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October 21, 2002
Stability and Growth
Western Europe begins to take steps to free up its governments' abilities to use fiscal policy as a macroeconomic stabilization tool. If successful, this will remove one but only one of the major objections to the way western Europe currently runs its business-cycle stabilization policy.
Economist.com
Farewell to the stupidity pact?
Oct 18th 2002
From The Economist Global Agenda
The European Union’s troubled stability and growth pact looks unlikely to survive much longer in its present form. But there is little agreement on how to modify it and how to improve Europe’s economic performance
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Prodi thinks it's stupid |
ALL bets are off. The European Commission has been steadfast in its commitment to the stability and growth pact—the policy framework meant to support the euro—in the face of mounting evidence that it was in trouble. At the last count, four countries are likely to breach the firm targets set for this year and beyond; some, at least, no longer bother to pretend they’re trying to meet them. But when the commission’s president, Romano Prodi, described the pact as “stupid” in a newspaper interview published on October 17th, it seemed clear, finally, that its days were numbered.
One interpretation of Mr Prodi’s comments is that the commission is simply bowing to the inevitable. His remarks followed the admission by the German government that the euro area’s largest economy—and the most loyal supporter of the stability pact—would breach the pact’s limits for this year. Falling tax revenues mean the German budget deficit is all but certain to exceed the 3% set by the pact. And on October 18th, Italy was paralysed by a general strike, called to protest about government plans to cut spending and deregulate the labour market. Italy’s budget cuts are a response to pressure put on the government to ensure it meets the pact’s guidelines.
Ironically, everyone assumed it was Italy that the German government had in mind when it forced the stability pact on its partners in the run-up to the creation of the euro. The Germans were worried that fiscal irresponsibility on the part of some governments would undermine the new currency. Signing up to a commitment to limit government borrowing and, gradually, to eliminate structural budget deficits entirely was the price of entry to the euro.
Yet Italy wasn’t the first to breach the guidelines. That honour fell to Portugal, guilty of concealing the true extent of its fiscal deterioration, according to the European Commission. Far more significant, though, was the rapid decline in Germany’s budgetary situation. An embarrassed German government only just escaped a formal warning in February this year, when EU finance ministers overruled the commission. Hans Eichel, the German finance minister, has staked his reputation on sticking to the stability pact, even though he was not its author and the current German government took power after the pact had been agreed.
Germany’s problem is simple. Last year’s unexpected recession and this year’s unexpectedly sluggish recovery has put enormous strain on the government’s finances. Spending is higher than planned and tax revenues are falling faster than anticipated. Many economists have long questioned the wisdom of a pact which obliges governments facing economic slowdown to raise taxes or cut spending—the opposite of providing some sort of fiscal stimulus to aid recovery.
The German government continues to pay lip service to the pact. But following last month’s election, Mr Eichel’s position within the government seems to have been downgraded. A new super-minister, responsible for economics and employment, has been appointed to try to reinvigorate the economy and bring down unemployment. That might make economic sense, but it doesn’t sound like a recipe for budgetary tightness.
Others have been quick to exploit the German predicament. To the fury of his euro-area colleagues, President Jacques Chirac of France has made it clear his government will put electoral promises, including tax cuts, first. Only if the French economy grows at 3% next year will the government even try to start bringing down the budget deficit towards balance. In September, the European Commission reluctantly agreed that France, Germany, Italy and Portugal could have longer to achieve this, extending the deadline from 2004 to 2006.
It is clear that behind the scenes tensions among finance ministers and between them and the commission are running high. Sometimes this boils over in public, with the commission’s head of statistics at one point comparing Italy’s government accounting systems to that of Enron. The president of the European Central Bank (ECB), Wim Duisenberg, has also entered the fray: he and his colleagues have been critical of failure to stick to the pact’s guidelines. One ECB board member said on October 18th that countries breaching the pact should be penalised. Some speculate that concern about the pact has been a factor in the ECB’s reluctance to reduce interest rates in recent months.
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Time for a new policy framework for the euro then? Perhaps. But Mr Prodi’s unfriendly reference to the stability pact doesn’t mean the replacement he has in mind would find favour with others. The commission, judging from a paper Mr Prodi issued last May, would like more power to enforce the stability pact. At least some finance ministers, faced with the practical difficulties of trying to meet tough budgetary limits when their economies are less than buoyant, have begun to see the benefits of more flexibility.
