Preparing for Europe’s Next Recession

PARIS – If you do not understand what is happening to the eurozone economy, you are not alone. One day we are told that growth is definitely passé; the next that recovery is on track; and the third that the European Central Bank is considering sending checks to all citizens to boost output and revive inflation. Rarely has the economic picture been so confusing.

Start with medium-term growth. Since the global financial crisis erupted in 2008, productivity has grown at a snail’s pace. Oddly, the smartphones’ magic computing power does not seem to offset the slowdown in efficiency gains in manufacturing and standard services. For almost a decade, annual productivity growth in the advanced economies has been close to 1%, versus 2% previously.

This may be a temporary lull or a statistical illusion. But with no evidence that it will end, policymakers have downgraded their forecasts. Since 2010, the US Congressional Budget Office has lowered its outlook for productivity growth in the decade to 2020 from 25% to 16%; so has the United Kingdom’s Office for Budget Responsibility, reducing its forecast from 22% to 14% productivity growth. Everyone is adjusting to leaner times.

The surest way to buck this trend is to invest in education, promote innovation, and foster efficiency. In Europe, especially, a broad array of reforms could contribute to bridging a growing efficiency gap with the US. The ECB can exhort or incentivize, but it is governments that must act.