Europe: the uneven recovery*

Leszek Balcerowicz

Warsaw School of Economics Visiting fellow at The Hoover Institution

Hoover Presentation, October 14, 20011

*in preparing this presentation I was assisted by Aleksander Łaszek

Plan of the Presentation

1. Convergence-divergence in Europe, 1994-20072. The boom years, 2003-20073. The slowdown (recession), 2008-20094. The recovery, 2010-20115. Some final observationsTwo groups of countries considered:• Developed Europe (DE)• Emerging Europe (EE)

1. Convergence - divergence in Europe, 1994-2007

4

Figure 1. GDP growth in Europe: 1994-2007, 2008-2009, 2010-2011

Figure 2. Economic growth in Europe,1994-2007

2. The boom years, 2003-2007

Figure 3. GDP growth, 2003-2007

Table 1. Public spending /GDP

Source: IMF WEO IX 2011

Table 2. Fiscal deficit (surplus)/GDP

Source: IMF WEO IX 2011

Table 3. Public debt /GDP

Source: IMF WEO IX 2011

Table 4. Current account deficit (surplus)/GDP

Source: IMF WEO IX 2011

Table 5. Domestic credit to the private sector /GDP

Source: WB WDI online

Figure 4. Unit Labor Costs in Manufacturing

3. The slowdown (recession), 2008-2009

Figure 5. GDP growth in Europe, 2008-2009

4. The recovery, 2010-2011

Figure 6. GDP growth in Europe 2008-2009 and 2010-2011

Figure 7. Unemployment in Europe 2008-2009 and 2010-2011

Figure 8. Inflation in Europe 2008-2009 and 2010-2011

Figure 9. Harmonized long-term interest rates, Sept. 2009, 2010 and 2011

Figure 10. Unit Labour Costs in Manufacturing

Figure 11. GDP growth: PIIGS vs. BLLE (Bulgaria, Lithuania, Latvia, Estonia)

Figure 12. ULC in Manufacturing: Greece, Italy and Spain* vs. BLLE

Figure 13. Public debt: PIIGS vs. BLLE

Figure 14. Fiscal deficit: PIIGS vs. BLLE

Figure 15. Public spending: PIIGS vs. BLLE

Figure 16. Current account: PIIGS vs. BLLE

5. Some final observations

1. Large variation in both DE and EE regarding all key aspects of the economic performance: Europe defies easy generalizations!

2. Most countries (both DE and EE) which experienced growth problems during 2008-2011 registered huge fiscal and/or private sector’s credit booms, as well as large increases in ULC in manufacturing, during 2000-2007

3. The recession 2008-2009 was accompanied by the increases in fiscal deficits. However, the size of these increase was not strictly related to the magnitude of the recession.

4. The unemployment in DE in 2008-2011, displayed very different dynamics, which was not strictly related to that of GDP

5. Despite recession there was no sign of deflation and recovery has been accompanied by the accerelation of inflation in DE (not so much in EE)

6. BLLE have on average adjusted much better than PIIGS. Within PIIGS Ireland and Spain have performed so far much better than Greece and Portugal.

7. The example of BLLE and Ireland shows that countries can adjust via internal devaluation even after huge shocks.