EUobserver opinion: Opinion: Why America is recovering, but Europe is not - Part I

BRUSSELS - Half a decade after the financial crisis, the United States is recovering, but Europe is suffering a lost decade. Why?

In the second quarter, the US economy grew at a seasonally adjusted annual rate of 4 percent, surpassing expectations.

In the same time period, economic growth in the eurozone slowed to a halt (0.2%), well before the impact of the sanctions imposed on and by Russia over Ukraine. Germany’s economy contracted (-0.6%). France’s continued to stagnate (-0.1%) and Italy’s took a dive (-0.8%).

How did this new status quo come about?

In the United States, real GDP growth showed resilience last year (1.9%), while inflation remained below 2 percent (1.5%). In the ongoing year, the first quarter was far weaker than expected (-2.9%) and caused downgrades as the projected annual growth was re-estimated to less than 2 percent.

However, economic indicators for the second half of the year tell a story of recovery and the outlook for 2015 is optimistically seen as almost 2.5-3 percent.

Mid-term elections will ensue in fall 2014 and presidential elections in 2016. If Democrats want to keep the White House and the Congress, US economy must look strong - at least through the two elections.

The Federal Reserve, (Fed) is likely to end the large-scale debt purchases around October. As a result, the debate has begun when the rate hikes will follow.

The Fed chief Janet Yellen is determined not to raise the policy rates too early and risk hurting the US recovery, which remains fragile. For now, the hikes are expected by mid-2015.

However, Yellen is also a consensus leader and as labour markets are improving, several Fed board members would like to raise borrowing costs sooner; the “hawks” already in the late fall. In the recent Jackson Hole summit, Yellen presented herself between the “hawks” and the “doves".

If the rates are hiked too early, US recovery could be threatened and the spillovers would be negative from Europe to China.

Eurozone woes

Meanwhile, in the eurozone, real GDP growth contracted last year and shrank in the ongoing second quarter, while inflation plunged to a 4.5 year low.

Europe’s core economies performed dismally. In Germany, foreign trade and investment were the weak spots. The country could still achieve close to 2 percent growth in 2014-2016 until growth is likely to decelerate to 1.5 percent by late decade.

In France, President Francois Hollande i has already pledged €30 billion in tax breaks and hopes to cut public spending by €50 billion by 2017.

Nevertheless, French growth stayed in 0.1-0.2 percent in the 1st quarter.

Fiscal austerity and falling consumer confidence are preventing domestic demand from rebounding, while investment and jobs linger in the private sector. Pierre Gattaz, head of the largest employers union in France, has called the economic situation “catastrophic.”

As France is at a standstill, Paris has all but scrapped the target to shrink its deficit. Before his resignation, PM Manuel Valls intensified reforms, which in April included additional EUR 11 billion in tax cuts for companies and households.

This is how the reform-minded Valls reshuffled a new government without his left-wing economy minister Arnaud Montebourg, as well as the ministers of culture and education, who have blasted both chancellor Merkel’s austerity doctrine and president Hollande’s economic policy.

By replacing Montebourg with the ex-banker Emmanuel Macron, who helped to draw up Hollande’s pro-business agenda, both Valls and Hollande need results fast.

The new stance is to avoid an explicit confrontation with Germany, but to redefine austerity vis-à-vis budgetary reforms. As a result, Paris hopes to soften eurozone budget rules already next month.

The timing is favourable. After all, Italy has fallen back into recession. To sustain his bold economic reforms, Prime Minister Matteo Renzi i now needs a whopping €32 billion to overhaul the labour market, €18 billion for unemployment benefits and €13 billion for infrastructure projects.

While better performance is likely to ensue later in 2014 and thereafter, growth will linger. Indeed, Italy and France are coping with similar ailments. In both, fiscal adjustment is strangling domestic demand, while exports suffer from de-industrialisation, erosion of competitiveness and the strong euro.

In 2014, the eurozone growth is expected to increase to 1 percent, but the recovery is fragile and downside risks have grown elevated. The ageing Europe is breathing heavily before stumbling, or falling down.

What next?

In America, polarised economic growth has endured for three decades.

Ferguson, Missouri is just the tip of the iceberg. However, if Washington can avoid its political stalemates, US growth may accelerate to 2 percent growth in 2014 and could remain around 2.5 percent through the rest of the decade.

It was the plunging consumption and the subprime-market abuses that initiated the crisis in America in fall 2008.

Despite improving wages, it remains the weakened consumption and slower home-price appreciation that continue to penalise growth, along with the ageing population and other secular forces. Further, premature rate hike expectations could cause new economic uncertainty and market volatility.

In 2014, the eurozone growth rate will linger at close to 1 percent and it could remain at less than 1.5 percent through the rest of the decade.

As the European Central Bank chief Mario Draghi i recently indicated, persistent disinflation is driving the ECB away from strict austerity policy.

The inconvenient truth is that this happens half a decade too late. Unemployment rate remains 11.5 percent and prohibitively high in Greece (27%) and Spain (25%), respectively.

Today, even successful performers, such as Germany, are no longer immune to adverse turns, and others, such as Finland, are navigating to uncertainty.

The writer is a researcher at the India, China and America Institute in the US and a visiting fellow at the Shanghai Institute for International Studies in China