Any fundamental changes might also require modification of the way the ECB conducts monetary policy. The bank currently sets its own inflation ceiling, 2% at present (one breached more often than not since the euro was created). Some economists think the bank should have a symmetrical inflation target—that is, a central point with one percentage point variation either side, the system used in Britain.
The planned enlargement of the EU, scheduled for 2004, would provide one opportunity for an overhaul: all new members will be committed to eventual euro membership with all that goes with it. Another would be British entry to the euro, though that might not happen for some time, if at all.
But changes to the fiscal and monetary policy framework can only do so much. Europe’s economic performance in recent years has been disappointing, especially when compared with America’s. Europe’s labour, product and capital markets are much less flexible than those across the Atlantic. Unemployment has been consistently higher. And the EU’s commitment, made at the Lisbon summit in 2000, to become the most competitive region in the world by 2010 is going nowhere fast. Governments remain too ready to back down in the face of union unrest and too fond of writing cheques to prop up failing companies. Abandoning the stability pact would be only a step on the road to economic reform.
Posted by DeLong at October 21, 2002 01:30 PM
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Well, if you consider the fact that in the US states have to balance their budgets then the EU's stupidity pact doesn't look so exotic anymore. The problem is that there isn't the equivalent of federal borrowing and spending... and it's not like Germans are likely to pack their stuff to go take a job even in nordic Ireland.
I believe intra-European immigration could be encouraged though especially among younger workers, but immigration isn't really Europe's political strengh... it's too bad because selective immigration could help it solve its Social Security and other aging related problems.
An other thing that would help is strenghening cyclical transfers among European states. If only money could be spent for something else than agriculural subsidies... Vive la France! %-)
Output per head has grown as fast in the EU since 1990 as it has in the US.
If you accept Krugman's figures on inequality, and make an assumption about the same figures for the EU, then median income (a more relevant figure to most of us) has probably grown faster.
Obviously the total per head remains far lower than the US (lower than Missisippi!) but much of that can be accounted for by working patterns.
Now Americans (and their Press acolytes such as The Economist) argue that America's system is better, or sometimes they argue that Europe's is worse...but surely they can't be THAT sure it is so much better to keep writing these articles.
Krugman showed that from about median downwards Swedes are much better off. In terms of life expectancy etc, most Europeans are better off.
I wouldn't on the basis of these facts start lecturing Americans, but I would say -- maybe you should think a little before lecturing Americans.
>> maybe you should think a little before lecturing Americans.<<
I assume you meant "lecturing Europeans". Nice Freudian slip, MJ! :)
I think Europeans' habit to be self-critical and lend some legitimity to Americano-Anglo-Saxon critiques (although not necessarily at face value) is a European relative strengh. If only America would look in the miror regarding its gun policies and their effects on criminality etc. At times, it almost feels like that if Europeans favor one thing, than true American patriots gotta favor its oposite for the sake of...
The European nations for most part parasite off the United States. This is a continent of cowards and petulant childish individuals who feel guilty about burdening America with their self defense needs. Mooching off the United states has become a way of life. Is anyone naive enough to believe that the Europeans will soon set aside their destructive welfare state policies? Unfortunately, things are likely to get far worse before they get better. Embracing pacifism is often a convenient way to avoid facing up to one's responsibilities.
Respect must be earned. The French and Germans particularly deserve our contempt. I thank God that my ancestors left Germany over one hundred years ago. Those left behind are now mired in envy and bitterness. It is the land of the losers.
I declare the terms
- anti-Europeanism
- anti-European
- anti-Europeanist
officially added to our vocabulary. >:-D
By the same token, please take notice that by order of Vice-President Cheney, speaking from an undisclosed location, the term anti-Americanism has been redefined as follow:
"Any and all form of criticism of ideas emanating from Washington. Example: Her non explicit and full endorsement of the Bush administration was clearly a reflection of her anti-Americanism."
Gotta send a link to this page over to Europe, my friends are in for a BIG laugh. Thanks, David!
