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By Philippe Legrain 3 COMMENTS

The bubble may have burst, but the hubris lives on. Despite Bush administration concerns, expressed at the G-8 summit of leading industrialized countries this week, that economic weakness is spreading throughout the globe, Americans still routinely boast that their economy beats the socks off the rest of the world. Japan? A write-off. Europe? A basket case. China? A threat, perhaps, but still a distant one. While others stumble along, the United States races ahead. After all, President Bush never ceases to reassure Americans that "the U.S. economy is the strongest and most resilient economy in the world."

To be sure, even Panglossians concede that the U.S. economy has had a few problems of late: the odd multibillion-dollar bankruptcy, a significant decline in stock prices, even a mild recession. But such hiccups, we are assured, are transitory. America’s economy is fundamentally sound. Money is cheap, consumers continue to indulge, and more tax cuts are in the pipeline. Supercharged, productivity-led growth will soon resume. Europe’s condition, by contrast, seems chronic. Weighed down by high taxes, throttled by endless red tape, held back by inept policymakers, it staggers lamely on. Only 18 months ago, crow American officials and businessmen, all the talk was that 2002 would be Europe’s year, as the benefits of the euro took hold–yet, once again, the U.S. economy outperformed its Atlantic competitors.

The lesson could not be clearer. America’s economic model is triumphant. Government is the problem, not the solution. Markets know best. The rest of the world must adopt American-style capitalism or face inevitable decline. Bush administration officials, from the president on down, hold this as an article of faith. Even liberal pundits seem convinced. As Thomas Friedman, the globe-trotting foreign affairs columnist for The New York Times, put it in his inimitable faux-naif way in The Lexus and the Olive Tree, "Through the process of globalization everyone is forced toward America’s gas station. If you are not an American and don’t know how to pump your own gas, I suggest you learn."

Pause for a second. Allow some awkward facts to intrude. Which economy has performed better in recent years–Europe’s or America’s? Surprise: According to the International Monetary Fund, an institution more often accused of imposing Washington’s ways than of knocking them, Europe’s has. Over the past three years, living standards, as measured by GDP per person, have risen by 5.8 percent in the European Union but by only 1 percent in the United States. An unfair comparison, perhaps, given America’s recent recession? Then look at how the European Union and the United States size up since 1995, a period that includes the go-go late ’90s, when America apparently advanced by leaps and bounds. While living standards in the United States have risen by a healthy 16.1 percent over the past eight years, they are up by 18.3 percent in the European Union. Another statistical sleight of hand? Not at all. Pick any year between 1995 and 2000 as your starting point, and the conclusion is the same: Europe’s economy has outperformed America’s.

To be fair, on a different measure, the United States has outpaced Europe. Its economy has grown by an average of 3.2 percent per year since 1995, whereas Europe’s economy has swelled by only 2.3 percent. These headline figures transfix pundits and policymakers alike. But this apparent success is deceptive. Not only are U.S. growth figures inflated because American number-crunchers have done more than their European counterparts to take into account improvements in the quality of goods and services, but America’s population is also growing much faster than Europe’s. It has increased by nearly one-tenth in the past eight years, whereas Europe’s population has scarcely grown at all. So, although America’s pie is growing faster than Europe’s, so too is the number of mouths it has to feed. Most people, though, care about higher living standards, not higher economic growth. If size were all that mattered, the United States could simply annex Canada and, presto, its economy would be larger, whether people in Peoria felt any better or not.

U.S. economic triumphalism is based on more than just GDP growth, of course. Boosters claim that it has enjoyed markedly faster productivity growth, too. Really? It is tough enough to measure how fast productivity is growing in the United States–remember all those wrangles about whether the step up in productivity in the late ’90s was a giant leap, a modest bounce, or an illusion. International comparisons are harder still. Even so, the Conference Board, a New York-based business-research group that is hardly a fan of European ways, has taken a stab at it. Their figures show that, although the average U.S. labor-productivity growth of 1.9 percent per year since 1995 exceeds the EU average of 1.3 percent, five individual European countries have done better than the United States. Belgium managed 2.2 percent per year, Austria 2.4 percent, Finland 2.6 percent, Greece 3.2 percent, and Ireland 5.1 percent. If you take a longer time span, 1990 to 2002, not only does the European Union as a whole outpace the United States, so do ten of the 14 individual EU member states for which statistics are available. (The Conference Board does not include figures for Luxembourg.)

