The report notably contrasts the European situation with the fragile economic recovery in the United States.
The European Union entered a double-dip recession in the last quarter of 2011, with the economy shrinking by 0.3% and the unemployment rate continuing to increase, reaching a record in the eurozone of 10.7% in January.
The study was presented at a conference in the European Economic and Social Committee on 20 March.
The report blames this divergence largely on the actions of EU-level and national leaders.
Andrew Watt, an economist and one of the report’s co-authors, said: “It was a collective failure of the Commission, the European Central Bank and national governments.”
“In a normal democracy, Olli Rehn would have been forced to resign," he said, referring to the European commissioner for Economic and Financial Affairs. "Heads would have rolled.”
The report also criticises the European Central Bank (ECB), claiming it helped “quell the recovery,” by increasing interest rates for banks’ refinancing twice in 2011, making it harder for them to lend to governments, as well consumers and companies in the real economy.
“On both occasions, the increase in the spreads in the 10-year bond yields of [the peripheral economies] increased sharply,” the report underlined.
The general increase in bond yields in the eurozone, the interest the market demands for governments to refinance themselves or secure new loans, was one of the major causes for the economic slowdown and increase of unemployment in the second half of 2011.
The report claims this led to economic crisis even in countries with modest debt and deficits. “The failure to undertake a full government bank role so far, along with other failures of economic governance, has led to a spreading of the debt crisis even to member states with fundamentally sound public finances,” it reads.
German priorities ‘bound to make recession deeper’
The ECB has since dramatically reversed policy, reducing refinancing rates to their original level, and taking measures of unprecedented scale including the purchase of over €200 billion of Spanish and Italian bonds, and the making of over €1 trillion in low-interest, three-year loans to eurozone banks since December.
This action is widely credited with easing the economic crisis and giving European leaders a “breathing space”. It is uncertain whether this will prove lasting in the absence of effective reforms at national and European level.
In particular, member states’ competitiveness will need to converge to reduce trade imbalances between them. This means, as countries within the euro cannot devalue, that wages must decline dramatically in peripheral economies such as Greece relative to those in core.
Some economists have suggested the rebalance should also be achieved through an increase in wages in “over-competitive” in Germany. The report says “the insistence by Germany and other core economies that current account imbalances are corrected unilaterally by those member states in deficit, are bound to make the recession deeper and more widespread.”
Rising unemployment and inequality
The study describes in detail the increases in unemployment, poverty and inequality that have resulted from the crisis, drawing on statistics from various sources including the EU’s Eurostat statistical agency, ECB, the Paris School of Economics and others.
Among the worst-affected are youth, with an EU average unemployment rate of 22.4% with over 40% of those with jobs working on temporary contracts (almost four times as many as people over 25). The situation is also dramatic for migrants from outside the EU27 who, to the extent that such estimates can be made, suffer an unemployment rate of around 20%.
In addition to a moderate increase in the average inequality between individuals in EU countries, it also shows that inequality of wealth between European regions and nations is on the rise.