More to the point, it is less interesting (at least for those of us under 70) what Europe is like now than what Europe will be like. Personally I prefer many aspects of the European social and political system to that of the US, but Europe's steadfast unwillingness to confront their demographic issues makes me wonder if their train is going to drive over the cliff before they belatedly admit to the problem.
In the stupidity race between Europe's pension problems and America's attempts to recreate the Gilded Society (followed by the Great Depression), I wouldn't be on America succeeding before Europe.
The ECB has always struck me as a particularly stupid idea. Europe does not have an economy so uniform that one monetary policy is appropriate for all parts of it.
As for labour movement - well, capital is free to move as it will, you see, but not labour. Because capital should have more economic rights than human beings.
>>Europe's steadfast unwillingness to confront their demographic issues makes me wonder if their train is going to drive over the cliff before they belatedly admit to the problem.<<
Exactly the point. Ever heard of Enron anyone? Well the principal Euro group countries, and especially Germany, Spain and Italy, all have enormous off-balance sheet undeclared liabilities: they're called unfunded pension and health care claims with rapidly ageing populations and imploding dependency ratios.
The stability pact was an attempt not to get into more debt before things really started to get tricky. Ever heard of rosy cash-flow massaging (think of all those dot-com venture capitalist plans). Well take a look at the growth numbers projected by these same countries for this decade, and look at the realities.
The big danger in all this "stupid pact" talk is that ECB policy becomes a political toy. Of course changing the objectives from price stability towards growth oriented policy sounds nice (as if we weren't all trying to achieve growth already), the problem is when you get to read the fine print.
Sure, Germany needs more budgetary flexibility to be able to tackle the growing deflation dangers, but then there is the problem of inflation in Greece, Portugal, Spain, Ireland and Holland. I don't know whether a quick band-aid fix exists for all this, somehow I doubt it. But simple demogogic talk about 'stupid' pacts is easy and dangerous.
Perhaps the real problem is that the Euro decision was a political and not an economic one in the first place.
>>Perhaps the real problem is that the Euro decision was a political and not an economic one in the first place.<<
To me the problem is the lack of the equivalent serious federal budget. Simultaneously, Europe also desperately needs to expend the political legitimacy of its communautary institutions. In other words, with a single currency, there is no way around a full-fledged European federal government. The European Commission is not a government it's an administration (in the Euro sense of the term, not the American one.) It is supposed to carry out and execute the legal decisions that would be taken by the European legislative estate, not write laws in and of itself.
The European Parliament would feel like the right place to start but big nations are too busy trying to maintain their pre-enlargement grip on Eurowide decision making for the Parliament to be allowed to be the central piece. Instead, an expended, complex and only indirectly democratic extended Council is considered under, as usual, the watchful eyes of Brittain.
All it takes to make the right decisions is Europeans' willingness to consider themselves as a nation to be. The yes vote to Nice by Irish voters (67%) perhaps herals a new era of popular yet less naive support for the European project. And if England doesn't want to board the ship, fine, so be it, but it should not be allowed to sabotage a dream most other Europeans share.
A economically viable society must severely limit its welfare programs. Providing cradle to grave benefits carelessly weakens the moral fiber of the nation's citizens. Creative destruction must for the most part reign supreme. Europe's protectionism has resulted in a pampered and childish populace unable to respond to the challenges of the day.
I notice that the following posters did not address my contention that the European nations parasite off the United States. Alas, I can readily understand their reluctance. After all, the facts are on my side. Americans should feel sorry for the weak willed Europeans, but we do not owe them respect. I might add that the same holds true for Canada. Our neighbors to the north have also enjoyed a free ride while our tax dollars protected them militarily. The United States should no longer be tolerate being played for a sucker. Do you recall Gary Cooper in "High Noon?" The sheriff was compelled to act unilaterally because the cowardly towns people refused to act multilaterally.
Excellent parody of nutty right-wing American, David. Good stuff.
In defense of the Stability pact I'd like to point that it introduced financial sanity to countries like Greece for whom the concept was alien. It was a clear set of targets, and really motivated governments to get their act together. Now it is outdated, and some new mechanism must define and implement a sound and better adapted policy.
