Quotation Breuss, Fritz. 2017. The United States-Euro Area Growth Gap Puzzle. WIFO Working Papers, No. 541, September 2017.


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Abstract

Ten years ago, the global financial crisis started to unwind in the USA and riggered the greatest recession since World War II. Although the crisis of 2007-08 was caused in the USA, their economy was not hit so hard in the Great Recession of 2009 as in Europe, and in particular in the Euro area. The USA also recovered more rapidly and sustained from the crisis than the Euro area. Additionally, the specific Euro (debt) crisis of 2010 led to a double-dip recession in the Euro area, not joined by the USA. This divergent post-crisis development since then accumulated to a considerable growth gap between the USA and the Euro area. What are the factors behind this different performance? Would a more aggressive fiscal and/or monetary policy in the Euro area have closed the growth gap? As our simulation exercises show: the answer is no. However, the unconventional monetary policy by the ECB since 2014-15 contributed to the most recent recovery in the Euro area. We identify the pivotal reason of Euro areas growth lagging behind the USA in the different experiences in the crises management. The USA has a long-lasting experience in handling financial crises. In historical comparison, the Euro area – the Economic and Monetary Union (EMU) of the EU – is still a "teenager". The crises revealed, that the legal basis of the institutional set-up of EMU and hence of the Euro area was not enough crises-proven. Rescue instruments had newly to be implemented. The global financial crisis was the first great shock which was badly absorbed by the still quite heterogeneous Euro countries. The Euro area, shattered by a succession of external (global financial crisis, Great Recession) and internal (Euro crisis) shocks, could therefore not unfold its growth potential in the last decade. If – hypothetically – the Euro area would have profited from the faster-growing production inputs (capital and labour) as in the USA, the growth gap could have been closed.

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Publication's profile

Status of publication Published
Affiliation External
Type of publication Working/discussion paper, preprint
Language English
Title The United States-Euro Area Growth Gap Puzzle
Title of whole publication WIFO Working Papers, No. 541, September 2017
Year 2017
URL http://www.wifo.ac.at/jart/prj3/wifo/main.jart?rel=de&reserve-mode=active&content-id=1298017551022&publikation_id=60596&detail-view=yes
JEL E37, E52, E62, F15, P52

Associations

People
Breuss, Fritz (Details)
Organization
Institute for International Economics IN (Details)
Research areas (ÖSTAT Classification 'Statistik Austria')
5115 European integration (Details)
5334 Political economic policy (Details)
5344 Foreign trade (Details)
5371 Macroeconomics (Details)
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