Other than the US, Europe saw through the worst of the financial crisis of 2008. Euro area went through a sharp recession in 2009 and while the two succeeding years showed initial signs of recovery, it was short-lived. Recession resurfaced in 2012 and went on until the year after. The recession, which mostly emanated from debt crises particularly in Greece, Spain and Ireland, prompted the European Central Bank to embark on a series of aggressive monetary policies. The benchmark interest rate was immediately cut from 5% to 1% in 2009 together with the deposit facility rate to initiate recovery the following year.
A series of rescue packages became necessary in order to remedy the growing debt of the most troubled economies with Greece leading the group. By 2010, in order to secure Europe's critical financial position, a European Financial Stability Facility was created to provide liquidity to ailing nations. The Central Bank also began an aggressive bond purchase in order to dampen the rapid rise in borrowing rates. Austerity measures imposed on troubled nations continue to weaken economies in favor of borrowings and marginal improvements in their respective fiscal positions. In 2015, the ECB announced their quantitative easing even as the US ended their own and kept the deposit rates below zero.
Today, very little improvement has been noted in the Euro Area. The recession is over, at least for the last three years, but growth has remained nil. In 2015, the economy advanced by 2.1% but immediately slowed down to 1.7% in 2016. Unemployment rate is still double digit though an infinitesimal deceleration has been noted for the last three years. Inflation rate is presently at a record low as a result of the falling global fuel prices.
Despite an aggressive move from the European Central Bank, the Euro Area has yet to take off and begin a more consistent recovery from the financial crisis of 2008. So far, the marginal economic growth has done very little to improve unemployment. All these are characteristics of what was once called Eurosclerosis in the 70's. But what's keeping the Euro Area from recovery this time around?
While monetary policies can jumpstart the economy, a long-term remedy to the debt crisis has yet to be put in place. So far, what the Euro Area has are preventive measures against another financial crisis but not a solution to the fiscal issues surrounding the ailing economies. Greece continuously weighs down the area with its fiscal mismanagement and growing debt together with Spain and in recent years, Cyprus and Italy. Unemployment is at its highest with Greece so far recording 24.9%, Spain 19.6%, Cyprus 13.3% and Italy at 11.9%. Germany, the Euro Area's largest economy, has so far managed to dampen the contagion with its economic growth and relatively lower unemployment rate.
France, the second largest economy in the area, has so far struggled but managed to keep growth positive for now. It appears that at the moment, the area is really all about offsetting any new development that makes it even more difficult to advance and recover. The same offsetting factor can be seen by sector in the first half of 2016, as services initially decelerated while manufacturing accelerated. The opposite pattern has been recorded the year before. The second half of the year showed services recovering its lost momentum while manufacturing sustained its acceleration. The result is an improved business activity for the year but relatively still a flat line from the previous year.
While offsetting factors made the economy stagnate in 2016, the new year is bringing new threats that will make recovery even more difficult. The major economies - Germany, France and the Netherlands - are about to hold general elections for a change in leadership. The uncertainty brought about by a government transition not to mention the current populist trend in global elections is a major potential threat to the economic well-being of the Euro Area as a whole. Italy's growing debt crisis, Greece's continuous fiscal issues, Spain's slow jobless growth and Brexit will all significantly play against any economic growth in the region. The rising fuel price is also expected to dampen domestic demand and combined with the low interest rate, has the ability to accelerate inflation beyond what the current economic growth can absorb.
Given all these macroeconomic indicators, Europe's economy will continue to stagnate. For the last five years, average economic growth has been below 1%. While there may have been marginal movements in unemployment, the fact remains that it is still significantly high (10%, 2016 average). Basic data analysis likewise revealed that economic growth has not significantly reduced unemployment rate for the last ten years. Despite some noted improvement in business activity, an end to deflation and even a less pessimistic consumer outlook, the threats are expected to prevail leaving a continuously stagnating economy.
It has been nearly ten years since the financial crisis of 2008 and while there may have been marginal growth, the overall situation in the area has not significantly improved. Debt crises continue to threaten the region. The change in leadership and looming higher inflation, together with the lack of definitive action to remedy the fiscal crisis among member-nations, will continue to threaten recovery. But more importantly, the slow job creation of whatever little recovery there may be points to a state that is about to persist for another five to ten years.
Nearly a decade since the crisis, it appears that Europe is heading to a state of eurosclerosis.
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