Jean-Philippe, we Europeans shouldn't follow the disturbing prefix cum hyphen habit. Anti-Europeanism, anti-European and anti-Europeanist are soooooo American. I prefer the more elegant Europhobe and Europhobia.
It appears that some people are unable to deal with awkward and uncomfortable issues. Am I merely a "nutty right-wing American?" If so, why indulge in ad hominem argumentation? Where are the weaknesses in my contentions? Of course, we already know the answer to that: there are none! The evidence is overwhelming that America spends far more than Canada and the Europeans on its military. Thus, it's logical to conclude that these folks are parasitizing off of us. That is one of the main reason for their irritation. Parasites usually despise those who permit themselves to be played for suckers.
One should stay out of the kitchen if they can't stand the heat. Many of the participants on this board have been living in the protected cocoon of a Liberal university social milieu. In other words, you have essentially gotten a free ride in life. Your professors have given you grades that you did not earn. They only demanded that you adhere to the nostrums of life destroying Liberalism. Alas, when you deal with me---you will have to earn everything you get.
It's getting better & better. Keep it coming...what's next black helicopters from the UN?
>>Exactly the point. Ever heard of Enron anyone? Well the principal Euro group countries, and especially Germany, Spain and Italy, all have enormous off-balance sheet undeclared liabilities: they're called unfunded pension and health care claims with rapidly ageing populations and imploding dependency ratios. <<
All of which disappear if one assumes an increase of 5 years in the retirement age .....
>> I notice that the following posters did not address my contention that the European nations parasite off the United States. Alas, I can readily understand their reluctance. After all, the facts are on my side.
-1, Troll. I know I shouldn't, but I'll bite anyway.
>> The evidence is overwhelming that America spends far more than Canada and the Europeans on its military. Thus, it's logical to conclude that these folks are parasitizing off of us.
Here is a fact that isn't on your side: it is 2002, not 1952, not even 1982. Here's another: "defence" is different word than "war". To most of us, defence means keeping oneself safe from an invader, David. Here's another: there is little, if any, threat of a full-scale *conventional* invasion against most any country in Europe. Here's another: even if there were, Europe's defence forces are strong enough and technologically advanced enough to stop it. Here's another: to defend itself Europe only needs a stronger and more advanced military than a potential attacker, not the US. Here's another: they have this.
Now, David, you seem like you're pretty bright and somewhat well-read. You might have heard the term "asymmetrical warfare". Do you know what that means? Do you know why it is being used? And do you know what the implications are? I think these are some questions you should think about a little more.
But I have a feeling these facts doesn't impress you. I can imagine you saying that defence means protecting economic interests. Here, there are two big question marks: the vulnerable oil-producing countries in the middle east, and those damn communists in China (Chairman Deng left some communists around, didn't he?)
And this is where the problem begins. You look at the facts and say, "aha! threat to world security! we need more tanks, airplanes, smart bombs and missile defence systems to protect us!" where as others look at the same facts and day, "well, the paranoia does act up when he doesn't take his pills." Note for the irony impaired: that last bit was an ad-hominem attack. The jury should disregard the rhetoric, and judge the argument on its merits: maybe you'll find danger if that is what you set out to look for; maybe you'll find security if THAT is what you set out to look for. Don't knock others' bias unless you realize you have one yourself. Yup, maybe I should take some of my own medecine and live by that... just as soon as you start taking your pills again ;)
"The evidence is overwhelming that America spends far more than Canada and the Europeans on the military. Thus, its logical to conclude that these folks are parasitizing off of us." I think there's a gap in the logic, and even though I think you're right in the end, I don't think it's quite as simple as this. Take Olympics broadcast rights, for an emotionless example. European nations don't let their networks bid against each other. Instead a pan-European authority (the European Broadcast Union) buys the rights and then sells them onto the national broadcasters. It costs them about 10% of what the U.S. pays. Are the Europeans parasiting? Well, yes. They only have to suffer certain decisions favoring the U.S. (when key events are held), but other than that, the broadcast is the same (except that the Americans have a lot of commercials). But who's to blame? Surely it's the Americans for not being as intelligent as the Europeans. Every parasite has to have a willing host...
