Why has the European Union suffered so badly in a crisis that began in the US? The answer is to be found in four weaknesses: first, Germany, the EU's biggest economy, is heavily dependent on foreign spending; second, several western European economies are suffering from post-bubble collapses in demand; third, parts of central and eastern Europe are also being forced to cut spending; and, fourth, European banks proved vulnerable to both the US crisis and to difficulties nearer home. Given these realities, recovery is likely to be slow and painful.
According to the latest consensus forecasts, the EU economy is expected to contract by 3.6 per cent this year and the eurozone's by 3.7 per cent, while the US is forecast to shrink by only 2.9 per cent. Thus the crisis punishes the frugal more than the profligate. It seems so unfair. It is not: the frugal depend on the profligate.
A remark in the European Commission's spring forecast gets to the nub of the problem: “As exports are usually the first component to recover in the eurozone business cycle,” it argues, “the export outlook is key.” The eurozone is the world's second largest economy. Why should it depend for recovery on external demand? The answer lies with Germany. The Commission forecasts that the fall in net exports will account for three-fifths of its 5.4 per cent economic shrinkage this year.