Europe’s economic disaster

August 21, 2014

Wonkblog’s Matt O’Brien looks at the current state of Europe’s recovery and calls it “one of the biggest catastrophes in economic history.” Paul Krugman agrees with that assessment. More than six years since the financial crisis began, Europe still hasn’t had a real recovery, “and…¬†that’s about to make it worse than the worst of the 1930s.” Wonkblog puts the current malaise in context by charting how many years it took after other crises to return to pre-crisis peak gross domestic product. The current era is the black line, and it’s not pretty:


All the more galling, O’Brien argues, is that this is a “policy-induced disaster” of fiscal austerity and weak monetary stimulus. Ryan McCarthy¬†pointed out in 2012 that the pattern to “Euro crisis flare-ups is getting very familiar”: problems get contained but fundamental causes remain unaddressed. The head of the European Central Bank, Mario Draghi, has rolled out a negative interest rate on bank deposits to try to spur lending and boost inflation. Draghi is also talking about quantitative easing, but it’s not clear that he has the power to implement such a policy. ¬†Unfortunately, that means there’s not that much more monetary policy can realistically do to offset disastrous fiscal policy.

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Didn’t the financial crisis of 2008 originate on Wall Street? The financial system froze. Banks refused to deal with other banks because no one could tell which financial institution would go bankrupt next because of all of the junk mortgage backed securities that the banks and brokers still had left on their books (unsold “inventory”).

Today Wall Street is selling low grade junk bonds at abnormally high prices – another crisis in the making? Europe is not the place to look for the next financial crisis.

Posted by nose2066 | Report as abusive