Jean-Philippe,
>To me the problem is the lack of the equivalent serious federal budget. Simultaneously Europe also desperately needs to expend the political legitimacy of its communautary institutions. In other words, with a single currency, there is no way around a full-fledged European federal government.<
I agree that the chances of a single currency working without a fully-fledged federal government are slim to judge by both the precedents from history and macro theory on the significance of fiscal stabilizers.
The single currency project was prematurely driven through in the early 1990s to increase the pace towards European federalism but it has become increasingly evident from misgivings about the Stability and Growth Pact as well as the persisting high unemployment and inflation rates of the Eurozone that was a botched job. In my view it would have made better sense to have sorted out the political institutions before introducing a single currency. A recent poll reports majority nostalgia in Germany for the DMark but then some of us have long suspected that the DMark got locked into the Euro at the start of 1999 at an over-valued exchange rate, which helps to explain faltering GDP growth of Germany's economy since and recent concerns about the prospect of deflation there - a characteristic symptom of an over-valued real exchange rate.
More than a year back in another message board forum I mentioned passages in both Dornbusch's and Blanchard's ever popular macro textbooks discussing the adjustment problems for the Eurozone single-currency economies which seemed to have escaped notice by some Commission officials. But then a Brit, Bernard Connolly, used to head the Commission's policy unit on monetary policy until 1995 when he was sacked for criticism of the Euro project - the preface to his book: The Rotten Heart of Europe (p/b in 1996) includes acknowledgements to Dornbusch and Blanchard. From long personal experience, it really is very difficult to have dispassionate discussion about the economics of the Euro project, which rather contributes to the reservations some of us Europeans have.
>All it takes to make the right decisions is Europeans' willingness to consider themselves as a nation to be. The yes vote to Nice by Irish voters (67%) perhaps herals a new era of popular yet less naive support for the European project. And if England doesn't want to board the ship, fine, so be it, but it should not be allowed to sabotage a dream most other Europeans share.
Earlier enthusiasms for European political federalism have gone into reverse of late. Current speeches of political leaders in Europe reflect a shift back to the previously favoured political model of "Europe of the nations". Another lower profile but huge practical hurdle is that the EU Commission's accounts have not been audited because the computer system holding the accounts is not secure - too many people have access to changing spending lines without leaving audit trails, which was well-documented in news reports in July when the chief auditor, Marta Andreasan, was sacked not, it was said, because she refused to sign the accounts but because she had spoken to European parliamentarians about the auditing problems.
In all, it does look as though some Europhiles haven't quite got the hang of democratic pluralism yet.
Amit Dubey,
Were these following sentences uttered with a straight face? Are you trying to be a comedian?:
"To most of us, defence means keeping oneself safe from an invader."
"Here's another: even if there were, Europe's defence forces are strong enough and technologically advanced enough to stop it. Here's another: to defend itself Europe only needs a stronger and more advanced military than a potential attacker, not the US. Here's another: they have this."
Europe's military capabilities are so patheitic that the United States had to save its bacon during the Balkan conflict. Defending one's country today requires that you are able to take the fight to the home of the thug. Waiting for an actual "invasion" is absurd. A Saddam Hussein is very unlikely to directly attack America or any of the European nations. Instead, the Iraqui tyrant will covertly support major terrorist activity. A bomb discretely brought into a country via a suitcase is just as deadly as one delivered by more conventional means. This is why the allied forces invaded Afghanistan--and most certrainly will have to add Iraq to the list. Therefore, it is logical to assert that Canada and the Europeans parasite off the United States. We are the only ones spending the serious money to launch preemptive strikes against those who wish to destroy Western Civilization.
"Now, David, you seem like you're pretty bright and somewhat well-read. You might have heard the term "asymmetrical warfare". Do you know what that means? Do you know why it is being used? And do you know what the implications are? I think these are some questions you should think about a little more."
Huh? Roger W. Barnett's book "Asymmetrical Warfare" will soon be released. It is my understanding that the author essentially agrees with my viewpoint. Is there something I missed?
"I can imagine you saying that defence means protecting economic interests."
Yup, I most certainly do believe that defence includes "protecting economic interests." Rightfully understood, this is indeed a valid reason to go to war. A sufficient oil supply is important to everyone.
