Europe in the crisis, in search of lost time

by Marco Fortis*

For some time I have been saying that the crisis cannot be measured only using the GDP. There are other, equally crucial, variables that can get much worse than the GDP and that explain more fully the social hardship generated by the recession: for example, the decrease of consumption or of the wealth of the families, or the increase in the unemployment rate.

Countries like Spain or Great Britain, during the crisis, were able to reduce the drop in their GDP through strong adjustment on the import side, i.e. they imported less. But the consumption of the families has decreased sharply and unemployment has also grown enormously, much more than in Germany or Italy, which in 2009 had experienced greater decrease in the GDP, but caused mainly by the decrease in exports due just to that severity of the recession in their clients' countries.

Other economies, like The Netherlands, are experiencing a fall in private consumption much greater than that of Italy, but are able to mask the effects on the GDP through public spending, with a cost, however, that adds to the deficit; and it is no coincidence that Holland has been reprimanded by the EU just for this excessive government deficit, not in line with the commitments foreseen by the Fiscal Compact recently signed.

In the report I presented at the conference for the tenth anniversary of the Edison Foundation in November 2010, I illustrated very clearly how, in terms of the level of the rate of unemployment and the decrease in the wealth of the families, the economies that once prospered thanks to the real estate bubble and then suffered the most when it burst, including the U.S., Great Britain and Ireland, had gone much farther back in time than Italy, France and Germany, much more than appeared from the simple GDP data.

Now, the British weekly Economist (issue of 25 February-2 March) has also examined the effects of the crisis from our same viewpoint. Actually, the Economist has created an index, ironically dubbed «The Proust Index» (from the name of the author of In Search of Lost Time), that measures the degree of time lost by the different economies, based not only on the GDP but on the average of seven variables: in addition to the GDP they consider consumption, the stock markets, salaries, real estate prices, private wealth and the unemployment rate.

As we can see in the graph, the «Proust Index» takes the Italian economy back in time by about seven years with respect to 2012. We have gone back, in other words, to 2005. Germany has done better than us and has gone back economically only to 2008-2009, and France to 2006-2007.

All the other economies considered behaved much worse than Italy. Spain, for example, went back economically to 2004, Great Britain and Hungary to 2003-2004, Ireland to 2002-2003, Latvia and Portugal to 2002, the U.S. all the way to 2001-2002. The worst off are Ireland, which is back in 2000, and Greece, in 1999.

One thing should be clear. A statistical index in the Economist certainly isn't going to make us feel better. The crisis in Italy is and remains severe. The austerity necessary to bring public spending under control will push us back into recession in 2012 and unemployment, especially among young people, is becoming an explosive problem.

But it is a fact that during the crisis our private wealth has remained practically intact and, in spite of what some say, it is among the best distributed in the world. In addition the consumption of our families was much better than in many other economies. Indeed, from the beginning of the crisis to the present time, private consumption in real terms is only 1.1% lower.

In The Netherlands, for example, with respect to pre-crisis levels, it is down by 4.2%, in Denmark by 3.8%, in Great Britain by 5.5%, in Spain by 6.6%, in Ireland by 13.8%, in Hungary by 9.4%, in Estonia by 19%.

*vice-president of the Edison Foundation and professor of Industrial Economics at the Università Cattolica, Milan