TCS Daily


Europe Rising?

By Craig Winneker - September 8, 2006 12:00 AM

We might forgive Europeans a little gloating in recent weeks over some economic news of the man-bites-dog variety. It seems the EU outperformed both the US and Japan in the last quarter, posting a 0.9 percent growth rate (with an annualized rate of 3.6 percent). The US and Japan were an anemic 0.7 percent and 0.2 percent, respectively.

Now, a growth rate of less than 1 percent is not exactly a reason to break out the Champagne, but for EU leaders, used to enduring complaints about how desperately they need to reform to catch up to and compete with the US in a global economy, it's at least reason for a minor celebration (perhaps a modest bottle of m├ęthode champenoise, made in California?). This, after all, was the first time in five years that the EU had outperformed the US.

In fact, there have been a few dribs and drabs of good economic news for Europe in recent months - inflation holding steady even as oil prices have gone up, a real estate market that is still growing even as the US bubble bursts, rising exports, small declines in unemployment rates, etc. More importantly, the gains have come not just from the go-go member states of Eastern Europe, where high growth rates are to be expected and are still actively encouraged, but also from France and Germany.

Those two behemoths, the traditional engines of Europe's economy, have also been doing surprisingly well of late, accounting for the strong growth across the eurozone. But before we head straight for the impending bad news - yes, Europe's boom is doomed to be short-lived - let's try to account for the recent spate of positivity.

Germany's growth rate could certainly in part be attributed to the increase in consumer spending that resulted from the country's fabulously successful hosting of the World Cup soccer championship in July. (Adidas, the German sporting goods company, sold 15 million of its special "Teamgeist" World Cup footballs and more than 3 million jerseys, and estimated its tournament-related sales would be €1.2 billion.) France grew at an even faster rate than Germany in the second quarter - at an annualized rate of more than 4.5 percent. It was only the third quarter in the last 20 years that the French economy has grown that much. In Europe's smaller economies, even better results could be found. Polish economic growth accelerated to an annual rate of 5.5 percent in the second quarter. Its unemployment at 15.7 percent, the highest in Europe, but still a five-year low for the country.

(Another theory for why Europe has done relatively well of late was whispered to me by a European Commission official, who cited the current EU "period of reflection" - during which politicians are supposed to be figuring out how to reconnect with the electorate and rethink European integration. It's produced a kind of holding pattern - the EU hasn't done anything for a year. There's reason enough for an economic boom.)

But soccer ball sales and a short spell in the eye of a regulatory storm can't last forever. And, sure enough, the bad news is already starting to rain on the EU's economic parade. New figures released after the quarterly growth numbers show that growth in Europe's service industries -- from banking to telecommunications, the biggest part of the economy - have probably slowed in August.

True, this could be explained away by the summer break. But impending tax hikes in Germany and Italy threaten more severe and longer-term damage. You read that right. Tax hikes. Undaunted by economic growth figures, Germany plans its biggest tax increases since the end of World War II. The value-added-tax (VAT) would go from 16 percent to 19 percent. Italy is flirting with a capital gains tax increase and an inheritance tax. According to Bloomberg analysts John Fraher and Simon Kennedy, these governments "are taking a risk with economic growth by lifting taxes as their economies gain momentum".

Ironically, these governments fail to appreciate that their tax revenues have already been going up as a result of the economic upturn. Handelsblatt, Germany's main financial newspaper, reports that the combined tax take of federal and local governments through July was running some $25 billion ahead of official forecasts. By increasing the rates, Germany risks not just crippling growth but also encouraging tax evasion.

France and Germany and Italy are right to worry about their persistent budget deficits. But they need to wake up to the fact that the only way to get rid of them is by encouraging economic growth - not smothering it in the crib.

The author is Europe Editor of TCS Daily.

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15 Comments

As much fun as pounding Euro-trash is, dosen't this say something unfortunate about us?
Less than 1%? We are the home of capitalism and freedom and we grow at 0.7% a quarter?

It may be easier for an economy like that of Poland to grow by 5.5% a quarter, given that they are rebuilding after the desolation that communism inevitably brings, and I certainly don't expect an economy like ours to achieve a similar level of growth. However, the fact that we are not leaving the EU in the dust tells me that we have some serious problems of our own. Quite possibly the same problems that they have.

Socialism is the stealth bomber of political philosophies. Pretty much everything it suggests can be justified as "for the children" or as "making the rich pay their fair share." Americans are suckers for fairness and kids. Each individual policy sounds sensible to people who do not understand economics, and who rarely consider the big picture. This piecemeal conversion from capitalism to socialism is quiet, but continuous.

