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2005-05-15 Europe

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Posted by tipper 2005-05-15 13:29|| || Front Page|| [3 views since 2007-05-07] Top

#1 Registration required. Not gonna happen.

How about a taste of what it said, tipper?

Posted by Barbara Skolaut">Barbara Skolaut 2005-05-15 15:32|| 2005-05-15 15:32|| Front Page Top

#2 Ask and ye shall receive:

BRUSSELS--Is the European "social model" doomed? It's a question that comes up with increasing frequency as unemployment across Western Europe has climbed into the double digits and economic growth has ground to a virtual halt across much of the Continent.

Updated GDP figures for the euro zone came out last week, and growth in the first quarter was a disappointing 0.5%. Last month both the European Commission and the European Central Bank cut their annual growth forecasts for the euro zone to 1.6% from 2%, and that ugly word recession is in the air.

The European Union's much-ballyhooed "Lisbon Agenda"--which was supposed to revive growth in Europe--was really not an agenda for reform at all. It was, instead, simply a statement of nice things the EU would like to see happen to the European economy to help it compete with the U.S.--such as raising employment levels, increasing R&D spending, and so on.

Unfortunately, but not surprisingly, almost none of those things have happened, and halfway through the 10-year timetable of "Lisbon," the European economy is in at least as bad a shape as it was when Lisbon was announced in 2000.

Given that Europe's streak of economic underperformance can now be measured in decades, perhaps a better question to ask is: Why does anyone think that a system of generous welfare benefits, high taxes and harsh restrictions on hiring and firing would ever produce anything like a dynamic, growing economy? Why does anyone assume that there is such a thing as a "European model," rather than just a collection of ill-conceived policies having a predictably depressing effect on the economy and job creation?

Of course, Europe did have growth, once. Indeed, for 25 years or so after World War II, European growth was something of an economic miracle, bringing countries like Germany out of hyperinflation and poverty into the first rank of world economies. Along with Germany, Britain, France and Italy rank among the world's biggest economies; and the European Union, considered as a whole, rivals the U.S. for the title of the world's largest economy.
In other words, per the conventional wisdom, Europe had low unemployment and high growth in the past, so it can again. Unfortunately, the argument is wrong. A fundamental change occurred in Europe between the salad days of the 1950s and '60s and today, and Europe never recovered. In a word, the 1970s happened.

In 1965, government spending as a percentage of GDP averaged 28% in Western Europe, just slightly above the U.S. level of 25%. In 2002, U.S. taxes ate 26% of the economy, but in Europe spending had climbed to 42%, a 50% increase. Over the same period, unemployment in Western Europe has risen from less than 3% to 8% today, and to nearly 9% for the 12 countries in the euro zone. These two phenomena are related; in a country with generous welfare benefits, rising unemployment increases government spending rapidly.

But here a third element enters the picture, creating a feedback loop that explains why the Continent will never regain the halcyon days of postwar growth. As spending goes up, higher taxes must follow to pay for those benefits. But those taxes, usually payroll taxes, must be collected from a shrinking number of workers as jobs are cut. This in turn increases the cost of labor and decreases the benefit of working rather than collecting unemployment or welfare checks. As Martin Baily, a former head of Bill Clinton's Council of Economic Advisers, has described, this can lead to a spiral of rising taxes and falling employment, especially when welfare payments are high, as they are in most of Western Europe.

The result is predictable--more jobs are lost, the tax base shrinks, and taxes must go up further to pay for yet more welfare benefits, making work less attractive and not working more attractive.

In the 1970s, unemployment went up everywhere in the developed world. But on the Continent, it never went down. Britain and the U.S. both saw major economic reforms in the early 1980s and subsequently recovered from the '70s. The Continent did not, and it's endured the pain of that lost decade ever since. As the nearby chart shows, growth has gone up a little at times, then back down, but unemployment in Continental Europe has remained stuck in a narrow range for three decades.
Western Europe jumped the track and fell into an economic ditch in the 1970s along with the rest of the world. But the Thatcher and Reagan reforms that pushed Britain and the U.S. back onto the rails were never tried on the Continent, and most of those countries have been spinning their wheels ever since.

Rather than ask whether the "model" is doomed, it would be better to question how it ever attained the status of a model at all. The welfare state worked in Europe for two decades because so few people needed it; growth was strong, employment high and actual benefits paid were low. When the world economy hit a speed bump following the collapse of the Bretton Woods arrangement in 1971, both government spending and unemployment went up, and the system of incentives and benefits now enshrined as the "European model" was tested and found wanting. The result is permanently higher unemployment and taxes, a nasty mix.

