TCS Daily

Will the Real Global Economic Threat Please Stand Up?

By Alex M. Brill - October 17, 2005 12:00 AM

China is the global economic debate du jour. On one side we hear that China is manipulating its currency and hammering away at the US manufacturing base; that it is growing "too fast" and heading for a hard landing that will ripple across the globe; that it is pushing up commodity prices and causing global inflationary pressures; that China's purchases of U.S. Treasuries are suppressing interest rates and contributing to a U.S. housing bubble; and that China's banking system is on the verge of collapse.

On the other side, the more rational and level-headed view is that a growing China has created large investment opportunities for American business, an expanding market for American exporters, and an important source of low cost goods for American consumers.

While this battle over how to look at China continues and the pro- and anti-China policy makers and economists sling statistics and economic predictions back and forth, a much larger, more troubling foreign economic situation poses a challenge quite opposite from that of China. The problem is not one of fast growth in an emerging economy, but rather slow growth of a developed region; not of surging exports to the U.S., but rather slowing import growth from the U.S.; not about an economy stealing jobs from America, but an inability to create jobs at all. The problem is Europe and it should worry us more than anything going on in China.

The economy of the single-currency eurozone is five times larger than China's and per capita income is more than 20 times higher. U.S. exports to the larger European Union (EU) region, at $193 billion in 2004, were more than five times greater than to China but have grown a measly 3 percent since 2000. Imports from the European Union last year, $321 billion, were more than 60 percent higher than from China. U.S. foreign direct investment into Europe last year was $97 billion compared to just $4.2 billion into China. By virtually any measure, Western Europe is the most important trading partner, investment partner and strategic partner in the world for the United States. And the European economy is floundering.

Annual economic growth in the eurozone has averaged less than 2 percent since 2000. The unemployment rate has averaged 9 percent thus far in 2005, compared to 5.1 percent in the U.S. Half of Germany's unemployed are classified as "long-term" compared to just 12 percent in the U.S. -- a direct result of the fact that Germans receive at least 12 months of unemployment benefits and older workers can receive benefits for more than two and one-half years, compared to the typical six months of benefits available in the U.S. Europeans with jobs don't work as much or produce nearly as much as Americans. The typical German works 1,400 hours a year, two months less than a typical American worker due to a shorter work week, more vacation and more holidays. While labor markets languish, Europe faces challenges of both a rapidly aging workforce and low birth rates. Meanwhile, government spending in Europe is nearly half of GDP as tax burdens are enormously high on everything from gasoline to low-income worker's wages.

America is perhaps the most competitive nation in the world, but it is wrong to think we are in a race against our economic trading partners in a zero-sum game. China's fast growth does not mean they are beating us, nor does Europe's slow growth mean that we are beating them. Conversely, Europe's stagnation directly hampers our ability to increase our exports at a time when our trade deficit is becoming a serious challenge. Increased exports are badly needed to support U.S. output growth and enable increased saving -- to save more, we need to consume less and make up the lost income by stronger exports. That can only happen if the rest of the world is growing. Europe's lack of labor market reforms and other critical structural reforms has dampened opportunities for productive U.S. direct investment on that continent. Opening a new business is still daunting in much of Europe. These uncompetitive structures hinder innovation and competitiveness globally, thereby harming consumers here and abroad.

Unfortunately, the short term economic outlook for Europe is poor. The International Monetary Fund (IMF) again lowered its growth forecast for Europe now to below 2 percent annually for this year and next. The forecast for Italy, the third largest economy in the Euro area, was reduced to zero for 2005.

The political outlook for Europe is not encouraging either as the recent splintered election outcome in Germany and difficulty in achieving reform in a grand coalition demonstrates; and the failure to achieve measurable progress towards the European Union's Lisbon Agenda which set as a goal significant economic reform across the EU. The rejection of the EU constitution by France and the Netherlands and controversy over beginning accession talks with Turkey are further evidence that Europeans are not eager to embrace change.

And yet, there is hope. Europeans have the fundamental core structures to allow for the necessary reform: strong and stable democracies, fluid capital markets, and well-defined property rights. Embracing labor market reform will lead to faster growth and greater prosperity. Impetus for change won't come from government; the choice lies with the voters. Rather than decrying progress in China because it is change, we should support change in Europe where it can lead to progress. Stronger growth in Europe will be good for Europe, the U.S. and the world.

Alex M. Brill is the chief economist for the Committee on Ways and Means in the U.S. House of Representatives.


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