Mauro Guillen on European Recovery

guillenThe eurozone’s economy has begun a fragile turnaround since European Central Bank head Mario Draghi announced late last year that the institution would do “whatever it takes” to backstop the euro. For the first part of 2013, that meant the economy was still losing ground – but at a slowing rate. The region finally reversed course and grew by 0.2% in the second quarter. But don’t expect that quarterly figure to climb much above 0.5% over the next year or two, which means a jobless recovery is likely. Knowledge@Wharton spoke with Wharton management professor Mauro Guillen to see where things are heading.

An edited transcript of the conversation follows.

Knowledge@Wharton: The 18-month recession in Europe looks like it has ended, officially at least. In the second quarter, there was growth of 0.2% — not a huge number, but certainly better than going down. In addition, manufacturing expanded for the first time in two years. But is that likely to continue? What’s your view of what those numbers mean? And the growth certainly hasn’t affected unemployment very much, yet.

Guillen: As you know, unemployment is a lagging indicator, and it takes much more than 0.2% growth to bring unemployment down. Europe has been going through a double dip recession, so there was one immediately after the financial crisis. And then there was a second one, and it has affected some countries of course more than others, especially the southern periphery.

Now, is this likely to continue along that slow growth trend? Probably yes. I’m not expecting in the next year or two or three for growth to accelerate. I’m not expecting a third dip, either. I think growth will probably stay within 0.2%, 0.5%, 0.6% or so for the next year or two until all of the economies in the area make adjustments.

Knowledge@Wharton: One worry is that this could be a jobless recovery, so that you have some economic improvement in certain indicators, but the one that really matters to most people is unemployment. What do you think the prospects are for a jobless recovery?

Guillen: Well, it will be jobless to the extent that it is so timid, so slow, right? If these economies were growing now at 2% or 3%, then I think we would see very quickly much more improvement of unemployment. But you’re asking a very important question, which is, prior to the crisis in some of these countries we had certain sectors of the economy that were employing a lot of people: retail, construction and so on. There’s still a big question mark as to whether retail will recover quickly, and that’s a major employment area in Europe, as it in the United States.

I think there’s also a huge question mark as to whether construction or real estate in general will again generate a lot of jobs. I think it is better to be cautious about the job prospects because, again, not all of the adjustments have been made. Not all countries in Europe have regained the competitiveness that they lost over the last 10 years before the crisis hit.

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Originally Published September 18, 2013.