For more information about the woes of Club Med, click here.
Three years after the Great Recession officially ended, the United States is still struggling with high unemployment and a faltering recovery. But for the troubled economies across the Atlantic, where there is now open talk of the potential collapse of Europe's shared currency, the United States looks like a veritable economic success story -- perhaps even a place to look for lessons on how to manage the crisis.
As it turns out, the experiences of a few U.S. states in weathering the housing crisis that precipitated the 2008 global financial crisis can provide insight into the eurozone's struggles. The Sun Belt states of Arizona, Florida, and Nevada saw a big housing bubble and subsequent bust, much like Greece, Ireland, and Spain -- a group we call "Club Med." While both groups continue to suffer from the aftereffects of the crisis, the Sun Belt is recovering more vigorously than Club Med, which appears caught in a vortex of failing banks and deteriorating public finances. Here's what the United States got right -- at least compared with its European cousins -- in its economic recovery.
The Power of Market Adjustment
There are plenty of differences between the United States and the European Union, but they have one important aspect in common: Both are monetary unions. That means neither the Sun Belt nor Club Med can resort to currency devaluation to help weather the shock of an economic downturn by enhancing competitiveness and stimulating exports. Instead, their channels for adjustment are limited to cutting wages, increasing productivity, encouraging some workers to move across borders, and relying on transfers from stronger states within the monetary union. On these counts, as we illustrate here, the United States comes much closer to being an optimal currency zone -- where shocks affect some regions more than others but can be more easily managed. As a result, while the Sun Belt and Club Med both experienced downturns that were severer than those of their broader monetary unions, the Sun Belt has managed a stronger, more rapid recovery.
In the Sun Belt, average annual GDP growth rates from 2000 to 2007 were 1.3 to 2.4 percentage points above the U.S. average. The Sun Belt states' recessions were also steeper: In 2009, their respective GDPs declined between 2.6 and 3.4 percentage points more than the U.S. average. Underscoring the severity of their recessions, the Sun Belt states' GDPs remain between 6.9 and 9.1 percent below their 2007 peaks, even as U.S. GDP has recovered to its pre-crisis level.
Club Med also experienced a sharper boom than the rest of the eurozone. From 2000 to 2007, these economies grew between 1.4 and 3.4 percentage points higher than the European average. Their fall was also steeper than elsewhere in Europe: In 2011, Greece's real GDP was 13.2 percent below its pre-recession peak, Ireland's was down 9.5 percent, and Spain's was down a more modest 3.1 percent. Meanwhile, GDP for the eurozone as a whole was only 0.4 percent below its pre-crisis peak.
Importantly, the Sun Belt states have since returned to growth. In 2010 and 2011, their GDP grew between 0.8 and 1.1 percent, and recent indications suggest that growth is continuing. But the U.S. economic recovery -- modest and hesitant as it is -- is still a distant dream in Europe.
The Sun Belt's quicker housing adjustment has likely played a role in its relative success. Between 2007 and 2011, housing prices fell 43 percent in Florida and Arizona and 53.5 percent in Nevada. In contrast, home prices in Greece, Ireland, and Spain fell 12 percent, 33 percent, and 15 percent, respectively, over the same period. Declining housing prices can be expected to accelerate the recovery of housing demand and, perhaps even more importantly, force banks to recognize and process losses on their mortgage loans more rapidly. This occurred too slowly in Europe -- everybody pretended for too long that housing prices remained stable, nurturing concerns that banks in Club Med carried large, unrecognized real estate losses. This in turn deterred lending to Club Med by other banks and eventually led depositors to withdraw their money, accentuating the credit crunch.