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Eurozone Rebound: Blip Or Trend?


This is WEEKEND EDITION from NPR News. I'm Scott Simon. Earlier this week, the eurozone emerged from an 18-month long recession. The trading bloc's gross domestic product grew by 0.3 percent in the second quarter of this year but is one good quarter a blip or a trend and will it have any impact on the U.S. economy?

Simon Johnson is a professor at MIT and former chief economist of the International Monetary Fund. He joins us in the studios. Thanks very much.

SIMON JOHNSON: Thanks for having me.

SIMON: So is this just a good few weeks or has the eurozone turned a corner?

JOHNSON: That's a great question. Things are definitely improving in the eurozone. It is unfortunately too early to say that they're out of the woods or even completely out of their recession.

SIMON: I gather that most of the growth appears to be centered in Germany and to a lesser degree France. And is this then just a case of work with the best economies to begin with getting a little bit better?

JOHNSON: Well, Germany has been the better of the European economies, since they're getting a little bit better. France has struggled. Portugal had some good numbers last quarter. That's encouraging. But you're right, we are still deeply worried about other places, such as Italy, Spain and, of course, Greece.

SIMON: Well, that brings up the question because unemployment still continues to be perniciously high in Spain and Greece. Does this improvement somehow filter through to them?

JOHNSON: Well, it certainly will - should if it continues, but you need faster growth rates than this. The hope is that this is the beginning of a faster recovery. But the way the European economy is, roughly speaking, you need more than 1 percent per year annualized growth rate in order to reduce unemployment. Unemployment's very high. We want to be seeing on an annualized basis 2 percent, perhaps even 3 percent in this recovery phase in order to feel that they've really turned the corner.

SIMON: You need greater growth to be able to spur greater hiring and to lower the unemployment.

JOHNSON: That's right. Well, productivity increases in all these economies and if you have 1 percent growth, roughly speaking, you're going to have a 1 percent productivity increase. So you could chug along at 1 percent without generating more jobs. So the unemployment would stay high, and of course that would not be a good outcome.

SIMON: Are these numbers relatively good and does that suggest that the eurozone could continue its policies, or do you think something else needs to be done?

JOHNSON: Well, there's a huge debate in Europe about exactly that. Where the people who think you should have tight fiscal policy saying, aha, this proves tight fiscal policy's working, and the people who want a much looser fiscal policy are saying, well, we've loosened a bit in the past few months and that's working. I'm afraid it's hard to sort it out, even with all the data that there are, and people are going to continue to argue about exactly where policy should be.

SIMON: And so each side will use these numbers to ratify their own argument and suggest they'll be right.

JOHNSON: Absolutely. The Germans are saying this proves we were right to be austere and the French are saying, no, no, this proves we're right to back off a little bit. And the Europeans unfortunately continue to have these structural problems with the nature of the eurozone and the way their currency union has worked and nothing we've seen so far shows that they've turned that very large corner.

SIMON: Well, let me get you to be a little less analytical. Where do you stand on that question of austerity versus loosing the strings?

JOHNSON: Well, I think in the particular context of Europe today, they would do well to be a little big looser, but the big issues is, is the currency, the structure of the currency union and also the banking system. They've got some very weak banks, huge banks, actually bigger than our banks, relative to their economies. They're actually worse run than our banks, if you can believe that. So that remains a very big vulnerability for their economies going forward.

SIMON: What impact do you see, if any, on the U.S. economy?

JOHNSON: Well, this is good news, no question. They're an important market for us. We sell to them, they sell to us, and when things go well there's a positive symbiotic relationship. So, it's encouraging. But it doesn't, unfortunately, say that U.S. unemployment is going to drop dramatically in the quarters to come.

SIMON: So a small change maybe for the future, but nothing immediate?

JOHNSON: It's better than the alternative, which is continued recession. It's encouraging. If the Europeans can address the structural problems in the euro area and if they can get growth again in Spain, Italy - that's a very big question - and hopefully Greece, then they can begin to grow their way out of their problems without further disruption to debt, without further disruption to their banking system, and of course, closer link to our banking system.

SIMON: Simon Johnson, a professor at MIT and former chief economist for the International Monetary Fund. Thanks so much for being with us.

JOHNSON: My pleasure.

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