26 September 2018

Europe's Economic Performance Over the Past 30 Years

Europe’s economy has experienced a great deal of ups-and-downs in recent decades as a series of upheavals have led to a major transformation of one of the leading centers of the world economy. In recent years, the European economy has staged a modest recovery from what was a prolonged period of major uncertainty and turmoil.  

Nevertheless, over the longer period, Europe has struggled to match the growth rates of many of the world’s other leading economic centers, although some individual European economies have managed to perform significantly better than most of their peers in the region.  Many of Europe’s struggles can be attributed to the fact that many of Europe’s leading economic centers have failed to adopt to the economic, political and technological changes that are transforming the 21stcentury world economy, a development that can be seen in how individual European economies have reacted to the upheavals that the region has faced.  

Therefore, in order to determine how Europe’s economy has performed over the longer-term, we need to look at how three dramatic changes have altered the face of the European economy over the past three decades.


Europe Since the Global Financial Crisis

The most recent of these upheavals was the global financial crisis that began in 2008 and lingered for many years thereafter.  While the global financial crisis did not begin in Europe, few regions were more impacted by the crisis than Europe, in particular, the region’s most vulnerable economies.  

The ten years since the outbreak of the financial crisis can be broken into two five-year periods.  Between 2009 and 2013, the European economy experienced three recessions that led to multiple debt crises and soaring unemployment rates across the region. The second five-year period from 2014 until today has seen most European economies stage a modest recovery, with a few economies even managing to record growth rates not seen since before the crisis. 

This recovery was prompted by weak regional currencies (which boosted export competitiveness) and low commodity prices (which increased consumer and business spending), two factors that have always had a major impact on Europe’s economic performance.  When this ten-year period is taken as a whole, Europe’s economy expanded by an average of just 1.1% per year, the worst ten-year period in Europe since the Second World War.  Still, things could have been worse if Europe had not have been able to return to growth beginning in 2014.


Europe Since the Launch of the Euro

Another major upheaval for the European economy was the introduction of the euro and its subsequent adoption by 19 member states of the European Union.  When launched, the euro was championed as a major advancement for European unification and was seen by many in Europe as an alternative to the US dollar as a leading global currency.  Instead, the rushed introduction of the euro has proven to have been a major disruptive factor for the European economy and has been at the root of many of the region’s recent economic troubles.  This is due to the fact that the adoption of the euro resulted in a loss of monetary policy independence for those countries that use the euro, and some of these countries needed this independence to maintain their economic competitiveness. 

Nowhere has this been more evident than in Italy and Greece, both of which have suffered from a dramatic loss of economic competitiveness since they adopted the euro.  In fact, since the euro went into circulation in 2002, the Italian economy has recorded almost no growth, while Greece’s economic output is actually lower today than in was when the euro was launched.  In contrast, European economies that maintained their ability to set monetary policy (such as the UK, Sweden and Poland) have largely outperformed their Eurozone counterparts.  Since the euro was introduced in 2002, Europe’s economy has expanded by 1.6% per year.


Europe Since the Fall of Communism

The first of the major upheavals to transform the European economy in modern times was the fall of communism in central and eastern Europe, and the eventual integration of many of these countries into the larger European economy.  This integration of Europe coincided with the formation of the modern globalized economy that took place in the 1980s and 1990s as China, India, Southeast Asia, Latin America and other emerging regions were connected to the global economy.  

Like many of these other emerging regions, parts of central and eastern Europe became major export-oriented manufacturing centers, enabling them to achieve solid rate of economic growth that significantly improved living standards in those regions.  For Central Europe, this transformation has been a game-changer, and today, per capita GDP levels in some countries in this region are now approaching West European levels.  However, for less-competitive West European economies, the emergence of Central Europe as a manufacturing center has hallowed out their own manufacturing sectors, contributing to their relatively poor economic results over the past 30 years. Overall, Europe’s economy has expanded by 2.0% per year over the past three decades, with a surprising amount of harmonization among the long-term growth rates of the region’s largest economies.


Lessons for the Future

These three massive upheavals over the past 30 years have changed the face of the European economy.  For some European countries, these changes have proven to have been very beneficial, particularly those countries that have attracted investments in export-oriented manufacturing or themselves have invested heavily in high-tech industries and services.  In contrast, other European countries have struggled to cope with these changes, particularly those countries that have seen their manufacturing sectors decline or have failed to invest in high-tech, high-growth industries. 

Meanwhile, the nature of Europe’s economy means that it will remain exposed to external shocks that could usher in yet another period of upheaval for the region.  With an unfavorable demographic situation, scant natural resources and a reliance upon access to large export markets, Europe cannot live in a bubble as its ties to the global economy are essential for its future well-being.  Likewise, more European countries need to dramatically increase their spending on research and development, lest they fall further behind their competitors in North America and East Asia in the high-tech industries and services that will drive growth for the global economy in the future.  If Europe fails to maintain its access to export markets and continues to underspend on technology, it will certainly face more crises in the future.  Instead, it must use the examples of those European countries that have succeeded during the past three decades of upheaval to carve a path towards future economic success and long-term growth.