Euro Zone: Why are Things not Improving?

The American economy and the European economy historically closely link within one another. When one economy is doing well, the other usually does the same. This was true in the 2008 recession that hit both America and the Eurozone. However, interestingly this trend has not continued since about 2011. The American economy has risen about 4% even since the beginning of 2013; yet the economy of the euro zone appears to still be in “crisis”. In fact, the euro zone’s unemployment rate has been at a record level in 2013, and has been steadily rising for the past 22 months. What accounts for the recent differences in growth and lack of growth between the two large economies? An article found in the Economist helps to give explanations for the differences.

Interestingly in 2011, the Economist had published an article that forecasted the possible crisis that the EU has now found itself in. The article written in December 2011 shows the similarity between the years leading up to and during the Depression that come close to paralleling those of the 2008 recessions in the EU and the United States. Industrial production, equity prices, and global trade falling to low levels are similarities to both the 1930s economic collapses and the 2008 recessions. Though times were bad in 2008, why was there not a literal Depression? The answer lies in government intervention. The article states that the governments in the 1930s tightened budgets and central banks increased their rates to try and regain economic stability, which worsened things; in 2008, leaders came together and expanded their economies. However, the question still remains of why since 2008 America has steadily recovered and the EU has not. Basically in 1930s, there was a problem with Germany needing to devalue money in order to increase imports and exports (current account surplus), however the gold standard at the time didn't allow this to happen, so countries were forced into importing too much. These countries responded to the problem by tightening their monetary policy and banks eventually began to fail from the tightening policies. The gold standard according to the article parallels the EU's common currency, the euro, now.

The article offers that the reason that America has recovered from the crisis of 2008 and the EU hasn't comes back to a difference in knowledge. Europe is falling short of the "intellectual potential", in which a country gains knowledge and skills to not repeat the same mistakes it has in the past and actually improve over time. Basically, through not moving towards liquidation, Europe has not learned from its past missteps during the Depression and America has. The EU has not been able to create a structural framework from a lack of intellectual potential. It's interesting. This information is relative to all people, those who study IPE and all other American citizens, for several reasons. First, there are cycles and it proves useful to learn from past mistakes. Second, economies in Europe affect Americans, and vice versa. Third, learning the mistakes made and the potential to correct them in the future are important for citizens to avoid economic crashes in the future, as well as recover from the current euro-crisis. It is relative to class, because it refers to the fact that economies are INTERNATIONAL in essence; in other words, what affects America will affect Europe, who are two major trading partners and closely connected. Second, it is referring to the euro crisis, which we have recently learned about in class. I found it very interesting the correlation found between the Great Depression in the 1930s and the recent 2008 recession. Finally, I do find it interesting that knowledge and "intellectual potential" are reasons given for the difference in recovery between the EU economy and American economy. It turns out history is important!