Eurozone crisis: It ain’t over yet

Paolo Manasse, 17 January 2013



Despite apparent calm on the financial markets, no illusions that the storm is ending soon should be entertained. Indeed, we may well be in the eye of the hurricane.

A calmness settled when Mario Draghi pledged that the euro was an irreversible project. Yet, the forces that could eventually break up the Eurozone are not only untamed but are growing in strength1. Partly due to serious policy mistakes made by European leaders, ‘asymmetric shocks’ have grown since the beginning of the crisis, and the Eurozone still lacks a credible means of dealing with them ex post.

Lessons from the US and Eurozone experiences

A useful starting point is to compare how the US and Eurozone have been affected by and have responded to the recent financial crisis. The goods and labour markets show an instructive comparison between the US and the Eurozone.

Key to such a comparisons are notions of:

  • Permanent versus transitory consequences of shocks;
  • Active versus passive policy responses
  • Symmetric versus asymmetric shocks.

The figure below compares US GDP (in red) with Eurozone GDP (in blue) from 2006 to 2013 (that is, the IMF’s forecast). I have normalised the initial values to 100 in order to make the comparison easier. A few points ought to be noted:

  • The US recession starts earlier (2007), than in the Eurozone (2008);

The financial crisis originated in the US and later spread to the Eurozone and elsewhere.

  • Despite the crisis origin, the fall in output is larger on impact in the Eurozone;
  • The US economy started recovering from 2009, while in the Eurozone recovery has been short-lived, and flattens out in 2010.

As a result, US GDP in 2012 is above its 2006 level by 7%, while the Eurozone’s output in 2012 exceeds its level in 2006 only by 2%.

Figure 1. GDP

Source: Author’s calculations based on World Economic Outlook.

The labor market comparison tells an interesting story: the picture below describes the rate of unemployment in the US (blue line) and in the Eurozone (red line).

Figure 2. Unemployment

Source: Author’s calculations on World Economic Outlook.

First, note that the rise in unemployment in the US is on impact much larger than in the Eurozone, despite the fact that the latter experiences a larger drop of output. The data is therefore consistent with the presence of labour hoarding in the Eurozone relative to the US, possibly due to higher firing cost in the Eurozone. Second, following the sharp rise in the rate of unemployment in 2007-08, the US rate starts to decline in 2010, although there is little progress in 2012. Third, by contrast, the European unemployment rate rises relatively more smoothly since 2008, but shows no sign of reversal.

The evidence so far points to much more persistent contractionary effects in the Eurozone than in the US. The global crisis seems to have been a quasi-permanent shock for the Eurozone but a transitory shock for the US. It seems that we are in for another round of ‘hysteresis’ in Europe, similar to what happened after the first oil shock in 1973. The question at this point is: to what extent this is a reflection of different policy stances in the Eurozone and the US? Or it is due to other economic factors?

Deficit and debts

A look at fiscal and monetary policies in the two sides of the Atlantic ocean reveals important differences. The next picture shows the ratio of government budget deficit to GDP in the US and in the Eurozone. We know that this ratio should not be interpreted as an indicator of discretionary fiscal stimulus, but it's nevertheless interesting. The differences are quite striking:

  • The rise in deficit/GDP ratio in the US – a downward jump in the red line – is far more pronounced than in the Eurozone: 12 versus five percentage points of GDP from peak to trough;

This occurs despite the fact that Europe experienced a deeper recession, which reduces GDP and raises the deficit due to automatic stabilisers;

  • The ‘expansionary’ stance in the Eurozone is short-lived, and reverts as soon as 2009 while the deficit/GDP ratio in the US improves only from 2010;

As a consequence, the debt/GDP ratios that were approximately at 70% in both the US and the Eurozone start diverging since 2007, with a much larger rise in the US (see Figure 4).

Figure 3. Government budget/GDP

Source: Author’s calculations on World Economic Outlook.

Figure 4. Government debt/GDP

Monetary policy

The following figure (Gros et al. 2011) compares purchases of securities relative to the respective GDPs for the Federal Reserve (blue), the Bank of England's (red), and the ECB (green). While relying on a single indicator to gauge monetary policies may not be entirely appropriate, the differences involved are, again, striking:

  • The size of the ECB interventions is about one fifth of that of the Fed, about 4% of GDP compared to over 20%.

