Charles Wyplosz compares the two regions in this nice short paper.
This paper starts by laying down the facts of what led to the current European crisis in Section 2 and then attempts to disentangle the causes and effects in Section 3, in which the paper argues that Europe never had a chance to avoid contagion from the US. Trade and financial links—some of which operate through third countries, those in East Asia in particular—are simply too powerful. At the same time, domestic conditions were often critical in a number of countries where house prices had generated unsustainable booms, even though there is no European equivalent to subprime lending.
A comparison of the economic situation across the Atlantic cannot be complete without looking at policies. Section 4 looks at fiscal policies and provides currently available evidence that suggests eurozone governments have showed considerable restraint in using this instrument, something that may well be a consequence of the Stability and Growth Pact. While de facto suspended due to exceptional circumstances, the pact is bound to be reactivated when the situation improves. This may deter governments from undertaking active countercyclical policies. Section 5 examines monetary policy, showing that the European Central Bank (ECB) intervened promptly and massively to attempt to maintain liquidity in the money market. It is also argued that the ECB was more focused on (then high) inflation than on the (then largely unexpected) upcoming recession.
The last section offers some concluding remarks that may be interesting for East Asians. The quietness on the currency front—the raison d’être of the monetary union—is a remarkable achievement. It has not prevented markets from discriminating among countries, but this time through another channel: the markets for public bonds. Reasons why both the ECB and national governments have acted more prudently than most other developed countries are also discussed.
The author points things were not as bad in Eurozone. As in EU Households has limited exposure to financial markets, EU exports declined less etc. So both financial and trade channels were limited. But still EU faced severe recession. The economies collapsed like US and in same cases more than US. Eurozone entered recession late but impact was as great. Why is this? The author looks at all possible channels but fails to find a convincing reason. He says more detailed analysis would be needed. In the end he offers some possible reasons which need to be looked at:
Finally, a puzzling question: With limited direct exposure of households to financial events and a limited impact of declining exports, why is the recession so severe? Policy reactions have been subdued and late, but this does not quite explain the rapid decline in consumption and productive investment. An intriguing possibility is that demand was reined in simply because households and firms became overly cautious, thus triggering a self-fulfilling prophecy. This has led a number of observers to recall Keynes’ views on animal spirits.
Overall, a nice comparison of the two major economies in this crisis.