Cheers,
David Thomson
"Europe’s labour, product and capital markets are much less flexible than those across the Atlantic. Unemployment has been consistently higher"
- Yes, on average unemployment has been consistently higher. But several countries within the European Union has lower a unemployment then the US. Some of these countries also have a very un-flexible labour institution. So the connection between flexibility and unemployment is not very strong at all...se Nickell´s work for example.
I know it's childish but I can't resist...
>>A Saddam Hussein is very unlikely to directly attack America or any of the European nations. Instead, the Iraqui tyrant will covertly support major terrorist activity. A bomb discretely brought into a country via a suitcase is just as deadly as one delivered by more conventional means.<<
The only two terrorists camps in Irak are located in the North, i.e. the Kurdish region. These are the people your administration is counting on to topple Saddam, and they're Saddam's worse nightmare (besides Iran and the US.)
>>This is why the allied forces invaded Afghanistan--and most certrainly will have to add Iraq to the list.<<
Even the CIA admits the war in Afhanistan is a huge fiasco and that Al-Qaeda is as strong as ever, if not stronger because now spread over a wider area. The Bush admninistration has just been careless in its dealing with the Talibans starting way before the attacks on the WTC (you know what I mean, right, David?) It's pathetic: so much display of brutal force, so much hathred generated, and yet ZERO (if not negative) efficacy. You guys impress the hell out of us, I tell you.
>>Therefore, it is logical to assert that Canada and the Europeans parasite off the United States. We are the only ones spending the serious money to launch preemptive strikes against those who wish to destroy Western Civilization.<<
By the way, it needs to be repeated thar there are currentlty more European soldiers in Afghanistan and former Yougoslavia than American soldiers. Someone's got to do the peace-keeping, you know... And, so far, when the wars America takes on aren't too wacky, you can be thankful, the rest of the planet is there to foot the bill. This time around though, nobody wants to subsidize what could be the premises of the worst regional if not global conflict we have seen since WWII.
***
But why you feel warranted to parazite a thread on the European economy with US war-monging is beyond my understanding....
Question, David: Have you ever set foot outside America? Ever been to the countries you critize so much? Ever talked to an Iraki or at least somebody from the Middle East? Ever tried to befrend a Muslim?
David Thomson>> First of all: It's quite funny to take part of your thoughts. By all means, continue...it really lives up to the picture of a modern hill billy cowboy some of us Europeans do have of Americans.
And yes, the world would certainly be a better place if more European countries copied the American military style. I mean, you have an excellent record of military invasions. Who can have any negative thougths about Nicaragua, Vietnam and some other Latin American countries where your government supported un-democratic right wing extremists.
"Europe's military capabilities are so patheitic that the United States had to save its bacon during the Balkan conflict."
- That really had nothing to do with the actual strength of European military forces. It was a political failure of the EU leaders. Unfortunately EU countries have had major problems to agree on a common foreign policy, for example during the Balkan conflict (it's getting better though).
But that you act with one face isn't of course always good. For example we can take the American support for the israeli government. If Bush were concerned about human rights at all, he would of course have included Israel in his cowboy talk about "axes of evil". There lies no doubt in the fact that Israel is one of the biggest criminals concerning violating human rights...but that's fully supported by your government. Does that make you proud?
Mikael,
>Yes, on average unemployment has been consistently higher. But several countries within the European Union has lower a unemployment then the US.
Some smaller economies in the Eurozone have low unemployment rates but not the large ones. The average unemployment rate in the Eurozone is some 50% higher than in the UK outside the Eurozone, and the average inflation rate on the same price index is double. On top of that, the Eurozone's GDP growth rate is about half the UK's. In all, that doesn't look like much of a recommendation to me for the UK to join the Euro.
Bob-
The fact is that the UK is less integrated with the European continent than other countries on average, and more in tune with the US economy than most other EU countries (except perhaps Germany.) So, whenever Germany catches a cold most of Europe catches it whereas the UK business cycle is having a life of its own (Bob, what's the recent evidence concerning the isolating effect of the pound for the UK economy?). On the other hand, I think the trend was quite good in terms of EU unemployment until the recent slowdown in the global economy, and the collapse of European investments in the US...
I would bet that a lot of the core European inflation is due, once again, to rising oil prices. In that respect, the UK has an advantage that is simply not replicable by other EU countries, independently of the Euro.