Have we really reached the point here where we are approaching the socialist event horizon? I have to wonder, when both parties are pushing welfare programs of unparalelled size like the new Medicare Prescription Drug Plans and Hillarycare. Katrina and the welfare state that developed as a result of it is another great example of our leaders' methodology for problem solving.

Now that my gripe session is done, I have to ask: How do we stop this slide in to socialism? My natural reaction would be to say: "Elect another Ronald Reagan." If we can get a genuine conservative with the testicular fortitude to take on the Dems in the Oval Office, I think the country might see some real change. There is always education in economics, but the problem is that any program that deals with that is inevitably going to result in more socialism than before and in the last place where it is needed: the public shool system. Of course, this might all sort itself out without any intervention. Entrepreneurship is on the rise in this country, and after a tiny amount of time spent dealing with the government regulators, most people can feel their brains starting to liquefy nad leeak out of their ears. Hopefully, that will produce a generation of people who will not take this sort of garbage from the government.

On the other hand, maybe I'll just move to Poland...

France and US, totally different
France and the US are totally different. Just look at the flags. The US flag is red, white, and blue, while the French flag is blue, white, and red.

What part of...
"This, after all, was the first time in five years that the EU had outperformed the US."

don't you understand? It's one quarter out of five years. Don't worry, they screw up any gains they make in this one quarter.

A market does not go up forever. Up and down. No need for despair or rants about our very vibrant economy.

Using the revealed preferences method...
"Ironically, these governments fail to appreciate that their tax revenues have already been going up as a result of the economic upturn. Handelsblatt, Germany's main financial newspaper, reports that the combined tax take of federal and local governments through July was running some $25 billion ahead of official forecasts. By increasing the rates, Germany risks not just crippling growth but also encouraging tax evasion."

...we may need to conclude that pols don't want to raise taxes in order to raise revenue. The more of GDP they spend, the more power the pols and bureaucrats have. That is desireable in itself.

complaints
I thought that his complaint was that US growth was only 0.7%. Not that Europe for once in a blue moon had a higher growth rate.

I agree with Publius that the US should be doing better, and could be doing better if we could get govt out of the way.

The capitalist model works, the socialist model doesn't.
on that, we agree.

Always can be better but...
considering current affairs and the real estate slowdown our economy is still alive and doing very well.

With the upcoming elections I would hate to think what a Democratic House and Senate would do to the economy since they all seem to think that what we really need is a nice tax increase...

But as you say, there is always room for the government to back off. Bush needs to concentrate on actually cutting the budget and not just cutting the percentage of budget increases.

budget
Since when has Bush cut the percentage of budget increases?

Don't you recall?
Bush "gutting" veteran benefits, welfare, etc.? If you actually looked at those budgets he cut the percentage of increase for those things. Say Head Start was supposed to get a 12% increase. Bush, that *******, only gave them a 10% increase cuz he hates black people.

That is the Democrat definition of "slashing" and "gutting".

MarkTheGreat is correct, my concern is with comparitive rates of growth...
... not that they beat us once.

The very fact that they CAN beat us is a little disturbing to me, and it indicates that something is dragging our economy down. We do not have the substantial job protections that the French and Germans have instituted, nor do we have socialized medicine. How do we end up with such low growth numbers that they can beat us? How do we consistently perform so poorly?

There has to be some other factor or cause involved, and I am mostly asking for suggestions as to what that cause might be, and what we do about it.

Growth Rates
I just checked the Bureau of Economic Analysis press release of August 30, 2006 and the rate of second quarter growth in the United States was at an annualized rate of 2.9%.

https://bea.gov/bea/newsrel/gdpnewsrelease.htm

creeping socialism
The US economy does better than old europe because it's SLIGHTLY freer yet, but also going more down the road off government interferring more and more with it. It's probalby gotten to the point already that there are a critical mass of left wingers, and also vested interests that don't want to reverse the trend. I've read than Ronald Reagan couldn't really do all he wanted, like dismantley the dept. of edu. and also in the UK marg Thatcher couldn't really dismantle all the welfare crap they have there. The population has been too brain washed already, entitlement mentality , etc. "Socialism is the system whereby everyone tries to live at the expense of the others".

Socialists
They can never understand free market solutions to economic woes. We have many of them in this country who are currently without much power. That could change in the next election. Our economic fixes will soon resemble theirs if we are not careful. We are creeping toward socialism under this leadership but the creep would turn into a sprint if the other party regains power.

bravo
I could not have said it better. Reformative economic thinking will not spring from our educational facilities in this country anytime soon.

Relative
I think that the entire dollar size of the EU economic structure is about the size of the state of California's. In relative dollars or euros earned we are still generating vastly larger amounts of profits and capital. Their engine is rather small and easier to rev up.

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