Will Europe’s economy stand up to its old population and spiraling pensions costs? It might, or at least according to this article. Also mentioned is Chirac’s likely successor, Nicolas Sarkozy.
In office, Sarkozy has steered a complicated course of talking of reform, including efforts to increase working hours in France, while also pushing through a state bailout of Alstom, the large engineering firm, and blasting German companies that have threatened to move operations out of Europe if workers did not agree to longer hours.
His popularity does not appear to have fallen, and Chirac now seems to be trying to force Sarkozy to leave the government.
The writer is optimistic about Europes looming worker deficit:
European economies are on track to grow reasonably well this year, even if they are trailing the United States and much of Asia. European productivity growth has trailed that of the United States, but the gap narrows substantially when expressed in terms of hours worked. It can be argued that the difference reflects a quite reasonable preference for leisure over additional income. No doubt that is true for some, but many of the persistently unemployed in Europe would no doubt prefer less leisure and more income.
The demographic horror story – in which the structure crumbles because there are too few workers being forced to pay taxes to support too many retirees – may be oversold. There is an ample supply of extra workers available via immigration, and while there is great reluctance to let them in, and more than a little discrimination against hiring those that are already in Europe, that can be seen as an untapped resource.
And while it is true that European growth has lagged in recent years, in one important measure it has done reasonably well. Paul Krikorian of Bridgewater Associates, an American investment firm, calculates that since 1999 the United States’ market share of world exports has fallen by 4.4 percentage points.
Most of that went to China, but some of those lost exports were replaced by exports from European countries, whose share fell in 2000 but has since rebounded. Europe is running current account surpluses even as the United States runs record deficits.
So maybe we should look on the bright side:
It is true that Western European countries have huge debts looming over them in the form of promised but unfunded pension benefits for aging populations, and it is not at all clear how that issue will be resolved. But owing a lot to one’s own citizens – under laws that the government can change – may not be worse than owing real money to foreigners who have a right to repayment, the position the United States Treasury finds itself in.
2 thoughts on “Europe's economic woes: Oversold?”
IHT must stand for “I Hate Thinking”!
Strictly the US doesn’t owe real money to foreigners, as no level of government borrows in any currency other than greenbacks.
It’s not inconceivable that the Fed could repay the debt by just using its license to print money, as it did in the sixties and seventies to fund Vietnam and the Great Society. Obviously the bond market wouldn’t like it, but under extreme circustances, it would pass what one IMF economist I know labelled the “lamppost test”: Is this economic policy likely to see me lynched by the public?
Crucially, unlike Europe, America already has a federal co-ordinated economic policy. The ECB and EC lack the legitimacy and the formal power to control both fiscal and monetary policy; Witness the collapse of the Stability and Growth Pact.
Neither do most European governments have much stomach or power to implement reforms to labour markets and public spending as Thatcher did, curbing unions and cutting the growth in benefits payments. Given progress to date, Gerhardt Schroeder might have to rename his reform package “Agenda 2020”.
However, the real crux of my argument is that the levels of debt are higher in Europe. Compare the Italian, Belgian and Greek debt/GDP levels in excess of 100% with the US federal debt of about 4 trillion in an 11 trillion dollar economy. For the other big two of the Euroland, France and Germany, the level is somewhat higher, at about 65%.
Financial types are already looking seriously at whether Italy might go down the same road as Argentina and default. Some US states have done this in the past, but how can you tell the citizens of a European country that they are now bankrupt? How will the iron triangle of debt, demographics and deficits be straightened out then?
I’d be so happy if Sarkozy resigned for real. To me, he’s the king of the morons, just after Bush lol
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