has a negative impact on demand, for the eurozone as a whole. Even Germany, which is virtually at full employment, is stuck in a broadly restrictive stance, in spite of the presence of the social democrats in the ruling coalition.
The situation in the eurozone is reminiscent of Japan in the 2000s. The country began to experience deflation in 1999, following the recession associated with the Asian crisis. At the time, despite an average growth rate of 1.4 per cent between 2000 and 2006, prices failed to pick up. Despite pursuing expansionary monetary policies, the Japanese central bank could not find a way out of the trap. This is precisely the predicament the eurozone finds itself in today.
But while the sluggish recovery is a major cause for concern, there is something more important to worry about. The crisis has, in fact, exacerbated the divergence between European countries. While overall unemployment is high, it is dramatically so in some peripheral countries, like Greece (26.7 per cent in January 2014) and Spain (25.3 per cent). In these countries, investment is at an all-time low. In Greece for example, investment is just 35 per cent of what it was in 2007, and austerity has seriously affected the quality of education and healthcare. The result is that both physical and human capital have been destroyed, and the capacity of these countries to benefit from the recovery is seriously hampered. This vicious dynamic is captured by the World Economic Forum competitiveness index. Compared to the mid-1970s, core countries like Germany and Finland have improved their ranking, while peripheral countries have all become dramatically less competitive. The proponents of austerity had claimed that it was a bitter pill, necessary to emerge from the crisis as a more cohesive, competitive and dynamic eurozone. But they have been proved wrong. Today, the eurozone is even more heterogeneous and, hence, fragile to external shocks, than it was in 2007, at the outset of the crisis.
It is hard to believe that the current macroeconomic trends, and the self-congratulatory attitude of the European elites, will alter this bleak picture. The projected breakthrough of eurosceptic parties into the European parliament is, therefore, no surprise. A radical change in policies, and in politics, is needed.
The writer teaches economics at Sciences Po, Paris and at the Jakarta School of Public Policy. He co-edited ‘Reforming Europe’, a volume exploring solutions to the current European crisis. Twitter: @fsaraceno