The shrinking incomes of Europe
The frailty of euro zone will ensure monetary policy at European Central Bank will remain easy and the ultra-low rates there will be a source of liquidity for global markets
Seven years after the financial crisis first struck in 2007, Europe continues to teeter on the brink of a recession. Many economies in the region are yet to regain the levels of per capita income they saw in 2007. For some, incomes are much lower than what they were seven years ago.
The accompanying chart shows those European economies that continue to see a fall in per capita incomes, computed in their national currencies at constant prices, compared with 2007. The data have been taken from the International Monetary Fund’s World Economic Outlook database, updated in October.
Greece has been the worst affected, but it is not only southern Europe that has been hit. Incomes in Finland, Denmark, Luxembourg and Norway are still considerably below where they were in 2007. While there’s much talk of a recovery in the UK, per capita incomes there are still below their 2007 level.
The weakness in Europe will have several consequences. The obvious one is exports to the region will suffer. The frailty of the euro zone will ensure that monetary policy at the European Central Bank will remain easy for a long time and the ultra-low interest rates there will be a source of liquidity for global markets. Further, with incomes not rising, fresh investments in Europe are likely to be delayed. As a result, funds are likely to move out of Europe to greener pastures, to markets such as India.
The long stagnation in Europe is already having social repercussions, with mainstream parties losing ground to populists of the right and the left. But the stark question that confronts Europe today is: in an era of globalization and footloose capital, is it possible for its welfare states to survive? Or, is the welfare state a hoary relic of a bygone Keynesian age?
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