The Euro bet is based on the assumption that it will boost both trade and industrial restructuring over time (through increased FDI patterns and otherwise). This will prove very useful vis-a-vis Eastern Europe, in countries that would be prone to currency crisis otherwise.
Much has been written about this, but what the evidence I have found most convicing on the trade issue comes from Andrew Rose, and is conclusive and positive. As far as the boost to the industrial consolidation of Europe, it's probably hard to say whether the Euro is the cause, but it's definitely taking place.
Anti-Semitism is alive and well on this discussion board:
"But that you act with one face isn't of course always good. For example we can take the American support for the israeli government. If Bush were concerned about human rights at all, he would of course have included Israel in his cowboy talk about "axes of evil". There lies no doubt in the fact that Israel is one of the biggest criminals concerning violating human rights...but that's fully supported by your government. Does that make you proud?"
It is an outrageous slur to describe Isreal as "one of the biggest criminals concerning violating human rights.." And yes, I am very proud that America is a close friend of the only democracy in the Middle East. This is why I warn my friends not to trust the Canadian and European Left. The moral and intellectual corruption of these individuals has gone beyond the pale. These people pretend that they don't despise Jews, but merely the Israeli government. Don't believe a word of it. They are anti-Semites in their heart of hearts.
Can we please not rise to Mr Thomson's trolling? I think -- obviously I can't be sure -- that he is just someone pretending to be a caricature of a loony-right American in order to get responses. Rising to it just makes us look stupid.
Discussing the issues, Bob Briant makes an interesting point about the UK's growth rate compared to the rest of Europe. One has to say though -- how long has it outperformed the rest of Europe? Not over the 1990s as a whole, so we are basing a belief in UK superiority on a very small time series.
I aggree, George, and on the one hand currency parities were already pretty much fixed before the UK started to outperform the Euro-zone, and on the other hand, the Euro has not been in place long enough to be able to make any inferences on its effect on, at least, trend growth and inflation. Further, there are countries in the Euro zone that are faring pretty well under it, almost too well.
I think the Stability Pact should be amended to allow for more state level fiscal flexibility and yet be kept in place as a guardian against excessive debt issuance with an eye on the upcoming demographics-driven problems, and on our common objective not to return to the fiscal laxism of the past for the sake of price stability.
P.S. I believe David if for real though, but my only evidence for this hypothesis is the consistence of his posts throughout the comment section of this blog. Perhaps should it be mentionned in passing that the EU has had a free trade agreement with Israel for a while now. Besides, there is not a single EU country that does not consistently stand behing the right for Israel to exist as a Jewish state in spite of their discomfort with the second class citizen status of Palestinians.
I want to warn my fellow Europeans that we have entered an era in the US where any concern for Palestinians is taken as a form of anti-Semitism by Likud suporters (although that's not entirely new as a form of rhetorics on their behalf). But I want to equally warn them against exaggerated generalizations regarding our American friends. There are all kinds of weirdos in our countries as well... And there are a lot of reasonable people in the US. More than half of them did not vote for Dubya, after all..
If David Thomson is who I think he is, he is for real. Don't feed the trolls.
Jean-Phillipe's point about the Euro helping ensure that countries that would otherwise be prone to currency crises, aren't, is a very good one. And, the primary arguments for having your own currency is that it:
a) provides feedback to the economy; and
b) allows real independent monetary policy.
But, since most currencies are now moved primarily by overnight money flows and not by trade flows 'a' is less the case than it once was. And 'b' is an illusion for most countries unless they want to have money controls (a policy that I would argue actually makes a great deal of sense for many nations.)
But the solution that makes sense to me isn't throwing away national currencies, it is doing something about all the overnight money the world is washed with. Perhaps the Tobin proposal - but something. Entire economies have been wrecked, millions of jobs have been lost and innumerable companies have gone under as a result of uncontrolled monetary flows over the last ten years. It is not clear to me that the benefits have been worth the downside.
David Thomson is real, he has written numerous reviews at Amazon.com and lives in Houston, Texas.
George Thompson: > Discussing the issues, Bob Briant makes an interesting point about the UK's growth rate compared to the rest of Europe. One has to say though -- how long has it outperformed the rest of Europe? Not over the 1990s as a whole, so we are basing a belief in UK superiority on a very small time series.
