11

Europe’s Poisoned Chalice of Growth

CAMBRIDGE – After a double-dip recession and an extended period of stagnation, the eurozone is finally seeing green shoots of recovery. Consumer confidence is rising. Retail sales and new car registrations are up. The European Commission foresees 1.3% growth this year, which is not bad by European standards. But it could be very bad for European reform.

It is not hard to see why growth has picked up. Most obviously, the European Central Bank announced an ambitious program of asset purchases – quantitative easing – in late January. That prospect rapidly drove down the euro’s exchange rate, enhancing the international competitiveness of European goods.

But the euro’s depreciation is too recent to have made much difference yet. Historical evidence, not to mention Japan’s experience with a falling yen, suggests that it takes several quarters, or even years, before the positive impact of currency depreciation on net exports is felt.

So other factors must be at work. One is that spending and growth are now under less pressure from fiscal consolidation. The structural primary budget balance, the International Monetary Fund’s preferred measure of “fiscal thrust,” tightened by an additional 1-1.5% of GDP each year from 2010 to 2012, after which it remained broadly stable. The subsequent two years of neutral fiscal policy has made a positive difference for economic performance.