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Europe Fails To Stimulate Growth In 2012

Filed by KOSU News in US News.
December 31, 2012

The U.S. economy grew at a steady though not very strong pace this year. But Europe slipped back into recession because of the ongoing debt crisis. European leaders took steps to stimulate growth but it wasn’t enough to reverse course.

The economic crisis that got under way five years ago was felt all over the world. But Mohammed El-Erian, CEO of the investment firm PIMCO, says different regions have healed at much different rates.

The year “2012 was another multi-speed world globally, in the sense that different parts did different things,” he says.

El-Erian says developing countries such as China have slowed down but not too much. The United States grew — albeit sluggishly. In Europe the troubles were more severe. In troubled countries such as Greece, the economy shrank by 4 or 5 percent, but bigger economies were hurt too.

In April, British Prime Minister David Cameron had to explain to parliament why his country was back in recession.

“These are very, very disappointing figures,” he said. “I don’t seek to excuse them, I don’t seek to try to explain them away.”

In the eurozone, strong economies such as Germany avoided recession but they too have seen slower growth. The troubles weren’t isolated to the continent. The slowdown in U.S. job growth last spring was partly attributed to fears about Greece’s debts. And, companies that export to Europe are feeling the impact of its slowdown.

John Bishop owns a small company in New Jersey that makes metal

parts for aerospace and electronics companies. He says one of his customers makes automatic power generators.

“Last year, they gave us a blanket order for the year to make around 1,200 systems,” Bishop says. “The order so far this year was for about 200 systems cause seeing what’s happening in Europe, they’re not sure of what’s going to happen and so they’re being conservative.”

Europe’s problems can be partly blamed on misguided policies, says Eswar Prasad of the Brookings Institution. Like the United States, Europe has faced weak growth and an uneven job market. It’s tried to stimulate growth and cut debt at the same time.

“Undertaking any one of those reforms is very difficult even in good times, and trying to do both at the same time when the economies are not doing well is really going to hold back growth,” he says.

Prasad says central banks have also responded differently to the crisis. The U.S. Federal Reserve has aggressively poured money into the economy. In September, the European Central Bank finally announced a limited bond-buying program to bring down interest rates in certain countries.

“But even if the central bank, the European central bank were to do that it has indicated it would pull that money that gets put into the economy out because it doesn’t want to stoke inflation,” Prasad says. “So in a sense they are still taking a very cautious line.”

The changes Europe has made this year have often been incremental. One was the creation of a single regulator to rein in and rescue the most troubled banks.

Mohammed El-Erian says after a long period of denial Europe is finally starting to build the infrastructure its economy demands.

There’s still tremendous emphasis on austerity, and the result of that is virtually every country is finding that it is disappointing on the growth side and it is also disappointing on the budget and debt side — which is ironic. And, the big question for 2013 is how long will the citizens tolerate this,” El-Erian asks.

What’s clear is that citizens’ patience is running out. Europeans may not agree on how to handle the challenges they face but after this year they do agree on one thing: What’s been done so far hasn’t addressed the region’s troubles. [Copyright 2012 National Public Radio]

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