Impact of the Crisis on the Real Economy

12-01-2010

This crisis came about because a bubble burst. Keeping this in mind leads to important considerations : 1) Europe (and in particular the Euro area) exhibited the same pre-crisis or ‘bubble symptoms’ (house price increase, excess credit growth) as the US. 2) The impact of the crisis on the real economy should be assessed on the basis of changes in unemployment and consumption (rather than only in GDP). A ‘happiness’ indicator, based on these two variables, has behaved in a quite different way across member countries. 3) If one looks at the crisis as the inevitable adjustment after a bubble one has to compare the present state of the economy to some ‘normal’ state (before the bubble) and not just to 2007, which represents the peak of the bubble (and therefore an unsustainable situation). Accounting for this leads to a quite different picture of the severity of the crisis. 4) Perspectives for the recovery? It does not seem that a credit crunch will impede a recovery as the ECB’s survey of bank loan officers has returned to normal, pre-crisis (but also pre-bubble) levels. Credit growth is still negative, but a more meaningful measure of the credit market is the ‘credit impulse’, which has sharply improved over the last year and seems to have returned to ‘normal’ by the end of 2009.

This crisis came about because a bubble burst. Keeping this in mind leads to important considerations : 1) Europe (and in particular the Euro area) exhibited the same pre-crisis or ‘bubble symptoms’ (house price increase, excess credit growth) as the US. 2) The impact of the crisis on the real economy should be assessed on the basis of changes in unemployment and consumption (rather than only in GDP). A ‘happiness’ indicator, based on these two variables, has behaved in a quite different way across member countries. 3) If one looks at the crisis as the inevitable adjustment after a bubble one has to compare the present state of the economy to some ‘normal’ state (before the bubble) and not just to 2007, which represents the peak of the bubble (and therefore an unsustainable situation). Accounting for this leads to a quite different picture of the severity of the crisis. 4) Perspectives for the recovery? It does not seem that a credit crunch will impede a recovery as the ECB’s survey of bank loan officers has returned to normal, pre-crisis (but also pre-bubble) levels. Credit growth is still negative, but a more meaningful measure of the credit market is the ‘credit impulse’, which has sharply improved over the last year and seems to have returned to ‘normal’ by the end of 2009.

Išorės autorius

Daniel Gros (CEPS) and Cinzia Alcidi (CEPS)