Tuesday, February 13, 2007

The Eurozone

Edmund Phelps has a piece in the WSJ about why he feels Continental Europe is growing much slower than the United States:


Germany, Italy and France appear to possess less dynamism than do the U.S. and the others. Far fewer firms break into the top ranks in the former, and fewer employees are reported to have jobs with extensive freedom in decision-making--which is essential at companies engaged in novel, and thus creative, activity.

I'm actually kind of split here.

First, I have the feeling, right or wrong, that Europe lacks the capitalist culture of the United States. This observation is purely anecdotal. In our international business class, our huge project was to take an American company and develop a business plan for entering a foreign market of our choice. The vast majority of students in the class were international students - I think there were about 5 or 6 Nrotheastern students in a class of 30. As it turned out, out of six groups, something like three decided that they wanted to do a business plan for Starbucks - ironic because the assignment was handed out right after we did a business case analyzing Starbucks' success in emerging markets. Even the international kids in my group seemed awfully gung ho about doing a projects surrounding Starbucks. I eventually conviced my group to explore something a little more creative, and talking to the other Northeastern students in the class, a few of them had similar experiences.

Now, obviously something else might've and probably was the cause of that. But it was just so striking to me that these students seemed to lacked the creativity in looking at business that many American students in the class obviously had. It truly seemed as though it was a subject matter that they grew up just never thinking of.

There is no "Apprentice" in Italy. In the United States, we tend to glorify business leaders such as Donald Trump, hailing them as self made geniouses. In Europe, the rich are looked at with much more disdain and envy, which is, I feel, at the root of their social welfare system. In looking at Europe's economic history, this makes sense. Socialism spread like a wildfire in Europe in the 1800's but did not hold too much sway in the United States. Europe has an aristocratic legacy dating back centuries. Ever since America's inception, there was always a sense of income mobility: Abraham Lincoln was born in a log cabin, a child of two uneducated parents. Even though Europeans are now roughly as mobile as families in the United States, it is not as ingrained in their culture which leads them to view the rich with sketicism and profits as a sort of negetive externality.

So I think that the author has a point. On the surface, Europe does seem to lack the dynamism of the United States. The technology was always there, but it was American firms that pioneered the internet; Apple that invented the iPod.

And yet, I think the view of the Eurozone's "lagging" growth is a bit incomplete. The much of the reason why growth in consistantly a few percentace points better in the United States than Europe can be attributed the the fact that the United States' population is growing (due to immigration and the propensity for immigrants to have larger families), which much of Europe's population is either stalled or slowing. If you look at GDP growth per capita instead of simply GDP, you see that growth in Europe and the United States is actually rather similar.

Which is in itself slightly bewildering to me. I agree with Phelps that Euope lack the capitalist culture of the United States. I also think anyone even mildly economically literate can see that much of Continental Europe's economic policies are largely backward and misguided. Tariffs remain high, welfare spending is exorbitant, labor market flexibility is next to nil. I mean, check out some of the proposals from Ségolène Royal, France's front runner in their presendential race:

In a two-hour speech to about 10,000 supporters north of Paris, she laid out a 100-proposal platform, pledging to raise pensions, to increase the minimum wage to €1,500, or about $2,000, a month and to guarantee a job or further training for every youth within six months of graduating from university.

She also said that randomly selected citizens' juries would watch over government policy and that juvenile delinquents could be placed in educational camps run by the military.

As if to preempt her opponents on the right, she stressed throughout her speech that her ideas had been nourished in 6,000 debates with citizens throughout France, a method she has called "participative democracy."....

A substantial part of her speech was dedicated to social and economic issues, on which Royal took a hard-left line.

"The unfettered rein of financial profit is intolerable for the general interest," she said. "You told me simple truths. You told me you wanted fewer income inequalities. You told me you wanted to tax capital more than labor. We will do that reform."

Royal said she would tax companies in relation to what share of their profits is reinvested in equipment and jobs, and what portion is paid to shareholders. She also promised to abolish a flexible work contract for small companies and hold a national conference in June on how to increase salaries.

Indeed, she seemed to have something to offer to most groups in society without saying how much the combined measures would cost: Under her presidency, she said, young women would get free contraception, all young people would get access to a €10,000 interest- free loan and the handicapped would see their benefits rise...

This kind of policy has to manifest itself somehow, and it does: continental Europe has insane, double digit unemployment and sub-par productivity. But why is their GDP growth per capita largely in line with the United States, a much more dynamic economy without the yoke of bloated welfare systems?

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