Not only is productivity growth higher in several European countries than in the United States–so too are absolute productivity levels. The average American produces $38.83 of output per hour, measured in 1999 dollars, according to the Conference Board. Average productivity in the European Union is still 8 percent less, largely because of lower productivity in Britain, Spain, Greece, and Portugal–although the gap has closed over the past decade. But six European countries have overtaken the United States: Germany, the Netherlands, Ireland, France, Belgium, and Norway, where output per hour is $45.55, over one-sixth higher than in the United States.

Advocates of U.S. ways could point out–correctly–that, even though those six European countries enjoy higher average productivity levels than the United States, they still have lower output per person. One reason is that less of the population works, by choice or because of higher unemployment, in each of those countries except Norway and the Netherlands. But the main reason is that Europeans work shorter hours. In some cases, they may be compelled to do so by law: In France, for instance, legislation limits many employees’ working weeks to 35 hours. But, typically, they choose to do so. Whereas American workers toil ever longer hours, Europeans prefer to take more time off as they get richer. Working more to earn more is a perfectly valid lifestyle choice. But one should not conclude that Americans’ higher output is a result of their greater efficiency, when it mostly reflects greater toil.

Where the U.S. economy is really said to come into its own, though, is in its ability to create jobs. Many of them may be low-paying–indeed, America’s minimum-wage workers typically earn less than Germans receive in unemployment benefits–but at least the United States does not suffer the scourge of mass unemployment that Europe does. Yet Europe is not the unemployment black hole it is made out to be. Although joblessness is shockingly high in some countries, it is lower in others–lower even than in the United States in seven of the 15 countries that make up the European Union.

The myth of U.S. economic exceptionalism warps expectations of the future as well. Most American economists, including members of the White House’s Council of Economic Advisers, think prospects for the U.S. economy over the next few years are brighter than Europe’s. But there is good reason to believe they will be proved wrong. Why? Because, while Americans harp on about Europe’s structural problems, they turn a blind eye to the unsustainable imbalances in their own economy.

There is no denying that Europe has its problems. It is in a cyclical funk. Its biggest economy, Germany, is still struggling with the burden of reunification–which eats up 5 percent of national income each year–and is weighed down by outdated labor restrictions. Although European leaders vowed at their summit in Lisbon in March 2000 to make the European Union the world’s most competitive and dynamic economy by 2010, many of the key reforms they announced are still on paper, waiting to be approved.

But none of this means Europe is a basket case. A cyclical downturn does not imply long-term decline. Germany, remember, still has higher productivity levels than the United States. Although the Lisbon process is depressingly incomplete, the ultimate destination is not in doubt.

Nor are Europe’s more stringent labor-market regulations (which vary widely from country to country) as great a hindrance to growth as they are made out to be. Of course, some may reduce productivity. They certainly impose social costs on people needlessly made redundant. If they raise the cost of hiring workers, companies have to recoup this higher cost by driving workers harder or holding down their wages. But, once this one-off adjustment has been made and companies’ profitability is restored, that’s it. Just as a one-off hike in sales tax may dent consumption but would not cause a downward spiral in consumer spending, so too tougher labor-market regulations do not cause the economy to continue going down the tubes, since companies respond.

Admittedly, rigid laws can also make it harder for an economy to cope with change. If they impede declining industries from shedding workers, they may slow the growth of expanding ones–and thus the growth of the economy as a whole. But, even though this loss of flexibility may ratchet up unemployment and slow economic growth somewhat, it is not the downward spiral critics fear.

After all, Europe’s strict labor laws have existed for years. Despite them, as we have seen, many European economies have outperformed America’s. What’s more, they are being reformed. The German government has announced ambitious plans to loosen job protection and cut unemployment benefits. France, Spain, and Italy have all made part-time work much easier. Why, then, given the changes in the works, should these regulations suddenly condemn Europe to stagnation over the next few years?

Europe’s higher taxes also are not as big a burden as they are made out to be. Undeniably, at some point, taxes get so high that they dampen economic growth. But it should be obvious that, if taxes are spent well, they can boost an economy’s productivity. Well-educated, healthy workers–and trains that get them to work on time–are pluses. Fans of small government point out that Ireland’s low-tax economy has grown the fastest in Europe since 1995 and Germany’s high-tax economy the slowest. But Finland, whose government takes half its citizens’ incomes in tax (far more than Germany’s does) comes in just behind Ireland (and Luxembourg) in the growth-league table–and far ahead of the United States. Another relatively low-tax economy, Britain, came in ninth out of the EU’s 15 countries. Look again at the list of five countries that have notched up faster productivity growth than the United States since 1995: Belgium, Austria, Finland, Greece, and Ireland. Consider the six that have higher productivity levels: Germany, the Netherlands, Ireland, France, Belgium, and Norway. Only Ireland is a low-tax economy.