In the U.S. and the U.K., a combination of tax cuts, labor-market reforms and deregulation starting in the 1980s broke the downward spiral in which the Continent still finds itself. In the 1990s, the U.S. added welfare reform to the mix. Unfortunately, the prospects for Europe are not particularly bright right now. German unions--and even some members of the German government--have in recent weeks taken to denouncing American capitalists as "locusts" and "bloodsuckers." Italian Prime Minister Silvio Berlusconi, perhaps the only politician in Europe who counts Ronald Reagan as a hero--and admits it--just had his coalition emasculated by special interests at home.

Sadly, it appears as if Europeans will be watching reruns of their own version of "That '70s Show" for years to come.

Mr. Carney is editorial page editor of The Wall Street Journal Europe.

Posted by Frank G">Frank G 2005-05-15 15:36|| 2005-05-15 15:36|| Front Page Top

#3 btw - I've never had any problems with WSJ/OP registration coming back to bite me in spam, etc.....

Posted by Frank G">Frank G 2005-05-15 15:43|| 2005-05-15 15:43|| Front Page Top

#4 Hmmm, '70's, high inflation, high unemployment, malaise - no wonder the Euro's like Jimmy Carter!

Posted by DMFD 2005-05-15 15:50|| 2005-05-15 15:50|| Front Page Top

#5 Europe, or as the reality shows it already by Eurasia, will continue to falter and recede economically until or unless a more free market system is implemented. The welfare state is so entrenched in the Europe mindset that it will take almost a major catastrophe, either an economic downturn (recession/depression) or a terrorist strike on the order of 9/11, to give the people/peasants enough courage to demand a major change.

Europe is dying in demographic terms. With birthrates well below replacement, and combined with large immigration flow from Islamic countries, Europe will cease to be Western in very short number of decades (20 - 30yrs). The only hope is for the populations of these countries to demand their leadship develop some backbone and deal with the facts that are so plain to see...End welfare as they know it...

Posted by Constitutional Individualist 2005-05-15 16:09|| 2005-05-15 16:09|| Front Page Top

#6 (http://bugmenot.com/ is just the ticket. Quick and easy to use, usually gets you in, anon, in under 15 seconds.)
As far as the European economy goes, their troubles are even deeper than socialism, and go to the very root of their legal system: Roman (and Napoleonic) Law instead of Common Law. In this case, the assumption that "unless something is authorized by law, it is illegal", is just the opposite of the Common Law assumption, and just destroys innovation and initiative--two things growing economies need. Take something silly, for example, Pet Rocks. No law against them in the US, so if people want to buy them, okay. So hundreds of people are employed in finding them, packaging them, shipping them and processing payment. For rocks. But there is no way you could do that in continental Europe. The government would never *permit* you to sell rocks to people--it is nonsensical. So you would never hire hundreds of people and make millions of dollars, half of which is paid in taxes. Because some bureaucrat thinks it is a silly idea, *you* can't do it. Which kills many small businesses before they even start. Britain, on the other hand, has a leg up on the continent, since they are still to some degree under Common Law. So what holds them down is Brussels and Socialism alone, which is why they are doing better than most.

Posted by Anonymoose 2005-05-15 16:10|| 2005-05-15 16:10|| Front Page Top

really not an agenda for reform at all. It was, instead, simply a statement of nice things the EU would like to see happen

Yup, that pretty much sums up the EU.

When they stop saying and start doing, let me know. Until then, *yawn.*

Posted by Barbara Skolaut">Barbara Skolaut 2005-05-15 17:09|| 2005-05-15 17:09|| Front Page Top

#8 They never learned the basics of Thatcherism/Reaganomics:

Tax it and you get less of it.

Subsidize it and you get more of it.

They tax the productively employed.

They subsidize the unemployed.

So the get less of the former, and more of the latter.

Hello? Anyone awake over there in Western Europe?

Why the hell is anyone over there wondering what happened? Its all there plain as day.

Posted by OldSpook 2005-05-15 17:10|| 2005-05-15 17:10|| Front Page Top

#9 The WSJ is wrong both on the cause of the Euro-malaise and when it started and frankly I'm surprised RBers would buy this piece of socialismisthecause PCism. The reality is that socialism (more properly welfarism) works (sort of) in small cohesive societies that characterised Europe until recently. One has only to look at Sweden over the last 50 years to know this is true. Up until the early 1990s Europe was achieving similar and many cases better productivity growth than the USA. Things started to go wrong about 10 years ago. While European 'harmonization' has increased in that period there hasn't been a significant increase in socialism. More socialism is clearly not the cause.

