What to make of the latest European data confirming a recession in the euro-zone? The increasing likelihood that this will be an atypical and long recession, with characteristics unique to this era.

The euro-zone's economy contracted -1.6 percent in Q4 2008, Eurostat announced Tuesday (pdf). That's -0.2 percentage points worse than the previously announced estimate, and the region's worst GDP contraction in at least 13 years, the E.U.'s Luxembourg statistics office said. For all of 2008, the euro-zone economy grew just 0.8 percent, after recording an impressive 2.6 percent growth rate in 2007. In Q4 2008, Germany's economy contracted -2.1 percent; France, -1.1 percent; Italy, -1.9 percent; and Spain, -1.0 percent.

Europe still too dependent on U.S.

But even more significant, the euro-zone's slump confirms what was first thought to be an implausible pattern and an unlikely causation: namely, the relationship between U.S. GDP growth and euro-zone GDP growth.

With more than a decade of an integrated, universal economy linked by a common currency (the euro) under its belt, European public officials and economists had expected Europe this decade to be capable of not only self-reliant, continent-based growth, but to be relatively immune from an economic downturn in the United States. The thinking was that strengthened trade linkages between euro-zone members, combined with commercial development in embryonic Eastern European economies would lead to a stand alone, self-sufficient European growth model.

However, the recession that began in the United States in December 2007 has proved otherwise.

What's more, the recent downturn in Europe has raised concerns about a disturbing pattern in the business cycle – one of several structural imbalances that occurred during the recent leveraging bubble. Namely, that U.S. hyper-consumption was not only driving U.S. GDP growth, but also euro-zone growth, and a considerable portion of emerging Asia's growth, as well.

"The starting point is weaker and highlights that the average growth for 2009 will be very negative. We forecast a contraction of -4.3 percent," Juergen Michels, economist for Citigroup (C) told Reuters Tuesday.

A union, but not a growth engine, yet

It seems implausible, even farcical, that GDP growth in the euro-zone, the world's second largest economy ($10.3 trillion GDP in 2007), a region with 310 million people, would be dependent on U.S. consumption, and accompanying trade with the U.S., but that appears to have been the case during the 2002-2007 expansion. Household spending in Europe has held up reasonably well during the past 12 months, but reduced consumer demand from the U.S. has plunged the euro-zone into a recession, nonetheless. (pdf)

"In spite of the euro-zone's impressive cross-nation trade development and relaxation of labor barriers in the past 10 years, euro-zone linkages to the U.S. were still strong, perhaps too strong," Economist Richard Felson said. "That left Europe once again relatively exposed to the shocks that have hit the U.S. economy and the U.S. consumer."

A major consequence of that structural imbalance? "First, Europe, like Asia and the U.S., will face an atypical, long recession. Europe's recession started in Q2 2008 and the U.S. recession is already 15 months old. Each recession will likely continue until Q4 2009," Felson said. "Second, it demonstrates a major flaw in the global economy. It's too dependent on U.S. consumption. That has to change for regional and global growth to resume."

Further, the that has to change is that Felson, like other economists, believes the U.S. will not return to its hyper-consumption ways, but has embarked on a new era of belt-tightening, reduced consumption per capita, increased savings, and simplified living characterized by reduced commercial activity, across society.

Economic Analysis: As the recession continues, two themes are coming clearer into focus: 1) a world ridiculously dependent on U.S. consumption and 2) too much manufactured stuff, everywhere. The solution is obvious enough: Europe, like Asia, must create domestic engines of growth, including increased consumption. If Europe and Asia do so, along with Russia, and Latin America, global growth will resume. If, however, the world remains stuck on the export-it-to-the-U.S. model, it will remain stuck in an atypical recession.

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