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2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994-1990 1989-1980 1979-1972 What is
causing the slow economic growth and high unemployment in Europe? When
the Swedish people voted resoundingly last month against adopting the
euro, some commentators took it as a sign that commitment to the
European Union itself was weakening. If economies in Europe were growing rapidly, many say, the Swedes would not have hesitated. But European economies will probably grow by only 0.5 percent this year on average, and unemployment is hovering around 8 percent or 9 percent. In France, all the talk is about cutting social programs to bring the national deficit down to 3 percent of gross domestic product, as demanded by the European Union. Is Europe self-destructing? Probably not, but it seems at the least to be shooting itself in the foot, and not for the reasons widely accepted in the United States. "There is an official view here of what is wrong with the economy," said the economist Jean-Paul Fitoussi, who runs a Paris research center, the Observatoire Francais des Conjonctures Economique. "The official view is all about inflexible labor and product markets." That view is held by the European Central Bank, the European Commission and the International Monetary Fund and by many influential American observers. "But then there are the facts," Fitoussi said. The facts are these, and they may surprise many Americans. By conventional measures, Europe is as productive as the United States, so the evidence does not readily support claims that the Continent is technologically behind. Exports from France and Germany, for example, are highly competitive with the rest of the world's, and, unlike the United States, both countries export much more than they import. Maybe more surprising to American observers, labor costs as a proportion of GDP have been substantially reduced in Europe over the past 20 years. French wage costs, for example, fell nearly 11 percentage points, from 78.5 percent of GDP in 1980 to 67.6 percent in 2000. German wage costs also stand at 67.6 percent of GDP. The U.S. level, meanwhile, fell much less, from 70.7 percent to 68.3 percent, the same as the average for the 15 European Union members. A lot of the restructuring that people are calling for has in fact already occurred, said Pascal Petit, an economist at another research center in Paris, the Centre d'Etudes Prospective d'Economie Mathematique. Even temporary work is way up in France. Instead, economists like Fitoussi and Petit argue that the high-interest-rate policy of the European Central Bank has been a major cause of slow growth and unemployment yet its impact is almost always treated as a minor influence in the public discourse in both Europe and America. Meanwhile, in the United States, the loose monetary policy of the Federal Reserve under Alan Greenspan is given a lot of credit for America's boom. If Europeans are so intent on adopting the U.S. economic model, why do they hesitate to adopt its monetary policy? "You have to look at the history," Petit said. "The Federal Reserve in America is required to pay attention to the level of employment. The European Central Bank is not." And he adds that when Europe's central bank was formed, in the mid-1990's, the tight policies of the seemingly infallible German central bank were especially popular. In addition, the budget reductions forced on France by Europe's rules are further restraining economic activity at a time the French economy may not be growing at all. It is exactly the wrong medicine, Fitoussi said. There may well be other causes of high unemployment. A group of economists meeting in Seville, Spain, two weeks ago cast further doubt on the "official" European view. Led by representatives from the University of Utrecht and the University of Amsterdam, they did not deny that high or rigid labor costs may impede employment somewhat. But they found that the higher per-capita GDP in the United States overwhelmed all other factors in accounting for unemployment in Europe. With a higher GDP, American consumers spend relatively more on labor-intensive services; their European counterparts spend more of their family budget on necessities like clothing and food, which require less labor. So, again, strategies that promote growth and raise per-capita GDP may be important in raising levels of employment. Clearly, this is a complex set of issues that yields no simple answers. Other policies may also be needed. Americans typically work more than Europeans, for example, so maybe the European welfare state needs further streamlining. On the other hand, Americans may work many more hours not because they want to but because they must, to meet rising health care and education costs more of which the state pays for in Europe. So America's vaunted standard of living may not be so much higher than Europe's after all. What is clear is that faster growth, however it comes, would work marvels in Europe. The welfare state would be more affordable because tax revenue would rise. Health care revenue is based on wages, so if wages rise, the health care system would be easier to finance. As Europeans got richer, they might spend more on services that employ more people. But Fitoussi remains a pessimist, saying that tight monetary and fiscal policies will remain in force. Stubbornly self-defeating economic policies are now seriously testing the will of Europe. At the least, there will be some bumps along the road. |
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