Secular stagnation, yes or no?
At this moment there is quite some talk of ‘secular stagnation’, i.e. the possibility that demand is, considering potential supply, continually depressed. Reasons cited for such a situation are demographics (a large amount of middle-aged people who save too much), balance sheet recessions (private debts are too high and people and companies try to pay them off ), overly high exchange rates, a banking sector in distress or combinations of such factors. In the EU, the ‘Troika’ might be added.
But: does secular stagnation exist? Yes.
The first graph compares the Nordic countries with the Netherlands. Almost 25 years after the Scandinavian financial crisis of 1992 total employment in the Netherlands (1992 Q2 =100) is still way higher than in the Scandinavian countries. By far the larger part of this difference originated in a short period: during and directly after the Scandinavian financial crisis. No catching up took place afterwards (until 2008). It has to be added, however, that Dutch employment growth was to an extent enabled by a huge house price bubble (just like around 1980). One might ascribe Scandinavian stagnation to demographic factors, but looking at the last 15 years (graph 2) it shows that after the Great Financial Crisis of 2008 a comparable event took place, albeit this time with Sweden as the lucky country. A combination of (temporary) low interest and exchange rates enabled Sweden to escape the ‘bad equilibrium’ which for some reason or another (high private debts….) did lead to sclerosis and rigidity in the other countries. It has to be added, however, that Swedish employment growth is to an extent enabled by, well, you know the drill. Again, there is no sign of catching up and except for Sweden even little sign of a return to pre-crisis levels of employment.
The horrifying implication of this is we can’t exclude that even short-term policy failures trigger long-term stagnation. The relatively dismal development of Denmark is surprising, considering that this economy is supposed to be an example of (non-financial) flexibility. A crisis trumps flexibility. The multi billion Euro question is: do, at this moment in time, higher wages (instead of house price bubbles) trump a crisis?