The 2009 recession was experienced worldwide and much of Europe is still in recession as the European Central Bank (ECB), International Monetary Fund (IMF), and individual European economies work on a plan for economic recovery.
The European Union (EU’s) statistics agency reported that the Eurozone governments exceeded revenues by 215 billion euros or $244 billion in 2015 (WSJ). Debt rose from 9.3 trillion euros to 9.4 trillion euros in 2014. As a percentage of the GDP debt fell 1.3% from 92% to 90.7%. The growing debt is creating doubt in the feasibility of the Eurozone’s austerity program (WSJ). The Eurozone responded to the 2009 financial crisis with cuts in government spending and increased taxation, known as austerity. In addition, now that the European Central Bank is charging negative interest rates on funds deposited to the banks and accused of printing money to buy bonds, this level of austerity is being reconsidered.
Several governments in the Eurozone are objecting to further budget cuts. The International Monetary Fund and the Organization for Economic Cooperation and Development have encouraged governments to increase spending and investment (WSJ). ECB President, Mario Draghi, stated that ECB fiscal policy is now slightly expansionary (WSJ).
Germany is the largest economy in the Eurozone and has maintained a strong adherence to the principle of austerity. Germany is unlikely to implement policy it does not agree is true austerity, causing conflict because it is the largest economy and reported a budget surplus in 2015 according to Eurostat that it intends to maintain until 2020 (WSJ).
Because the Eurozone is multinational, the different governments have varying levels of annual deficit. Greece refused austerity and doubled its deficit from 3.6% to 7.2% from 2014 to 2015 (WSJ). Under its current bailout plan with the Eurozone governments and International Monetary Fund Greece must increase its budget surplus from a 0.25% deficit to a 3.5% surplus by 2018 (WSJ). Other governments, such as Spain, failed to meet economic recovery goals of reducing deficit.
The ECB has increased its 1.5 trillion euro or 1.7 trillion-dollar stimulus since December but it is at the expense of negative interest rates, slow growth, and uneven growth among nations (WSJ). The United Kingdom has always had a tenuous inclusion in the E.U. and is soon holding a referendum on its membership in the E.U. The loss of the U.K.’s economic productivity would have disastrous negative impact on the fragile aggregate economy (WSJ, Draghi). Unlike the American bailout, the Eurozone countries have not seen an aggregate economic recovery and many economist and policy makers think that the central banks have become a crutch. The stimulus has been referred to as “extreme” distributions of money to banks and the public. Bond purchases have been reported at 80 billion euros per month (WSJ, Draghi).
The ECB’s current deposit rate is negative 0.4% and Eurostoxx has seen growth with an increase of 3% (WSJ, Draghi). The Euro has strengthened against the dollar but this can significantly hinder trade and is a primary factor in the cost of European exports, a stronger euro makes them less competitive in price on the international market.
Economists are warning against further interest rate cuts. In addition, interest rates are not the only factor. Unemployment is at a four-year low of 10.3%, that is still almost double the level of U.S. unemployment (WSJ, Draghi). Inflation was zero in March. Creating urgency, the current bond purchase program is scheduled to end March 2017, ECB officials are working on an economic recovery strategy (WSJ, Draghi).