The authors start by pointing out that countries suffering from a recession triggered by a housing bubble typically take a long time to fully recover (five-and-a-half years, on average).
In Europe’s case, however, those woes are further exacerbated by structural problems with the euro zone currency union. The continent’s banking system is still a mess
and hurt by a lack of coherent regulation. Meanwhile, many nations have been enacting sharp spending cuts and tax hikes
to deal with their debt troubles, dragging down growth even further.
The three economists, Laurence Boone, Céline Renucci, Ruben Segura-Cayuela, try to assess the long-term damage done by this unusually long slump. In places like Spain, where unemployment is now 26 percent, many people will be out of work for a long time, seeing their skills erode and becoming much harder to employ later on. (This is known as “hysteresis.”
) What’s more, it’s still not clear whether investment will recover back to its pre-recession pace — that depends on the banks.
In the “central case,” Germany, France, Italy and Spain all grow more slowly for years to come, never catching up to their pre-recession trend growth. In the “pessimistic” case, things get even worse, with Italy’s economy continuing to shrink through 2020. In the “optimistic” case, productivity and investment return more quickly, but even then, all the countries but Germany will be below their pre-recession trend growth by the end of the decade.
“In the absence of impetus for bold reform,” the authors conclude, “this exercise shows the damage will indeed be long lasting, permanently impairing growth in a context of an aging population that needs higher growth capacity than ever before.