Europe’s Gap

Πηγή: NY Times Blogs

του Paul Krugman

Listening to the comments of Jean-Claude Trichet and others, you might have the impression that Europe is well on the way to recovering from its slump. So I took a look at the actual numbers, and even though I sort of knew what they said, it was a bit of a shock.

In the figure below, I show an index of eurozone real GDP, from Eurostat, with 2007 fourth quarter — a quarter in which Europe was doing OK, but certainly not experiencing inflationary overheating — set at 100. And I compared it with a trend assuming 2 percent annual growth in potential output, a fairly conservative assumption even for Europe. Here’s what it looks like:

Eurostat, author’s estimate

So a huge gap has opened up between a reasonable estimate of potential output and actual output. Even if you believe that growth in Europe has picked up since the first quarter — and that the pickup will continue — it will take years to close that gap.

The only way you could justify not doing more to promote growth is to assume that potential output has been drastically reduced by the crisis — and if you believe that, you should be working day and night to reverse that decline.

The idea that policy has done enough is just crazy.