was back to around the 2000 level, and Greece was 1.6% smaller. Ireland and Spain had large financial sector booms, but, they entered the crisis with very low public debt ratios, and low measured deficits. Low public debt made recovery easier because market perceptions of default risk were lower / confidence in government programs higher. Ireland recovered the fastest, avoiding an outright recession in 2010, as did Spain (Table 3), though the latter had several years of recession thereafter‐ possibly due to a slower recognition of and recapitalization of the banking sector’s problems. Since 2011, Ireland’s growth has been higher than those of the EU19 or EU28 (averages) while GPS performed worse until 2014. Consistent with the lack of a similar asset price cycle, Portugal had the smallest decline in GDP (‐3%) in 2009, but has had the second worst performance since 2008 (Greece having the worst); Portugal continued its historical pattern of unimpressive macroeconomic performance with ever‐worsening debt indicators.<sup>21</sup> In other areas of the world, debt to GDP ratios came down as GDP rose, but in the euro area there was a vicious cycle of deleveraging causing low demand among households and firms, in turn causing low growth and more deleveraging; while at the same time, banks were building their capital buffers. Some features of their growth performance are described below, followed by aspects of their policy packages and economic structure that explain differences in their growth paths.

**Table 3: Real GDP growth and projections (%)**

||2009|2010|2011|2012|2013|2014|2015|20<br>IMF|16<br>EC|20<br>IMF|17<br>EC|
|---|---|---|---|---|---|---|---|---|---|---|---|
|Greece|‐4.3|‐5.5|‐9.1|‐7.3|‐3.2|0.7|‐0.2|‐0.6|‐0.7|2.7|2.7|
|Ireland|‐5.6|0.4|2.6|0.2|1.4|5.2|7.8|5|4.5|3.6|3.5|
|Portugal|‐3.0|1.9|‐1.8|‐4.0|‐1.1|0.9|1.5|1.4|1.6|1.3|1.8|
|Spain|‐3.6|0.0|‐1.0|‐2.6|‐1.7|1.4|3.2|2.6|2.8|2.3|2.5|
|EA‐19|‐4.5|2.1|1.6|‐0.9|‐0.3|0.9|1.6|1.5|1.7|1.6|1.9|
|EU‐28|‐4.4|2.1|1.8|‐0.5|0.2|1.4|1.9|1.8|1.9|1.9|2.0|

Sources: Eurostat; IMF, World Economic Outlook April 2016; EC, European Economic Forecast Winter 2016.

_<u>A uniform investment collapse.</u>_ <u>The double crisis led to a sustained reduction in investment in all</u> countries, beginning in Ireland in 2007, and by 2014, no country had recovered the public and private investment ratios seen at the beginning of the decade. While Greece’s investment collapse is striking, private investment having fallen over 60% as a ratio to GDP between 2007‐14, the others have also had declines of 30% or more from peak to trough (in IS the peak was in 2006‐ at the height of the housing boom). Portugal’s experience is different in that it is the only country where the (public and private) investment rate has been falling _since 2000_ with the decline accelerating in the crisis. Non‐residential investment did not increase in the Euro area after the financial crisis as it did in other advanced countries in 2011; as the sovereign crises struck, there was a continued drop in investment. Banerjee, Kearns and Lombardi (2015) contend that in advanced countries such as Italy, Germany, France and Japan, investment had not recovered to its pre‐recession level, because profitable investment opportunities were lacking. Lower interest rates have not been sufficient to raise investment; at the same time, the cost of bank credit has also declined by less than might have been expected by looking at the monetary policy stance because of tightening standards by banks and regulators. On the demand side, firms with high debt levels may choose not to invest so recapitalizing banks is not sufficient. Thus, an early withdrawal of fiscal stimulus, slow regional growth, deleveraging, and reduced investment in an environment of high unemployment and falling wages, dampened aggregate demand so that expectations of low growth ended up being self‐ fulfilling<sup>22</sup> (see below).

> 21 European Commission, 2015b.

> 22 Summers, 2014.

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