Europe’s economy needs a real dose of pro-market reform

WASHINGTON — Recession has been eradicated in Europe. Hooray!

Or at least, that’s what recent headlines and grandstanding from political leaders would have you believe.

The second quarter of 2013 saw a return to a positive but anemic economic growth rate of 0.3 percent in both the euro area and the European Union (EU) after six quarters of negative growth.

But only when quarterly growth returns to 2 percent — the generally-accepted threshold for economic health — and remains there for some time will there be some cause for optimism. And that will happen only if we also address European economies’ fundamentals.

The problem with recent economic analysis in Europe is that economists, journalists and politicians have focused excessively on gross domestic product (GDP), an approach that often leads to oversimplified and inaccurate conclusions.

When armchair economists pontificate on ways to boost the economy, they often merely propose ways to boost GDP figures. Fiscal stimulus is typically first among these proposals. Though GDP is but one measure of economic performance, it is often confused with economic performance itself.

Stimulus is a correcting trend, in that it is, by definition, temporary. Therefore, its boost to GDP is quickly realized and quickly lost, along with the distorted perception of growth it creates. Sadly, though, that often leads to calls for more stimulus measures.

Instead, for lasting, real economic performance, European policymakers should undertake a heavy dose of pro-market economic reform.

That means liberalization of wide swathes of the economy — from repealing archaic laws that prohibit firing workers for poor performance, to indexing pension eligibility to life expectancy, to axing corrupt licensing bureaucracies that stifle competition in everything from taxicabs to pharmacies.

Of course, this is easier said than done. Every law, social program and industry regulation has a benefactor who will fight tooth and nail to keep it in place.

Unfortunately, European leaders and economists too often take the easy way out and simply propose fiscal stimulus to boost GDP figures and put off reform for another day.

A new report from the Levy Institute of Bard College exemplifies this approach. It derides efforts to reform Greece’s overregulated economy and bloated bureaucracy and instead advocates for a big dose of public spending.

The authors claim that Greece can be set on a path to prosperity, or at least to GDP growth, by creating an “expanded public service work program.” This is an unlikely scenario in a country renowned for corrupt political patronage and where government annually spends more than half of every dollar spent in the economy.

Pouring more money into Athens or any other European capital will not solve the deep structural problems that beset so many EU members and have been building for years and decades.

Europe badly needs reform. Just as importantly, it needs politicians with the courage to undertake it.

But first, they must get a clear picture of the real state of the economy. To do that, they should stop using GDP growth as the end-all, be-all measure of economic performance.

Otherwise, we may be in for further rounds of fiscal stimulus that produce a lot of hype and not much else.

Matthew Melchiorre is the Warren T. Brookes Journalism Fellow at the Competitive Enterprise Institute and the author of the new CEI report, “Praying for Growth at the GDP Altar: The Perils of Confusing GDP Growth Figures with the Real Economy.”