Sluggish Growth in the Eurozone: the Long
Journey Ahead
Paolo Guerrieri

Professor of Economics, University of Rome, Sapienza; College of Europe, Bruges

The Depth of the Crisis in the
Eurozone
Six years after the Great Recession in 2008-2009, the economic conditions of the vast majority of euro area countries remain critical, with recession in many southern European economies and stagnation in the rest. Deflation risk is increasing and unemployment, particularly with youth, is persistently high in the majority of eurozone members. The protracted crisis for the euro area as a whole has become worse than the Great Depression of the 1930s.
The first months of 2014 showed signs of a very modest recovery, but with unchanged policies, growth in the eurozone is likely to remain slow and stagnant. It may be a new normal in Europe that could be extended until, or even after, the end of the decade. In this prolonged stagnation scenario, there are three main risks. First, since levels of public debt will continue to rise as a share of GDP, owing to slow or negative output growth, the issue of public debt restructurings in several peripheral eurozone countries could become very likely. Second, financial market fragmentation will continue to restrain credit and keep the system exposed to financial shocks. Finally, the risk of populist revolts and extremist political forces against EU-driven policies will increase and become permanent.
With reference to the secular stagnation debate about slow growth in advanced countries, the slowdown in observed output growth in the eurozone is mostly due—as explained in this chapter
—to gaps between actual and potential output. A large part of this sluggish growth is due to a lack

of aggregate demand. This is a function of both the balance sheet recession that almost all euro economies have been facing after the financial crisis and the austerity fiscal policies adopted so far to contrast the former. There are also problems of structural supply-side factors which stem from both the current prolonged recession and the difficult adjustment of many eurozone countries to the new global competitive environment.
Given all this, it becomes even more important for the eurozone to return to potential output as quickly as possible by pursuing policies likely to stimulate economic growth as well. The immediate challenge for the eurozone is thus to engineer a recovery of abovetrend growth, especially in the crisis-hit countries, all of which are still well below pre-crisis peak output levels. The "orthodox" handling of the euro crisis by national governments, led by
Germany, has greatly contributed to the actual distress. A possible solution is of course not an exit from the euro as proposed today irresponsibly by many Euroskeptics, but one that tries to change and discontinue the policies implemented so far within the eurozone. In this case, the recent rise of populist parties and protest movements in the recent European elections could turn into a positive salutary shock. But the road ahead is indeed very hard.

The Euro is Safer, the European
Economy is Not
A few months after the European parliamentary elections that generated a massive protest vote in favor of Euroskeptic and anti-European parties, the economic conditions of many European
THINK TANK 20:

Growth, Convergence and Income Distribution: The Road from the Brisbane G-20 Summit

115

countries remains critical. Twenty-seven million are still unemployed, and barely touched by the modest recovery now underway. At the same time, monetary and financial markets have undoubtedly improved in the eurozone by providing greater stability to the single-currency euro. Over the last year and a half, the financial markets have become surprisingly stable and spreads have decreased to pre-crisis levels.
Several developments helped to restore calm but the most notable came from European Central
Bank President Mario Draghi who promised to do
“whatever it takes” to