What changed was that their societies became progressively less cohesive as immigrant levels increased. Rather than the societies turning the immigrants into model Europeans. The immigrants are turning the societies more Algeria-like or where-ever else they came from. This is the cause of Europe's decline over the last 10 years or so.

Posted by phil_b 2005-05-15 17:33|| 2005-05-15 17:33|| Front Page Top

#10 phil_b

Well, another problem that socialism has, even in small cohesive countries, is that it increases economic inertia. The transition from the industrial age to the post industrial age has been a real bummer for the Euro zone and for Japan for that matter (many parts of the US are having problems with it as well).

Posted by mhw 2005-05-15 17:53|| 2005-05-15 17:53|| Front Page Top

#11 "Subsidize it and you get more of it."

That's what we were handed for providing the defense of western Europe for 50 years. We subsidized non-defense efforts of the Euros and we got more non-defense efforts. If any real threat shows up, they no longer have either the resources or the will to face it. The French government talks tough about a European alternative, but the budget numbers never show up, nor will. Good luck boys, bye bye.

Posted by Jeper Elmeath5805 2005-05-15 18:24|| 2005-05-15 18:24|| Front Page Top

#12 phil_b: the deception of Sweden was that it was a country with not one economic system, socialism, but with socialism and capitalism. The socialist side kept spending more and more money until it could no longer support itself, even with obscene taxes, then it began to squeeze the capitalist side, that is, the Swedish armaments-export side, who had been exempt from the socialist tax structure. But the socialist side kept demanding more and more resources, until finally they decided to kill the golden goose by nationalizing the arms industry. This was the brainchild of Olaf Palme, who shortly thereafter discontinued that proposal with a bullet to his head. And though the official investigation proved it was a lone, madman assassin, others are not so sure. In any event, socialism has been on the decline in Sweden ever since, though leaving them, relativistically speaking, one of the poorest nations in Europe.

Posted by Anonymoose 2005-05-15 19:48|| 2005-05-15 19:48|| Front Page Top

#13 IIRC, didn't Sweden's Volvo plants have something like 13% absenteeism every day for a while? Why bother to show up when your job's secure and you won't see much of your check anyway?

Posted by mom 2005-05-15 19:52|| 2005-05-15 19:52|| Front Page Top

#14 Oh, and the Swedes themselves say so:

http://www.johannorberg.net/pdfs/MPS.pdf

Posted by Anonymoose 2005-05-15 19:54|| 2005-05-15 19:54|| Front Page Top

#15 I meant this one:

http://www.timbro.com/euvsusa/

Posted by Anonymoose 2005-05-15 19:57|| 2005-05-15 19:57|| Front Page Top

#16 This report clearly shows a trend reversal in the mid-1990s in productivity in Europe versus the USA. Since then Europe has got steadily less productive relative to the USA. The overalll EU figures mask the fact that this has occured almost exclusively in western European economies as the new EU economies to the east has got more productive. If socialism is the cause then we should find more socialism since the mid-90s. As Moose points out the trend has been away from socialism. If this trend is socialism related then we have to conclude less socialism causes declining productivity and hence wealth. Clearly the cause lies elsewhere.

Posted by phil_b 2005-05-15 20:10|| 2005-05-15 20:10|| Front Page Top

#17 Contemplate these two contributing factors:
Germany: Reunification, since 1990.
France: Jacques Chirac, since 1995.

Posted by Tom 2005-05-15 20:53|| 2005-05-15 20:53|| Front Page Top

#18 phil b: the decline in socialism, more than anything else, has been a recognition of its failure and a stated desire to change. However, actual change has been very sluggish, as both the German and French leaders have been savaged for even their modest changes. Western Europe is still rife with socialism, and dreads competition with the East, where such things as the flat tax, limited worker compensations and loose regulation put intense pressure on the less efficient western economic regimes. You'll also note the unwillingness of the Frankenreich to submit to the economic controls they had earlier agreed to, wanting to continue spending beyond their means. But I agree that while socialism is a pestilence, it is just a symptom of a deeper philosophical problem that will hunt the continent for a long time, perhaps even dragging Britain down with it. That is the unwillingness of the elites to accept the notion that their power is derived from the governed--the people. The very idea that they *are* elites must be disposed. The EU Constitution is no place for petty bureaucratic rules, it should be a document of the people. Brief, concise and understandable by the man on the street. Rules for society that he can take home and post on a wall in a frame. Rules that do not define what government does, but what government is *forbidden* to do. Only when a man of humble origins, not just a Polytechnic graduate, can become a major political leader in Europe, will Europe really ever prosper. Imagine the outrage if such a proletarian tried to do that today.

Posted by Anonymoose 2005-05-15 21:54|| 2005-05-15 21:54|| Front Page Top

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