Business, Finance & Economics

Opinion: Pity poor Europe


LONDON, U.K. — Pity poor Europe. We tell them, “thanks, but no thanks” after they offer to help us topple the Taliban in the wake of September 11, then we berate them for not wanting to throw their troops into the misguided Iraq War. Then we alternately vilify or lionize their universal healthcare systems for our own narrow political purposes.

Now, ahead of the G20 Summit in Pittsburgh, Washington is unhappy at European lobbying to curb excessive risk taking in the global economy. This argument is superficially focused on the question of whether governments should put a cap on bonus payments to bankers. France and Germany support this, and (deja vu!) the British agreed with us that it’s a bad idea.

The bonus debate may be the closest thing to drama in Pittsburgh, which will otherwise feature a lot of press conferences and boring joint communiques. Yet the old G7 economies — the U.S., Japan, and Europe’s major powers — enter this meeting quite divided over how to apportion blame for and how to navigate out of the global economic crisis. They disagree, too, on climate change, on stimulus policy and on how deeply to adjust international institutions like the International Monetary Fund and World Bank to the rise of China, India and other emerging powers. With the exception of Britain, Ireland and Spain — three European economies who, like us, built their economic houses of straw — the major EU economies look relatively good right now. Just as they didn’t grow quite as fast during the bubble, they haven’t declined as quickly after it popped. Thanks to social safety nets, for instance, they have  more recession-proof societies (i.e., they had cast off fewer of the lessons of the Great Depression than America). Since regulation makes it harder for companies to lay off European workers, and because when they do families rarely wind up on the street, economic metrics look a bit better. As wise piggies, you might say, they built their houses of brick.

But economists see a problem in that analysis. In terms of joblessness, bankruptcies and GDP growth, most of the economies of the EU have fared a bit better (or a bit less bad, more accurately,) than the U.S. or Britain. But the long-term picture is dramatically different.  

For a variety of reasons, the medium- and long-term picture for Europe’s major economies — what economists call their “potential growth rate” — is quite grim. The so-called eurozone — which comprises the 16 countries of the EU using the euro as a currency — faces a far steeper decline in their relative economic strength than the United States.  At the core of the problem is a mixture of demographic reality and structural inflexibility which economist believe will significantly reduce the “potential growth rate” of the eurozone.

Potential growth refers to the rate at which any country (or trade bloc, in the EU’s case) can grow annually without triggering a serious bout of inflation. For the U.S., before the crisis, that figure was 3 to 3.5 percent. For Britain it was 2.8 to 3 percent, for China 8 percent, and for the Eurozone 2 to 2.5 percent. New figures, albeit hotly debated ones, have calculated some of the long-term damage done by the crisis. China, not surprisingly, remains at 8 percent (if not higher). The potential growth rate of the U.S economy post-crisis might have lost a full percentage point or more, economists believe. A Brookings Institution study released earlier this month puts the new American figure at 2.25 to 2.5 percent annually. If that holds true, all economic calculations of what the U.S. can afford in terms of national debt and government spending go out the window (and they head for the pavement, not the sky).

But economists are even more pessimistic about the eurozone economies. Already facing the double whammy of declining populations and rising percentages of retirees, now the continent’s economic engine is seen as faltering. The expectation that the euro will continue to rise versus the dollar as China and other major creditor nations diversify away from the house of cards Alan Greenspan built won’t help Germany, France or Italy, all heavily dependent on exports. Add this up, and you have an economic consensus emerging that pegs potential growth at just barely 1 percent.

One percent growth isn’t a cataclysm, but it is something akin to permanent recession.  
In the last two major previous downturns (1982 and 1991), near-miraculous productivity rises saved the day for both the U.S. and major European economies, preventing a permanent fall in potential growth. In the early 1980s, it was the shift from heavy industry to a more service-based economy. In the early 1990s, of course, it was the internet.

If anyone has any bright ideas for a third revolution in productivity, I’m sure the world’s leaders would be all ears.