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Saturday, November 19, 2005

Sunnyside Up On Europe?

The Economist has an article this week which essentially pushes the theme that "the euro area's economies are in better shape than they look". This may well be true, especially if you think they are in very, very bad shape: everything is relative to the expectations of the beholder.

I find the article a frustrating one, since some of the points it makes are extremely valid, and yet overall it still fails to grasp the underlying 'big picture'.

Things they get right:

1/. Eurozone economies are picking up speed. (Although not all of them, Italy isn't, and picking up speed for how long?).

2/. By American standards eurozone growth looks sluggish.

3/. The main reason - for the extra US growth - is that America's population is increasing much faster than the eurozone's.

4/. Spain has enjoyed the fastest expansion in jobs, 4% a year since 2000. (And Spain has the fastest growing eurozone population, thanks to a 1.5% increase per annum from immigration).

5/. Employment has not grown particularly slowly in the eurozone: "employment has grown a tad faster in the euro area than in America whether one looks at the past five years or the past ten - a striking improvement over the decade to the mid-1990s".

6/. Europe has to learn to live with a shrinking workforce and an ageing population.

Things that it gets not quite right:

1/. The article doesn't look at comparative numbers for changes in productivity. This - eg - is obviously in favour of the US (although this is one of the things which may change).

2/. The Economist claims that "even in Germany there are now signs that domestic demand is stirring". This, I think, is hope against hope. As the article itself notes, "economists at HVB, a big German bank, reckon that private consumption probably shrank for the third quarter running, for the first time on record". I see no reason why this situation is going to change dramatically.

3/ Really they fail to distinguish between France and Spain on the one hand, and Germany and Italy on the other ( See my posts on AFOE here, and on Afem here).

Basically I think their conclusion - "given that Europe's unhappy economies have not been doing so badly compared with America's jollier one, the rewards from further reform might be all the greater" - is a mistaken one.

It is mistaken since in the first place it is not a valid procedure - IMHO - to put all Europe's economies in the same basket in this context, and in the second place, because the whole argument depends on a kind of steady-state prejudice. Simply put, the only reason to assume that the Eurozone economies having grown slower than the US one for sometime may now grow more quickly, is the idea that they all share one common 'steady state' balanced growth path. This I think is a theoretical prejudice and a mistake, and if this assumption falls, then so does the argument. None of which should be taken as implying, of course, that most of the reforms the Economist is advocating aren't badly - and in most cases very badly - needed.