Evan Soltas
Apr 28, 2012

This Is a European Depression

5 charts and analysis to understand the magnitude of disaster

There is no getting around it: this is a depression in Europe. In just the last few days, the governments of the Netherlands and Romania have collapsed, and real contraction has returned to the United Kingdom and Spain.

I think it's really important that we use that word, too, depression. Anything else doesn't convey the severity of the economic circumstances in Europe's periphery, as I will show in the series of graphs which follow. The word recession exculpates. Only when we begin to call this crisis what it is will it get the sort of attention and resolution it requires.

Point #1. This is a depression in our lifetimes. The collapse of industrial production in Greece, Spain, and Italy since 2008 competes with the industrial collapse in the United States after 1929.Though America's industrial production collapse was deeper, what is now happening in Europe has now reached the contraction levels seen during the Great Depression. In all three countries, industrial production remains 25 percent below its pre-recession peak. And it's getting worse. By this point, this many quarters after the collapse in 1929, industrial production in the United States had begun to improve. In Spain, Greece, and Italy, contraction is not over -- it's actually accelerating.

Point #2. Unemployment is rising quickly once more, towards levels which to us [Americans] would be unfathomable except in comparison to our Great Depression. Nearly 15 percent unemployment in Ireland and Portugal. Over 20 percent now unemployed in Greece. And 23 percent unemployed in Spain. Overall, 3.8 million jobs have been lost in Europe, out of the 32.4 million which existed in January 2008. And unemployment, too, is getting worse in the European periphery; their depression continues. Since January 2011, the unemployment rate in Portugal is up 1.7 percentage points (pp); in Spain, up 2.5 percentage points; in Greece, up 6.3 pp. (Irish unemployment remains stable at elevated levels.)

Point #3. This is a nominal depression, in which "real problems" are fundamentally driven by a collapse in aggregate demand and in current-dollar spending. Nominal output, or NGDP, in all four countries is at or below its level in 2008.This is what happens when a country doesn't have monetary policy sovereignty, then loses its fiscal policy sovereignty, and there is a demand shock. Given the fact that NGDP is not only off its level path, but also remains well below its rate path, it is highly unlikely, if not unthinkable, that we will see any improvement -- only worsening -- in these economies in the medium term. Their depression remains uncured, even though it is manifestly curable.

Point #4. Deflation and internal devaluation has not been, is not, and will never be a cure for this depression. Despite soaring unemployment -- see Point #2 -- and increasing slack in capacity utilization, prices are not falling. Inflation is sticky and has remained stable.We'll be waiting for a long time -- another five years, at least -- if we want to see prices fall sufficiently for these countries to regain competitiveness. And where prices did fall sharply and briefly in Ireland, that was no panacea: unemployment remains sky-high and stagnant, and growth has not returned.

Point #5. Meet Germany, the depression profiteer. The Netherlands and Austria are also, to a lesser extent. These nations, in short, have used Eurozone crisis to run up massive current account surpluses at the expense of its Eurozone partners struck by crisis and now uncompetitive. At the same time, the current account imbalances make Germany's capital account negative -- i.e. Germany exports capital -- and when it goes into the Eurozone periphery, Germany protects its assets using the ECB as shackles. In effect, it has managed to rig the game and get the best of both worlds, doing so at the expense of Greece and Spain in particular, who now are in "the worst of both worlds" -- trade deficits they cannot escape, capital inflows with so many conditions that the resultant austerity only makes things worse.