growth Slows,” and “China’s Second Quarter Growth Slows.”

Even when inequality and pollution problems are described, they are considered separate from the growth process—as “side effects” of growth rather than issues that detract from the extent of growth itself. Headlines read, “China Blocks Access to Air Pollution Data,” “China Declares War on Pollution,” or “China’s Wealth Disparity Erupts in Protest.” It could, however, be argued that such destructive types of growth both take away from “good” growth and dampen positive growth in the long-run, so we should read about growth and its associated externalities within the same context. This is clearest in the case of pollution, where natural resources are destroyed and rendered unusable to future generations.

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Climate Change, Economic Growth, and Work Hours

Juliet Schor, Guest Blogger

Economist Juliet Schor is known worldwide for her research on the interrelated issues of work, leisure, and consumption. Her books on these themes include The Overworked American: The Unexpected Decline of Leisure, The Overspent American: Upscaling, Downshifting, and the New Consumer, and Plenitude: The New Economics of True Wealth (retitled True Wealth for its paperback edition). She is also a professor of sociology at Boston College.

I have a hard time thinking about the future without orienting all of my thinking about climate, because I just don’t see much of a positive future unless we can address climate change very significantly. And that means, for wealthy countries, pretty radical emissions cuts in a pretty short period of time. It actually means that for most countries.

So, as I think about the future, I think about what we could do that both addresses climate change through radical emissions reductions and also increases social justice, reduces inequality, and starts solving the enormous problems that we have in this country. My most recent book, True Wealth, is about how to do that. Obviously we need to get onto a renewable energy system, there’s no question about that. We need a carbon tax or carbon regulation, and that’s stuff that is very well known.

What is not understood, I don’t think, is that we can’t successfully address climate change with a model in which we continue to try to expand the size of the economy.

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