The Global Economy in Turbulent Times

CHAPTER 53 European Union: Favoring Growth Against More Austerity¹

The world’s US$80 trillion economy is split 50–50 between advanced economies (AEs) and developing countries (DCs). Since the financial crisis, AEs struggled to stay afloat. In 2012, they will grow a meager 1.4 percent according to the International Monetary Fund (IMF). Most of Europe is in recession (two consecutive quarters of shrinking growth); the United States isn’t doing better than expected (+2.1 percent); and Japan is driving hard to grow 2 percent.

Although DCs have done better, they are already slowing down. Emerging Asia (excluding Japan) remains the driving force as growth slackens to 6.8 percent this year, with China rising by 8.2 percent, and India, 7 percent. Just when the world economy might be turning the corner, along come Spain and United Kingdom slipping into recession, joining Belgium, Czech Republic, Italy, and the Netherlands. Mighty Germany may even be in recession in the second quarter of 2012. Then last week, it was the Dutch’s turn to realize the difficulties in pushing for more austerity, placing its AAA credit rating at risk. Spain is the next domino, struggling with continuing budget deficits, very high unemployment, and a very angry public.

The problem with Europe is not the debt crisis; it’s the lack of growth. The dilemma is plain: Cutting spending risks deepening the slump, widening the deficit with no prospect of growth, resulting in more street protests; however, any easing ...