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Unbundling the Great European Recession (2009-2013): Unemployment, Consumption, Investment, Inflation and Current Account

Campiglio, Luigi Pierfranco (2014): Unbundling the Great European Recession (2009-2013): Unemployment, Consumption, Investment, Inflation and Current Account.

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Abstract

The aim of the paper is to unbundle the main economic variables involved in the European Crisis and clarify their reciprocal relationship. The variable considered are: unemployment, inflation, consumptions, investments and current accounts. We use annual, quarterly and monthly data, until 2012, mid-2013 or an estimate of 2013 for the main European countries. The main results are the following: a) we show an emerging European economic divide, b) we detect a quasi-Okun relationship between investment and unemployment, c) we show the revival of the Phillips curve, especially in Germany, d) we test for the relationship between unemployment and the Government deficit, e) we show the existence of a relationship between unemployment and current account, f) we show how countries with high unemployment rate could bear the burden, g) we unbundle the unemployment-current account relationship, showing first the relationship between unemployment and final consumption, h) and then between final consumption, imports and corrent account, i) we show why a stable and growing inflation differential is not sustainable, but argue that internal devalution is not an effective policy, pushing inflation rates to a worrisome lower level and even outright deflation, l) we argue and show how to implement a more effective policy looking to the inflation differentials of specific products, looking to the case of Italy, m) we analyze the trade relationship between Germany and China, arguing that since the onset of the EMU and the successive membership of China to the WTO a European structural break occurred, with some European countries relying much more on exports rather than domestic demand. A more general issue of sustainability and replicability of the Germany’s export led growth model is raised.

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