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The Eurozone’s Double-Dip Recession is Entirely Self-Made


This month the eurozone returned to recession, three years after it emerged from the deep recession of 2008-09. Paul De Grauwe argues that the current situation has been produced by policy failures at the beginning of the crisis. The best initial policy would have been for the eurozone’s creditor countries to increase spending, while the struggling periphery countries implemented austerity measures. The budget-balancing policies of creditor countries have instead created an asymmetric adjustment process in which most of the adjustment has been carried by debtor countries such as Spain, Greece and Ireland. One mechanism for returning the eurozone to growth may be for states such as Germany, Finland and the Netherlands to maintain small budget deficits while keeping a constant debt to GDP ratio.

The risk of a double-dip recession in the eurozone had been increasing during the last few months. Figure 1 shows the growth rate of GDP in the eurozone. It can be seen that after a recovery from the deep recession of 2008-09, the eurozone’s GDP growth has been turning again into negative territory since the second part of 2012.


The renewed decline in the growth rates of GDP in the eurozone has the effect of automatically increasing government budget deficits and putting pressure on national governments to avoid an increase in these deficits. As a result, fiscal policies are tightened even further. The risk is that pro-cyclical budgetary policies will push GDP growth rates in 2013 firmer into negative territory, exacerbating the current recession. The asymmetric structure of macroeconomic adjustments in the eurozone has led it towards this situation. A more symmetric approach of adjustment may be a way to avoid it.