Eurozone : why does the growth potential remain weak in the rest of the world?

(Kindly translated by Anne-Marie de Grazia from Zone Euro : pourquoi le potentiel de croissance est-il faible dans le reste du monde ?)

The situation in the Eurozone is that of a recession which should prolong itself at least until the end of 2013 and possibly beyond. Yet, the French government and the President purport to see signs of hope beginning in the second half of 2013. Let’s see if the evolution within the great economic “blocks” allows a validation of this thesis, or if one must see in it merely an application of the Coué method of “conscious auto-suggestion.”

The economic situation in the rest of the world does not allow us to forecast a rapid return to  strong global growth. If the economic situation in China seems to be on the way to a slow recovery, the competitive pressure from the Japanese and Chinese economies should contribute to the recession. The new conservative government elected in Japan will not hesitate to let the Yen devaluate in the coming months. From this standpoint, the French economy should have to suffer not only from the competition from Japan, but also from the competition of those Eurozone countries which have proceeded to internal devaluations and put a downward pressure on salaries. This means that a very large part of the global demand in 2013 should not profit the French economy. Which might then attempt to imitate those Eurozone countries (Spain, Italy) which are engaging in salary decreases, but this will entail new GDP contractions, because the internal demand in France continues, willy-nilly, to drag in its wake the economic activity of the Eurozone.

We shall detail here the evolution in the great zones of the global economy, calling attention to the fact that the size of the European market makes it into the world’s primary zone of economic growth, and that it is illusory to expect to find a new potential for growth in the BRICS.

The United States

The United States economy has still not recovered from the crisis of 2007-2009, despite statements to the contrary here and there in the press. The crisis continues to make itself felt, especially through the impoverishment of a non-negligible part of the population (the number of the poor continues to grow). The relative decrease in unemployment (to about 7%)  does not translate into the creation of decently paid jobs. In fact, if one takes into account the official criteria defining unemployment in the United States, one can consider that, according to European norms, it would continue to hover above 10% of the active population. If the situation seems now stabilized, the medium term growth perspectives remain weak.

One can hear recurrent talk about a “return to growth” of the American economy. But the conditions for such a return are not entirely fulfilled, especially concerning household consumption for a large majority of the population. Savings and investments remain remarkably low. This is cause for serious concern.

Graphic 1


Source : IMF

Even if one can notice a small rebound of these two latter indicators, the current levels are particularly weak. Now, the link between investment and growth is particularly clear-cut in the United States, as can be seen on graphs 2(a) and 2(b).

The rebound in growth which we are presently witnessing, and which has translated into a relative decrease of unemployment, even if the latter remains particularly high if one takes into consideration American norms and statistic practices, seems essentially linked to the different episodes of monetary « quantitative easing » which have been put into place.  One notices major deviations in the statistical relations between investment and growth. The development of “non conventional » sources of energy (shale oil and shale gas) may explain it in part. But the idea that the United States could find back to stable and considerable growth thanks to a decrease in energy costs remains today largely in the domain of pure speculation.

Moreover, it appears clearly that the latest of these “monetary easings” (QE-3) has translated above all in an increase of dividends paid out to shareholders and in an unburdening of debts on the side of the companies.

In fact, one may wonder if the American economy is not in a big way living off  the delayed effects of the latest « quantitative easing » (QE2). This would explain the “abnormal” growth, if one considers investment in recent months. In this case, one would have to expect a brutal slowing down in 2013, which would manifest itself in the second semester – as it were.

Graphics 2(a) et 2(b)


Source : IMF, World Economic Outlook, 2012

Source : FMI, World Economic Outlook, 2012

The question of the « fiscal cliff » corroborates such a hypothesis. Even in the case of a bi-partisan agreement on this matter, which is still probable and will allow to push back somewhat the ceiling of the debt, the increase in taxes and the reduction in spending necessary to bring down the budget deficit will have a negative effect on growth in the second half of 2013. However one cannot exclude now the worst scenario where an agreement couldn’t be reached.

Graphic 3


Source : IMF, World Economic Outlook, 2012

The situation in this case would be much worse and the US economy could face a true recession for 2013. The worst is far from sure but the possibility of a “good” agreement for the economy looks now less and less probable. In all cases considered, the 2013 growth should not exceed the 2012 level. The American economy does not seem capable to play the role of a tractor of global growth.

China and India

The world’s two most populated countries have known diverse fortunes in their economies, during recent years.

In China, the government reacted massively to the 2008-2009 crisis, avoiding in so doing a collapse in growth, which would have taken the form of a true national catastrophe. But the massive injections of liquidities and the major investments which were undertaken have allowed the growth of a real-estate bubble of the first magnitude. The new Chinese authorities seem bent on purging this bubble out of the economy and on achieving a rationalization in the investment process. It is to be expected therefore that the growth rate will decrease. It should reach 7,8% in 2012 and probably 7,5% in 2013. These are considerable numbers, but they seem structurally over-evaluated by 3% to 4% because of problems encountered by the Chinese statistics agency (and not necessarily the result of any political manipulation).

As for India, it has always had growth rates more modest than those of China. It too must confront a very clear downward trend. For the first time in many years, the industrial production index has gone down in the third quarter of 2012. In India too, the problem of a rationalization of investments arises.

Graphic 4


Source : IMF, World Economic Outlook, 2012

It appears therefore that if a regain of activity sets off in China, its effects on global growth will be more than offset by the situation in the other countries. In the end the possibility of the two Asian “big” countries to pull world growth appears dim. The very idea that they could change the Euro zone gloomy environment doesn’t appear to be substantiated.


