The rise before the fall of Europe’s crisis-stricken economies

Quick quiz: Amongst Greece, Iceland, Latvia, and the US, which country had the worst-performing economy over the last decade?  Perhaps not whom you’d expect:

That’s right, the US comes out worse than the three economies that have seen the most spectacular financial implosions during the crisis.  The key point isn’t the sluggishness of the US, but rather the quite remarkable (yet generally under-remarked-upon) advances of the other three economies in the run-up to the financial crisis.  It’s true that Latvians today are some 25 percent poorer than they were in 2007, a dramatic loss.  But even after this drop, they’re still 50 percent richer than they were in 2000; perhaps not that bad a deal.  Meanwhile, Americans today are about 10 percent richer than they were in 2000.

The graph below presents the same data but in US dollar terms rather than national currencies, i.e. after accounting for exchange rate movements.  Greece, Iceland, and Latvia all experienced considerable exchange rate appreciation in the years up to 2007, which allowed their citizens to buy more foreign goods with the same amount of domestic currency.

Since the crisis, the Euro, Icelandic Krona, and Latvian Lat have all fallen relative to the dollar, but only the Krona has dropped below its 2000 level.  In US dollar terms, Greek per capita income remains about double its real 2000 level.

There is some real suffering going on in these economies today, which shouldn’t be easily discounted.  But when assessing how steep their falls have been, it’s worth remembering just how sharp their ascents were in the years before the downturn.

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