Europe facing another ‘lost decade’

Ten years after the financial crisis, economic stagnation risks becoming the new normal

The UK has endured nearly ten years of austerity
(Image credit: Dan Kitwood/Getty Images)

Europe is facing another decade of economic stagnation with low inflation, low interest rates and low growth becoming the new normal unless it takes drastic action soon to kickstart growth.

That is the view of CNN Business’s Julia Horowitz who warns that “ten years after the global financial crisis, Europe's economy has achieved a recovery, but not a revival”.

Citing eurozone inflation below the 2% target set by the European Central Bank (ECB); historic low interest rates; and stubbornly high levels of unemployment in some regions, she says “the conditions in Europe have drawn comparisons to Japan's lost decade, a period of slow growth and weak inflation in the 1990s from which the country has never convincingly emerged”.

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“With the eurozone economy stuck in a low growth, low inflation and low rates environment, it's really hard not to make ‘Japanification’' comparisons” admits ING. “If we’re honest, the eurozone is probably already in the thick of it, which means rates are likely to remain lower for longer and every new crisis or recession will bring the bloc closer to more Japanification”.

Like Japan, western Europe is also facing an ageing population, with pensioners dragging down the economy by choosing to save money rather than reinject it through spending.

The failure to return to anywhere near pre-2008 levels of growth while rates remain near zero means the risk for the eurozone is even greater than a decade ago, with even less recourse should a full-blown continent-wide recession hit.

Coordinated government spending and further quantitative easing have both been touted as possible solutions to kick-start the eurozone economy.

Mário Centeno, the president of the Eurogroup and Portugal's Socialist finance minister, last month summarised the reforms that the eurozone needs: a common budget, a European deposit insurance and, most significantly, a eurozone safe asset.

Politico says “the list is missing a crucial element: open democratic debate. The narrative that the main obstacle to more risk sharing among eurozone members is a lack of trust is a deceptive one. The problem is not that governments don't trust each other. It's that some governments want one thing and others want another”.

Much will depend on the incoming EBC chief, Christine Lagarde.

Writing in The Guardian, former Greek finance minister Yanis Varoufakis says “Lagarde’s greatest challenge is that she is replacing a man credited with saving the eurozone by means of policies that are no longer fit for purpose. If she departs from Draghi’s script, she will face fierce criticism. And if she does not, the eurozone’s never-ending crisis will spin further out of the ECB’s control”.

She may not have much time to find a solution. European Commission President Ursula von der Leyen yesterday warned there would be massive implications for both the UK and EU in the event of a no-deal Brexit, while Germany, the eurozone’s powerhouse economy, continues to flirt with recession.

“Germany is the world's fourth largest economy and the largest in the eurozone, meaning if the Germany economy stutters, the rest of Europe does and subsequently the rest of the world feels it,” says Markets Insider.

If Lagarde fails then, “Europe's malaise could have dangerous ripple effects” says Horowitz. “Another wasted decade would deepen the growing divide between urban and rural Europe, deprive more young people of work and feed political instability.”

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Elliott Goat is a freelance writer at The Week Digital. A winner of The Independent's Wyn Harness Award, he has been a journalist for over a decade with a focus on human rights, disinformation and elections. He is co-founder and director of Brussels-based investigative NGO Unhack Democracy, which works to support electoral integrity across Europe. A Winston Churchill Memorial Trust Fellow focusing on unions and the Future of Work, Elliott is a founding member of the RSA's Good Work Guild and a contributor to the International State Crime Initiative, an interdisciplinary forum for research, reportage and training on state violence and corruption.