Figure 5. Central Bank Purchases of Securities as percentage of GDP

Source: Gross et al (2011).

Assuming very conservative fiscal multipliers, the difference in fiscal stances between the US and the Eurozone (seven points of GDP from peak to trough) goes a long way in accounting for the worse performance of the Eurozone compared to the US (five points of cumulative growth) even without considering the strikingly less aggressive European monetary policy.

This suggests that Eurozone problems are largely homemade. Yet, this does not imply that the euro may be at risk. Not yet, anyway. For that, we must turn to asymmetries.


Beyond the aggregate responses in the US and the Eurozone, the crisis has heightened ‘asymmetries’ within Europe. Compare for example Italy (in red) with Germany (in blue) in the figure below. Their GDP levels have been normalised to 100 from 2006, with the divergence being marked:

Figure 6. Germany's GDP versus Italy's

Source: Author’s calculations on World Economic Outlook.

  • In 2012, GDP in Italy is 6% below its level of 2006, while in Germany is 8% above its level of 2006, a difference much larger than that we saw between the US and the Eurozone as a whole.

Unfortunately for the Eurozone, this pattern is general. In order to construct a synthetic measure of GDP dispersion, I have calculated, for each year from 2006 to 2011, the coefficient of variation – the standard deviation normalised by the mean – between the US states' GDPs (from the FRED data bank of the St. Louis Fed) and between the Eurozone countries’ GDPs (data from the most recent World Economic Outlook). The picture below shows the results, with the initial values normalised to one.

Figure 7. Coefficient of variation of GDP across US states and Eurozone countries

Source: Author’s calculations on WEO and FRED data.

What we see is striking:

  • There was a remarkable rise of the index of dispersion within Europe (i.e. between Eurozone countries' GDPs). Between 2007 and 2012 this index grew by more than 2%.
  • The dispersion between US states actually falls from 2007 to 2011, by almost 1%.

There are quite a few candidate explanations for this:

  • Asymmetric shocks.

Unlike in the US, countries in Eurozone were strongly hit by country-specific shocks: fiscal and current account imbalances in Greece, credit boom and banking crises in Ireland and Spain, and productivity growth in Portugal and Italy.

  • Asymmetric policy responses.

Unlike the US, in the Eurozone fiscal tightening was stronger precisely in countries suffering larger negative shocks.

  • Different institutions.

Unlike the US, Eurozone countries have segregated labour markets with different degrees of employment protection, different systems of wage bargaining, and different banking and welfare systems. This affects the response of the economies to shocks (this is a long and old story: see Blanchard 2000).


The Eurozone policy response to the crisis, fiscal tightening and reinforced constraints on Eurozone national borrowing to prevent moral hazard, is not only imparting a recessionary impact on the Eurozone, but it is also aggravating the ‘original sin’ of the euro: asymmetry.

Thus, in a context of scarce international labour mobility and lack of wage and price flexibility in some Eurozone countries, the lack of an operative ex-post transfer/insurance scheme becomes even more serious.

The problem is a very difficult one. A centralised ‘ex-post’ transfer scheme is necessary, but does not seem to be politically feasible. The adopted Macroeconomic Imbalances procedure, a mere ‘ex-ante’ monitoring device – akin to a score board – for detecting ‘asymmetries’ is probably counter-productive. Instead of transferring resources to countries suffering shocks, it punishes them.

The longer-term prospects for the survival of the euro not only are not improving, they are actually getting worse.


Gros, Daniel, Cinzia Alcidi, and Alessandro Giovanni (2012), “Central Banks in Times of Crisis: The FED versus the ECB”, European Parliament, Directorate general for internal policies, policy department A, economic and scientific policies.

Blanchard, Olivier (2000), “The Economics of Unemployment, Shocks, Institutions, and Interactions”, Introduction, Lionel Robbins Lectures, London School of Economics, October.

Manasse, Paolo (2010), “Stability and Growth Pact: Counterproductive Proposals”,, 7 October.

1 This note is based on a talk that I gave at the Conference "America: Still A European Power?" in Bologna, jointly organized by Johns Hopkins University-SAIS and Bologna University. The title of my presentation was "Why and How the US and the EU Did/Didn't Come out of the Economic Crisis".

Topics: Europe's nations and regions, Global crisis
Tags: euro, Eurozone crisis, US

Paolo Manasse

Professor of Macroeconomics and International Economic Policy at the University of Bologna