Europe is the sick man of the global economy

Behind the news


The continent is suffering from a bout of economic long Covid

by John Rapley

He needs a dollar. Credit: Getty

The world economy, which was meant to bounce back to life after the pandemic, is showing signs of persistent illness. The World Bank’s recent Global Economic Prospects paints a gloomy picture of slowing growth, marking what it calls a “wretched milestone”: not only a world economy that is growing more slowly than before the pandemic, but one expected to grow at the slowest rate in three decades: 2.4% this year, with hopefully a slight improvement in 2025. Worse, investment is expected to rise at 3.7% a year, barely half the average of the last decade, which risks locking in slow growth.

While almost everywhere is feeling the burn, the global performance is considerably weighed down by the advanced economies, with expected growth of just above 1%. Even this performance is flattered by the United States, which is estimated to have grown by an estimated 2.5% last year, and is expected to slow to 1.6% this year — though that performance has a big asterisk next to it because the country’s investment-fuelled rebound has been driven by a huge borrowing binge which recently took the country’s national debt past $34 trillion.

However, the real sick man of the world economy at the moment is Europe. With the exception of Eastern Europe, the continent barely grew last year, and European manufacturing is now in recession. By the IMF’s reckoning, six of the world’s 10 worst-performing economies last year were to be found there. 

It looks to be a case of economic long Covid. In the same way the pandemic exacerbated many existing morbidities, so too the economic measures used to stave off collapse may have aggravated underlying economic ailments. 

During the pandemic, Western countries paid their citizens to stay at home while their central banks flooded their economies with money. This served to keep asset prices from tanking. But while that prevented the deep scarring that has marked some of the less fortunate developing countries, it seems to have hobbled recoveries. With governments having added an average of a quarter of GDP to their debts, they now lack the funds available to invest in fixing the problems they had let fester before the pandemic, whether that be a lack of housing, decaying German infrastructure or Britain’s strapped healthcare system. 

Meanwhile the inflation of asset values, from property to corporate bonds to crypto, sucked capital away from productive investment and into rent-seeking opportunities. Barring a major fall in asset prices, this misallocation of capital is likely to remain a problem.

Even the US isn’t immune to these difficulties, since it’s not clear if its debt is sustainable, while the proliferation of zombie companies kept alive by cheap credit is causing persistent strains in the banking system. But because America still holds the world’s reserve currency, the planet has been willing to keep buying its bonds, funding its recovery. 

In contrast, as Britain discovered with Liz Truss’s ill-fated 2022 mini-budget, European countries lack the luxury of seemingly unlimited credit. Left to try to engineer recoveries while balancing the books, they are finding the world economy a less friendly place.

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