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Slowly, Europe rises from the ashes

Hans Timmer's picture

European airports have finally reopened after ashes from Iceland's Eyjafjallajokull volcano shut down Northern Europe’s airspace for 5 days. This unprecedented disruption in European air travel (which isn’t over) highlights two interdependencies in today’s world:

  • First, just-in-time logistics have become really global. Not only did the flight cancellations hit travelers from all over the world (for example, the World Bank put 150 staff who were stranded in Europe on buses to Madrid so they could fly to Washington in time for the Spring Meetings), but more striking is that already, about 1 million flowers in Kenya had to be destroyed. A quarter of all flowers in Dutch florists come from countries like Kenya, Ethiopia, Ecuador and Israel. And now also Kenyan flowers are being flown to Madrid to be trucked to Northern Europe. Moreover, within days, cell phone makers in Asia ran out of components that normally arrived just-in-time by air.
  • Second, to stretch the argument a little, the European economy has been hit by a series of diverse shocks in small economies, which illustrates the diversity and interdependence within Europe itself. Iceland, with a population of around 300,000, caused a fallout in the rest of Europe with its banking collapse in October 2008. The double digit contraction of Baltic economies in 2009 and the current debt problems in Greece are other examples of the diverse shocks in the periphery of Europe that triggered questions about the desirability of bailouts by the center. Similarly, in the current situation some have already raised the possibility of support for the airline industry.

 

As has become a custom, economists are already estimating the impact on GDP of the ash cloud. The most plausible conclusion of those exercises is that the impact on GDP will be in terms of decimal points. While certain activities are disrupted, other activities are stimulated. And, unlike other cases of airline disruption (Avian flu, 9/11), it is unlikely that this volcanic disruption will cast a cloud over confidence indicators.

That doesn’t mean that we shouldn’t be worried about European GDP or that the question of when Europe will rise from its ashes is an irrelevant one. The origin of that question is just much broader, and unrelated to the volcano eruption. Europe was hit by the global crisis much harder than the United States, and more importantly, the recovery is more subdued (see graph).

Among the reasons behind this dismal performance are the European economy’s heavy reliance on the banking sector and the vulnerability of many countries in emerging Europe. According to many forecasts, including ours, European GDP in 2011 is expected to be still below its 2007 level. For sure, Europe will recover, but the recovery is way too slow. But perhaps we should not be that impatient. The Arabian Phoenix continued to rise from its own ashes in a 500 year cycle...

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