Every two years, the United States and Europe go at each other at the Ryder Cup, a golf competition that has been taking place for over eighty years. Apart from being one of the biggest sports events in the world, even if you’re not a golf fan, or a sports fan for that matter, the Ryder Cup is interesting in the sense that is one of those rare – if not unique – events when Europeans do truly come together as a team and there’s a sense of real union. Watching the Ryder you can almost feel the idea of a United States of Europe happening one day. Think about it: how often do you see people waving European flags or a German player high fiving a Spaniard? Certainly, there’s not much of that at Eurogroup meetings.
Following the devastating economic and financial crisis that hit the global economy in 2008-09 – what we now know as the Great Recession – most economies started some sort of recovery from 2010 onwards. Among the myriad of numbers and economic indicators released on a daily basis, sometimes it’s easy to lose track of the big picture and to see how different parts of the world are actually doing now that we’re a few years removed from the global crisis. So just as an interesting exercise, how have the two largest economies in the world fared during this period? In other words, who is winning this economic Ryder of sorts? (I’ll give you a hint, Americans are kicking our butts).
In order to simplify things, I have deliberately chosen some really basic economic indicators as to give a broad overview of the state of both economies; some sort of basic macro score card if you will.
Quickly, one can see a simple fact: the United States has been expanding at more than twice the pace of the Euro area since 2010. Admittedly, barely exceeding a 2% growth rate is perhaps not much to brag about, but the afterwards of a massive financial crisis was never going to be easy. There was never going to be a quick bounce, V-shaped recovery, but a rather slow, painful process as balance sheets gets slowly repaired and deleveraging takes its toll.
Not only the United States grows twice as fast as the Euro area, but more importantly, the momentum of both economies is dramatically different. The U.S. economy has managed to grow at around the aforementioned 2% rate in annual terms through most of the considered period. The Euro area, on the other hand, managed to achieve a similar growth rate during 2010, but then growth fell off a cliff and has not returned since. With a 0.2% decline over the previous quarter in Q1 13, the common currency area has now contracted for six consecutive quarters, the longest recession in its history (as a reference, the U.S. economy grew at a 2.5% annualized rate in Q1, roughly equivalent to a 0.6% quarter-on-quarter expansion).
Another way to look at it is this: by the fourth quarter of 2011, the U.S. economy had already exceeded its previous peak achieved in the last quarter of 2007, and by now, total output is some 3% above that level. Across the pond, the euro area economy is still 3% below its previous peak.
One of the most evident effects of the different growth trajectories in both economies can be seen in the labor market. The average unemployment rate in the United States was 8.9% during the 2010-2012 period, while in the Eurozone, that number was 10.6%. However, again, the most dramatic difference can be seen when we analyze the evolution of unemployment figures in both regions during this period. Unemployment in the U.S. has been falling almost uninterruptedly since October 2009, when it reached the dreaded 10%, and is now at 7.5% according to the most recent data. What was the unemployment in the Euro area in that same October 2009? If you guessed the same 10% then you would be correct. What happened afterwards? Well, the mighty European economy managed to bring the jobless rate all the way down to 9.9%, and after that it starting rising to the current 12.1%.
If all these numbers don’t mean much to you, then let me try this. In spite all of its struggles and the constant reminders of how weak the labor market in the United States is, the U.S. has managed to create 6.2 million jobs since 2010, whereas the Euro area has destroyed three and a half million jobs (sure, over half of the them come from Spain alone but last time I checked Spain was – still – part of the Euro area)*. This is a social tragedy of gigantic proportions, and sadly, as a person writing from a country where unemployment is now above 27%, I feel highly qualified to comment on the subject.* And before you ask, no, removing Spain out of the Euro zone as a quick fix to improve Europe’s unemployment statistics is not a serious way to solve the problems in the continent. I wouldn’t be surprised if some genius in Brussels has thought about it though.
It would take a profound analysis to discern the different reasons why the U.S. economy has outpaced that of the Euro area, but this is not the aim of this piece. One reason, however, comes quickly to mind, and that is the ultra-loose monetary policy applied by the Federal Reserve. The Fed has taken bold, decisive action, flooding the economy with trillions of dollars through different quantitative easing programs, and while the exact effect of the monetary policy on economic growth and employment levels is still a subject open for discussion, it does seem quite clear that Bernanke’s approach has saved the United States a lot of pain. The price you pay for overflowing the economy with nearly unlimited liquidity? A monster from the past that we thought would never return…hyperinflation!!
