The 2008 financial crisis and the Great Recession that followed have had devastating effects on the U.S. economy and millions of American lives. But the U.S. economy will emerge from its trauma stronger and widely restructured. Europe should eventually experience a similar strengthening, although its future is less certain and its recovery will take longer to develop. The United States is much further along because its financial crisis struck three years before Europe's, in 2008, causing headwinds that have pressured it ever since. It will take another two to three years for these to subside, but after that, U.S. economic growth should outperform expectations. In contrast, Europe is still in the midst of its financial crisis. If historical logic prevails there, it will take four to six years for strong European growth to materialize.
Such strengthening in both regions will occur for one major reason: the crisis years have triggered wide economic restructuring. Sweeping changes in government finances, banking systems, and manufacturing are under way, as are structural reforms in labor markets. All this is proving once again that global capital markets, the most powerful economic force on earth, can effect changes beyond the capacity of normal political processes. And in this case, they can refute all the forecasts of Western economic decline. Indeed, in the years ahead, the United States and Europe could once again become locomotives for global economic growth.
This is not to say that the crises were worth the pain; they most definitely were not. There is palpable suffering on both sides of the Atlantic due to unemployment and government austerity measures. It is tragic that so many people have lost their jobs and will never recover them. And it is socially corrosive that the crises have accentuated existing trends toward greater income inequality. But these events happened, and the subject being addressed here is their long-term impact.
The U.S. economy has been expanding-albeit in fits and starts- since the recession's trough, in June 2009. Europe, however, is on an entirely different timetable. Unlike those in the United States, Europe's financial systems did not implode in 2008. There were severe problems in Ireland and the United Kingdom, but capital markets did not revolt against Europe as a whole, and thus there was not a large fiscal or monetary response. It was not until 2012, when the sovereign debt and banking crises hit the continent in full force, that the eurozone confronted problems comparable to those that had afflicted the U.S. economy in 2008-9. As of today, therefore, the eurozone's gdp is still shrinking, and its recession may not have bottomed out yet. Having experienced its crisis first, the United States now faces a shorter path to recovery. Yet if European countries can restructure their economies to the degree that the United States has, there will be cause for optimism.
The economists Carmen Reinhart and Kenneth Rogoffhave argued that periods of economic recovery after financial crises are slower, longer, and more turbulent than those following recessions induced by the business cycle. The painfully slow recovery in the United States and the sharp economic stress in Europe corroborate this thesis. But history is filled with examples of countries whose economies grew stronger after financial implosions. Following the Asian financial crisis of 1997-98, South Korea accepted a tough bailout package from the International Monetary Fund, strengthened its financial system, and increased the flexibility of its labor markets; soon thereafter, it enjoyed an economic boom. In Mexico, the economy has performed well ever since the collapse of the peso and the U.S. rescue package of 1994. A similar phenomenon occurred in parts of Latin America following the sovereign debt crises there in the late 1980s. Although these financial crises were far smaller than the 2008 collapse in the United States, they followed the same pattern, with capital markets rejecting the old order-and then inducing major economic restructuring. …