The truth about Europe is that its weaknesses are not as big as they seem–and its advantages are underplayed. Obscured by all the cyclical gloom, Europe’s new common currency, the euro, is already working its magic. Soaring cross-border trade and investment within the euro-zone are melding individual economies into one. Germany trades one-sixth more of its economy with its European partners than it did before the euro’s launch in 1999; France, one-eighth more. Cross-border investment within the euro-zone quadrupled in the first two years of the new currency as companies restructured their national operations along continental lines. The long-term boost to growth from the creation of a genuine single market with a single currency will be huge: Just look at how the U.S. economy took off in the last quarter of the nineteenth century and the first quarter of the twentieth.

Ironically, the biggest threat to Europe’s resurgence is not homegrown. It is that America’s unsustainably unbalanced economy will finally crash, dragging the rest of the world down with it. America’s brief recession has not purged the excesses of the bubble years. The U.S. economy is still awash with excess capacity from the investment splurge of the late ’90s. Americans continue to live beyond their means. The gaping U.S. current account deficit, which swelled to a whopping $503 billion in 2002, bears witness to it. Even relative to the vast U.S. economy, that’s big: more than 5 percent of GDP. The economy’s continued growth relies on foreigners lending Americans nearly $2 billion extra every working day. And this, at the trough of the economic cycle, when spending on all things foreign is subdued. How huge might the deficit grow if the economy really took off again? Americans are living on borrowed time.

For sure, the day of reckoning can be delayed. The world’s biggest economy can defy the odds far longer than, say, South Korea. The Bush administration’s Keynesian splurging (sorry, defense spending) has given demand a big boost. Alan Greenspan’s many interest rate cuts have made borrowing dirt cheap. Shrugging off the stock market slump, consumers continue to spend more than their disposable incomes, adding to their already huge debts. Fizzy house prices give consumers new grounds for exuberance; they are betting the house and more. But it cannot last forever. Americans are likely to pay a hefty price for their reckless profligacy: Recession or prolonged economic stagnation is likely, causing many more Americans to lose their jobs.

The point is not that Europe is better than the United States, still less that the United States should ape European ways. Each has its strengths and weaknesses. Besides, tastes differ: The American dream differs from European concepts of the good life. But it is simply not true that the United States is miles ahead of Europe, that the old world is a basket case, or that it must remodel itself along U.S. lines in order to survive. More generally, economies with higher taxes and stricter regulations are not destined to fail, however much talk there is of them being unsustainable in a global economy.

Only ten years ago, after all, Americans were convinced their country was in inexorable economic decline. In his 1993 best-seller, Head to Head, Lester Thurow predicted that Europe, not the United States, would dominate the world economy in the twenty-first century. Bill Clinton swept to the presidency on a simple slogan: "It’s the economy, stupid." On the heels of the ’90s boom and the continued U.S. economic triumphalism, which has persisted through the slowdown, such pessimism now seems quaint. But, although the gloom and doom was exaggerated, the blind optimism that has replaced it is equally misplaced. The United States was not doing as badly then, and it is not doing as well now.

Ten years on, Europe faces its own crisis of confidence. Many Europeans fret that their countries and continent are in decline. They may resent lectures from arrogant Americans, but many fear that they will indeed be compelled to trade in the European social model they cherish for more Americanized ways. Although there is no denying that Europe faces important challenges of economic reform, the pessimism is overdone. Europe’s economy has matched America’s in recent years. There is every reason to believe it will do even better in years to come.

Posted 16 Jun 2003 in Published articles
  1. Anonymous says:

    The french really are fucking idiots :)

  2. Paul Kalsbeek says:

    Cannot really agree with the French statement – My Wife works(ed) for a French owned company here in the US and was treated a whole lot better then I working for American owned companies!! Have not seen much on executive pay in the European Countries?? It seems to me this must be much lower there? Our executive pay and retirement bonuses detracts from the general population of workers it would seem to me -as someone must pay for these outlandish costs.

  3. nikita says:

    Thank god for the French, they were right about the invasion of Iraq-
    I’m moving there in one month – free health care, very low property taxes, beautiful weather (I’m going to the south of France), gorgeous people (no obesity), great beaches, fantastic food. Oh, did I mention the wine? No better way to retire.
    See ya :)

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