August 18, 2004

Interesting Economic News from Europe

One of the standard lines I get at work from my colleagues is about how "unfair" and "structurally misguided" our economy--and therefore our society--is, and how we need to shape our economy to be more like Europe.

Because, of course, a PhD in the humanities gives you keen insight to be a critic of economic policy.

So, just to be a pain, I'm forwarding this article from the IHT to a couple of my usual sparring partners, and it should be enough to get them to gag over their falafel and biscotti:

From the IHT:

When it comes to the economy, Europeans are worried. Growth may be good this year, but neither politicians, nor business executives nor consumers appear to have much confidence that the good news can last. If there is a crisis, it may be as much psychological as economic.

Perhaps the most revealing illustration of official pessimism came in France this year, after President Jacques Chirac's party suffered a humiliating rebuff in local elections.

Under pressure to shake up his government, Chirac moved the interior minister, Nicolas Sarkozy, to the finance ministry.

Sarkozy was widely perceived to be the most popular politician in Chirac's party, but he was also seen as a rival to Chirac if the president seeks a third term in 2007.

The move was seen as an effort to put Sarkozy in a post where his popularity was bound to atrophy. It may not have been Chirac's best move.

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.

But the fact that Chirac saw the finance portfolio as a way to dent his rival's appeal to voters reflected a reality of Europe, circa 2004.

The economic medicine widely prescribed for the major countries of Western Europe is fraught with political perils.

It calls for forcing through reforms that will reduce public pensions in the future, making people work longer before they retire and then get lower pensions when they do.

It also calls for making labor markets more "flexible" - that is, making it easier to fire workers.

Asked recently how he expected politicians to push through such measures, one European corporate leader, speaking on condition he not be quoted, painted a picture of governments enacting unpopular but needed reforms before being voted out of office. Then their successors could pass more reforms before they, too, felt the wrath of voters. He conceded that such a plan might not appeal to politicians.

The western European countries---in particular France and Germany--are in trouble. Ever heard that somewhat dirty joke whose punchline is, "Sorry, Saturday's your night in the barrel" ? Well, France and Germany's time in the barrel is about to begin. The article continues:

The causes of concern in Europe are basically that it has not kept up with the United States in terms of growth and that there is a demographic time bomb on the horizon, as an aging generation retires while expecting benefits that are far more generous than governments will be able to afford, in part because working populations are likely to shrink. . The newly expanded European Union, which now has 25 members, boasts that it has a larger economy than that of the United States. But the prevailing attitude about the new members from Eastern Europe appears to be fear. Many of the old members have delayed the day when workers from those countries will be allowed to emigrate to other parts of Europe. The new members themselves are seen as threats to export cheap goods and take jobs away. .

All bad news? Hardly: this is the IHT afterall.

But amid the gloom, there are signs of success. 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.

Here's the problem with their silver lining: how long can you continue to trade leisure for income without seriously constraining your ability to create new income? I'd much rather emphasize long term income growth, and take a smaller percentage of leisure as a function of income if income would continue to grow over time. And their breezy reliance on "extra workers" is the demographic horror story, as long as immigrants are not encourage to assimilate, as increasingly the problem on the continent. Headscarves, Jacques?

Posted by Steve at August 18, 2004 12:55 AM | TrackBack

Just think of the tragedy of teaching children not to doubt. Clarence Darrow (1857 - 1938)

Posted by: cash advance loan at November 21, 2004 02:37 PM
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