As for Japan, it has been for many years in the throes of a structural crisis which has been called « the lost decade. ». Its sovereign debt is considerable and doesn’t stop increasing. If the cost of interests has remained very low until recent years, by the effect of various conventions, a rupture of the latter cannot be excluded, and a brutal increase in interest rates which would accompany it. But for the time being, the major problem of Japan is indeed one of growth.

Growth remains weak and the rate of investment, which has been for a long time a strong point of the Japanese economy, is regularly declining. If the 2008-2009 crisis has been followed by an immediate rebound, the latter seems fated to be of short duration. The decrease in Japanese exports has resulted for the first time in many years in the appearance of a trade deficit in the 3rd quarter of 2012.  The immediate consequence has been a depreciation of the Yen. But the forerunners of a new recession, or at the very least of a stagnation of the Japanese economy are accumulating, precisely at a time when the demographic characteristics of the Japanese population are becoming increasingly unfavorable. Japan, who has ceded its second place in the world economy to China, will therefore not be able to be a tractor of global growth if its needs in fossil fuels are bound to grow in the years to come because of the catastrophe of Fukushima.

Graphics 5(a) et 5(b)


Source : IMF, World Economic Outlook, 2012

Source : FMI, World Economic Outlook, 2012

Even if the election of a new conservative government will somewhat slow down the process, one can guess that the aggressive policy of « Japan first » in the domain of trade will have serious consequences on the activity of other countries. In fact, one is witnessing right now a strong contraction in exports1. It is more than likely that the future Abe government will widely use the weapon of devaluation in order to correct the trend.

Consequences for the French economy

Overall, it is very difficult to imagine a reversal of trend for the French economy during 2013. Unemployment will therefore increase by 500,000 in the period of June-2012/June-2013, corresponding to the present slope of 45,000 jobs lost per month. The slight reduction observed in November (around 30 000 jobs lost “only”) seems to be a “blip” caused by the consumption rush of the end year. The probability of a true depression for the first 2013 quarter is still very high.

Graphic 6

Number of unemployed according to category


Source : DARES Indicateurs n° 087, November 2012, DARES et Pôle emploi, Paris.

By the way, there is no reason that the situation would improve after June 2013. In the second half of the year, the impact of already programmed austerity measures should result in an increase in unemployment of an additional 200,000 persons minimum. The dramatic level of 3.7 million Category A unemployed should therefore be reached in France by the end of 2013, and probably a level of 5.2 millions for the combined categories A, B and C (in Metropolitan France).

Note on statistical categories

Employment seekers are persons registered with Pôle emploi. They are divided into various categories:

Category A: employment seekers who must undertake positive acts of employment search; unemployed;

Category B: employment seekers who must undertake positive acts of employment search, having had a short period of reduced activity (i.e. 78 hours or less during the month);

Category C: employment seekers who must undertake positive acts of employment search, having had a long period of reduced activity (i.e. more than 78 hours during the month);

Category D.: employment seekers not compelled to underetake positive acts of employment search (because of an internship, of on-the-job training, of illness…), without employment;

Category E: employment seekers not compelled to undertake positive acts of employment search (for instance, if under an aided contract), having an employment.



It is clear that such a level of unemployment will considerably increase the charges weighing on businesses, unless the government goes for a considerable decrease in benefits, which would have yet another depressive effect on the French economy. In fact, France is confronted with two equally unpleasant alternatives.

Either it decides not to modify the budget plan for 2013, and then it will be largely incapable to reach its target of a 3% deficit in 2013, and also probably in 2014. This is what the IMF actually advised the French government! But, the uncontrolled increase of the debt will make the rating agencies fret, and France must expect to be downgraded again in the second half of 2013. The failure to reach a global agreement on a labor market reform, which is now looming, would certainly encourage rating agencies and financial markets operators in their pessimistic view of the French situation. Moreover, France will have to endure the competition coming from countries practicing the notorious wage deflation (Italy and Spain). The competitiveness of the economy will degrade during 2013. Then, in addition to the budget deficit, trade deficit should therefore also increase during the years 2013 and 2014. The inefficiency of austerity policies will then come to full light, but without an alternative policy emerging in the present state of affairs.

Alternatively, the government makes deficit reduction its priority for good, but it must then take complementary austerity measures, which will depress economic conditions even further. We know that the probable value of the multiplier of public spending is way above 1. Traditional econometric model were using a multiplier between 0,5 and 0,7. Actually, the multiplier is right now of 1,7 for Spain and 2,1 for Italy. It would be safe to assume a value o at least 1,2 for France right now and even this value could be underestimated. The recession then will be relatively important over the second half of 2013 and in the year 2014 and unemployment will continue to increase. It is not to be excluded that the government will then embark on a policy of salary deflation, the consequences of which will be quite dramatic on the French economy.

There exists no solution for the latter in the conditions currently prevailing in the Eurozone, caught in the logic of a continuous drive to ever more austerity. The absence of economic perspectives within the Eurozone, and worse than mediocre perspectives in the rest of the world will combine to drag the French economy from a recession to the edge of depression. The “political risk” will go on increasing, as it will in the other countries of the south of the Eurozone. The belief that interest rates will not reflect it in the end is profoundly illusory. The French economy is compelled either to keep the Euro and go down in 2013 and 2014 or exit the Euro zone if it wants to resume growth.

The present text is a revised version of the last part of the paper given at the seminar in Kazan (Russia).

See the French version : Zone Euro : pourquoi le potentiel de croissance est-il faible dans le reste du monde ? 

  1. James Mayger, « Japan Exports Slide Even as Yen Decline Improves ’13 Outlook » Bloomberg, URL : []

Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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