Will Europe’s Economies Regain Their Footing?

Some commentators have savaged Europe’s policymakers for not orchestrating as aggressive a fiscal and monetary policy as their US counterparts have. But these critics seem to presume that Europe will come out of the crisis in far worse shape than the US, and it is too early to make that judgment.

STOCKHOLM – What will Europe’s growth trajectory look like after the financial crisis? For some Europeans, still nervous that their economies and banking systems might collapse, this is a little like asking a passenger on the Titanic what they plan to do when they arrive in New York. But it is a crucial question to ask, especially when Europe has been facing so much outside pressure from the likes of the United States and the International Monetary Fund to focus on short-term Keynesian stimulus policies.

True, things are pretty ugly right now. Europe’s income is projected to fall a staggering 4% this year. Unemployment will soon be in double digits throughout most of the Continent, with Spanish and Latvian unemployment on track to exceed 20%. Europe’s banking system remains sickly, even though many national governments have gone to great lengths to hide their banks’ woes.

Yet, ugly or not, the downturn will eventually end. Yes, there is still a real risk of hitting an iceberg, beginning perhaps with a default in the Baltics, with panic first spreading to Austria and some Nordic countries. But, for now, a complete meltdown seems distinctly less likely than gradual stabilization followed by a tepid recovery, with soaring debt levels and lingering high unemployment.

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