Or do you?
Some economic commentators have been warning against the upcoming surge in inflation in the United States since as early as 2009. Images of the Weimar Republic and of Zimbabwe have been conjured up, as hawks see the Fed’s approach as nothing short of an unmitigated disaster waiting to happen.
But it has not happened. The average inflation rate in the U.S. and the Euro area between 2010 and 2012? The same 2.3% rate. True, prices in the United States peaked at a higher level in 2011, but now have fallen even below those of recession-stricken Euro area (1.1% vs. 1.2%). And even with the different monetary policy approach by the two central banks, inflation has followed a very similar pattern in both economies. Therefore, in retrospect, the Fed has clearly won this one as its growth supportive stance has helped achieve a decent level of economic growth while essentially maintaining price stability, the goal that the ECB – just like its predecessor de facto the Bundesbank – aims for, and the one single achievement that former ECB President Jean Claude Trichet so angrily defended in a now famous press conference.**For those who say that you cannot compare the ECB and the Fed’s approach because of their different mandates, I have a simple message: with unemployment over 12%, maybe it’s just about time to move on and give the ECB a dual mandate as well.
So, in a nutshell, the U.S. economy grows at a faster pace, partly thanks to its aggressive monetary stance, without having triggered any significant inflationary pressures. Let’s look then at the other main pillar of economic policy, the fiscal side. Surely austerity-driven Europe has done better than free spending Americans right? Yes. Well, sort of.
Deficit in the U.S. averaged 8% of GDP in the 2010-2012 period (vs. 4.6% in the Euro area) and is nearly twice as big as the European fiscal gap (6.9% of GDP in 2012 vs. 3.7%). But the devil is in the details. Fiscal deficit in the United States peaked at an eye-popping 10.1% of GDP in 2009, so the U.S. has already managed to shave off over three percentage points of GDP from its deficit in three years. But it gets better. According to the Congressional Budget Office (CBO) – a non-partisan agency that produces analysis on budgetary and economic issues – the fiscal deficit is projected to fall to 4% of GDP by the end of the fiscal year 2013. If achieved, it would mean that the U.S. has managed to bring down its fiscal shortfall to less than half in only four years, a massive reduction that amounts to 6.1% of GDP. Now, that’s fiscal consolidation that we can believe in!
Interestingly enough, this fiscal consolidation process is being achieved mainly throughout higher revenues, not through lower spending. As an image is worth a thousand words, in this case, the above chart says it all. Spending has actually been virtually flat from 2009 onwards. Granted, flat government spending over three years can hardly be considered expansive fiscal policy, but at least the U.S. government has not resorted to the massive cuts that are now commonplace in several countries in Europe.
Revenues, on the other hand, have experienced significant growth (over 16% from the trough reached in 2009 until 2012, and a projected additional 15% for this year), mainly a product of stronger economic activity, which has led to high corporate profits and higher-than-expected collections of individual income taxes, and, more recently, thanks to the expiration of some tax cuts. In essence, the United States is managing to accomplish an enormous rebalancing process of its public finances without the need for extreme budget cuts that bring the economy to its knees. Surely, there must be a lesson hidden somewhere for European leaders?
To wrap things up, the U.S. seems the clear winner by technical KO (somehow golf metaphors don’t have the same punch, pardon my pun). Alas, analyzing the Euro area economy as a whole can be a frustrating and often futile effort. The differences among its members are immense, not only in terms of economic and social structure, but now even their business cycles are radically different. What we know or think about the Eurozone sure must feel very different if you are writing from Hamburg or Helsinki than if you are doing it from Naples or Seville. But as economists, this is what we do, we take a complex reality and we try to organize it, model it and analyze it.
In any case, the conclusion is still the same, that sense of unity that I mentioned at the start of the post only takes place every couple of years for a few days and on a golf course. The rest of the time it’s “every man for himself” in the old continent, probably not the best way to escape from the worst crisis most of us have ever seen. Europe is in a hole and we don’t know how to get out of it.
But hey, at least we did win the actual Ryder Cup.
———————————————————————————————————————————–Ángel Talavera is an economist based in Barcelona who specializes in macroeconomic analysis and country risk. Any views or opinions in this entry are solely those of the author and do not necessarily represent those of the company.