European Recession and the Emerging Two-Speed Europe

Two-speed Europe has been the main consequence of the poor economic policies implemented to sort out the European economic crisis, reversing into an economic divide the achievement of economic convergence before the 2008 crisis and paving the way to the formal exit of the UK from the European Union: with the UK out, half the population of the EU improved their standard of living, while for the other half worsened or remained the same. Surging unemployment rates has been the central imbalance within the European Union, widening the gap between countries with high unemployment and countries with low unemployment. Increasing unemployment rates were associated with decreasing, even negative, GDP growth changes at country level, which, in turn, were associated with pro-cyclical decreasing live births, a signal of the increasing share of young unemployed. Higher unemployment prompted a surge of internal labour movements towards low unemployment countries: migration from outside the EU also increased, pulled by the demographic imbalances of the European countries. The enlargement of the European Union (EU) borders, in 2004 and 2007, shortly before the 2008 economic crisis, was a defining moment, which brought a substantial increase of the EU population size, mainly from countries of the central and Eastern Europe: the goal of “E pluribus unum” became more challenging, because the economic diversity widened, but without no clear commitment to speed up the convergence process. Internal devaluation and austerity, proved to be self-defeating policies, even for the major countries of the Euro Area. Low inflation or creeping deflation set in in Europe as a structural problem, rather than cyclical: the generational stagnation of the young could be a silent driver of the weak aggregate demand of the high-income countries. Slow growth in high-income countries implies that private investments declines because incentives are weaker, except in growing emerging countries: escaping stagnation in European countries requires a big “push” of public investments, both in infrastructures and the young, to jump start the inverse chain reaction of increasing disposable income and consumption.