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The European Union's economic death spiral

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 U.K. and 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 United States and the United Kingdom, a combination of tax cuts, labor-market reforms and deregulation starting in the 1980s broke the downward spiral in which the European Continent still finds itself. In the 1990s, the United States 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 PM 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.

Dit opiniestuk van Brian Carney verscheen in The Wall Street Journal, alsook op, en

Meer teksten van hem op

3 Reacties:

At 14:18 Eddy De Vlieger said...

De angst om economisch geen grootmacht meer te zijn, drijft de Europese leiders steeds verder in hun zoektocht naar extra Europees BNP. Dat de Europese burgers geen pap lusten van een uitbreiding met Turkije en Kroatië zal hen worst wezen. De angst dat de Europese economie binnen 20 jaar op wereldniveau niet meer tot de groten zou behoren, is hun ergste nachtmerrie. De Europese leiders hebben altijd al macht en aanzien gehad en willen dit nu ten koste van alles in stand houden. Dat de uitbreiding de onbestuurbaarheid nog zal vergroten neemt men er bij. Dit terwijl de burger meer gebaat is met een beter functionerende kleinere unie. Een kleinere unie waar de burger ook voor kiest. Maar onze Europese leiders achten hun persoonlijke wensen duidelijk belangrijker dan hetgeen de burger wil en vergeten gemakshalve dat ze volksvertegenwoordigers zijn. Als ik naar de daden van de Europese parlementairen kijk denk ik zelfs dat de meeste niet meer weten wat volksvertegenwoordiger zijn eigenlijk inhoudt.

Vandaar: niet meer uitbreiden, niet meer groeien in kwantiteit, maar kwaliteit verhogen! Meer interne hervormingen dus dan externe wingewesten inlijven!

At 17:11 Hugo said...

Vincent, ik begrijp dat je pogingen blijft ondernemen om de Europese Unie (of de EUSSR volgens uw teksten) af te breken en af te schilderen als iets slechts, zonder nuance. Natuurlijk moet je je dan in de eerste plaats informeren bij Britten, Nederlanders en Polen, de drie meest Eurosceptische landen van het moment, maar ik betwijfel of jij wel de juiste feiten en cijfers aanhaalt. Volgens dit artikel kloppen jouw cijfers niet.

Of gaat het misschien om een iets ouder artikel van die Brian Carney dat je nu pas op je blog gesmeten hebt omdat je zelf geen inspiratie had?

At 16:49 Anoniem said...

Thank you. Please keep blogging.

The US tax wedge data is somewhat misleading, since much of the US federal government spending was funded by foreign debt and monetary expansion. As a spending percentage of GDP, total govt expenditure in economy was significantly higher than 26% revealed by the tax-wedge.

This strategy fueled economic 'growth' but in reality it was a lot of mal-invesqtment, and the bill came due in 2007.


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