The Great Recession and the Need for Structural Reform

Sammanfattning: This thesis acknowledges and explores consumer sentiment and behaviour beyond the traditional dogma of rational agents. The hypothesis is that European consumers have become increasingly worried and/or affected by structural problems since the Financial Crisis, leading to a "wait-and-see" situation that prolongs the economic downturn. The structural problems include high government debt levels, government budget deficits and on a root-cause level: low competitiveness. Our results indicate that low competitiveness and government budget deficits have put a strain on consumer sentiment and consumption growth in many European economies since the financial crisis. Competitiveness levels below the median of the European OECD economies indicates lost consumption growth per capita of 0.5% per year for the GIPS-countries on average. The negative effect of highlighted structural problems is not captured by changes in disposable income, suggesting that it is primarily psychological. Consumer sentiment levels' strong reflection of structural problems suggests that politicians and central bankers might have underestimated the intelligence of the consumer. In contrast to traditional theories, consumers seem to not only care about how much money they have in their pockets at the end of the month, but also about what they conceive as unsustainable economic conditions.