The graph below says a lot. While the United States managed to overcome the crisis of 2008, the Eurozone seems stuck in the mud. Current US Real GDP stands well above the GDP number measured at the beginning of 2008. The Eurozone, however, has not managed to come close to that level ever since. In fact, the 2008 level is slowly moving out of sight again in recent years. Of course input factors like labor force and productivity matter, but they are not able to explain the massive growth gap that has opened up between the US and the Eurozone.
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The growth differential has everything to do with demand at home. Unlike the US, the Eurozone sentenced itself to harsh government spending cuts that restrict economic growth. The most explicit examples of this budgetary strait-jacket are of course the peripheral countries. These countries had to aggressively lower their government spending to keep debt from reaching (even more) unsustainable levels. But, although these countries have dominated the newspaper, they were not alone. Europe’s biggest economy, Germany, had already embraced a strict government spending discipline many years before. Yet, the Eurozone aggregate government debt to GDP ratio stands roughly 20% higher than that of the US.
Unfortunately, not only the Eurozone governments kept a lid on spending. Personal consumption, the biggest chunk of GDP, shows the same gap between the US and the Eurozone as overall GDP. While politicians in the US argue about the spending power of American citizens on a daily basis, consumption has in fact improved compared to 2008. Not so in the Eurozone. As a result of an unemployment spike, a collapse of several European housing markets, and the deeply rooted tendency of, again mostly the Germans, to save rather than spend, Eurozone consumption numbers are also below those at the beginning of 2008.
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The same holds for investments. US companies have been hesitant to invest, but investments have gone up. Moreover, after the housing market breakdown in 2008, last year showed a first time increase in residential investment as well. It’s not hard to imagine what residential investment looked like in, for example, Spain last year.
There is one area, however, where the Eurozone did outperform the US. And that is trade. The attribution of trade to GDP growth has been positive in both regions, but much more so in the Eurozone. Trade has pretty much been the only significant factor that has positively added to Eurozone GDP growth. Germany, once more, is responsible for the bulk of this growth with its record trade surplus. It does sound a bit paradoxical that the trade achievements of the Germany have been placed under scrutiny by the European Commission. Moreover, rebalancing the Eurozone economy is more like a marathon than a sprint. For now the euro area seems stuck in the financial crisis aftermath, and needs all the help from abroad to get things going again.