Sluggish growth in the Eurozone: Secular Stagnation versus Balance Sheet Recession

This paper investigates whether sluggishness in economic growth in the Eurozone following the Global Financial Crisis (GFC) is a permanent or cyclical phenomenon. Using a Vector Error Correction (VEC) methodology, we determine whether forces behind secular stagnation or a balance sheet recession explain sluggish postcrisis GDP and investment growth during the period 1999Q1:2015Q4. Our results indicate that post-crisis sluggishness in economic growth is mainly caused by forces underlying the balance sheet recession theory. Furthermore, we nd that, whilst the money supply has a large positive impact on GDP growth, lowering the real interest rate does not. All-in-all, we determine that the current state of the Eurozone economy is depicted by cyclical sluggishness.