I'll need to hunt for an online GDP data source - any suggestions welcome - but can anticipate a measurement problem at the outset.
For such comparisons, GDP growth rates should be measured from peak to peak in business cycles, or from trough to trough. However, the UK entered the European Exchange Rate Mechanism (ERM) in October 1990, a few months after what is generally reckoned as the peak of the UK's 1980s business cycle and with what, in retrospect, was recognised as an over-valued exchange rate because of pent up inflationary pressures - due to interest rates kept inappropriately low to curb appreciation of the Pound prior to ERM entry. One policy instrument - interest rates - was being applied to achieve two different policy variables at the same time: a "competitive" Pound, requiring lower interest rates, and lower inflation, requiring higher interest rates. Someone obviously hadn't read up Tinbergen 1952 on policy instruments and targets.
Famously, inflation accelerated after ERM entry, interest rates were increased and the fiscal stance tightened to reduce inflation but the Pound was subject to a speculative attack in September 1992 and dropped out of the ERM near the bottom of a deep recession. Thereafter the economy grew steadily through the rest of the 1990s with employment running at a historic high in recent years. By the mid 1990s, the UK's standardised unemployment rate had already receded below that of the other major European economies - France, Germany and Italy - and the UK's employment rate among working age people was higher.
The problem in comparing the UK's growth performance is that using the ERM exit point and the recession trough in 1992 would undoubtedly give a distorted picture in growth comparisons, whereas using the previous cycle peak of early 1990 would include the handicap of ERM membership at an over-valued exchange rate.
The special relevance here of recounting this admittedly thumbnail sketch is that in much of the continuing public debate about the UK joining the Euro the actual mechanics of entry are fudged.
A strict interpretation of the Maastricht Treaty of 1992 requires that the Pound would have to rejoin the ERM and maintain stable exchange rates against the Euro for two years prior to entry. However, it is generally conceded that the Pound is presently over-valued against the Euro even though the extent of over-valuation is debated. An understandable fear is that joining the ERM would lead to a replay of some variation on the speculative attacks against the Pound of 1992 resulting in higher interest rates, not directly to defend the Pound under current monetary policy guidelines of inflation targeting but to curb inflation-push from higher import prices and because depreciation of the Pound would boost demand when employment was already running at a historic high.
A tightening of the fiscal stance would also be necessary, not least because the current fiscal deficit is already higher now than expected in the Spring 2002 Budget due to slower GDP growth - recent press reports refer to a UKP 7bn hole in the budget. That will need tax hikes to fill regardless of Euro entry. In the context, the fiscal politics of joining the Euro starts to look distinctly unattractive - and that is before we start considering how well the UK economy will adapt to the one-size fits all monetary policy of the Eurozone - all of which doubtless explains why smart eceonomic commentators like Martin Wolf of the FT suggest it's better to keep the Pound floating at least until more favourable conditions materialise.
In any event, on the UK's long-term productivity growth performance we need to worry about the UK's relatively low savings/GDP ratio and one of the most "stunning statistics that we are 20th out of 24 OECD countries for staying-on rates [in education] at 17," [minister for schools], as suggested here before, as well as stroking up technical innovation as best we can.
Time for a reality check. Did anyone actually read the comments I was responding to? This particular person described Israel as "one of the biggest criminals concerning violating human rights.." Do any of you defend this disgusting statement?
Please note that they did not assert that Israel is not always in the right concerning its treatment of the Palestinians. I personally have a problem with the increasing number of additional settlements. No, this individual had a the audacity to charge Israel with being one of the most vile nations on this earth. That my friends is at least evidence of a mild flirtation with anti-Semitism. Israel may not be a perfect country, but it is definitely possesses a decent and humane political order. This is especially true if Israel is compared to its surrounding Arab neighbors.
And yes, I am a real person living in Houston, Texas, and I write a number of community reviews on Amazon.com. They can be readily found if you merely insert my name in the Google search engine. I am the very first David Thomson that comes up. Moreover, it might interest you to know that I'm a neo-conservative and have often enraged those more conservative than myself. Have You ever heard of Pat Buchanan? He has absolutely no use for folks like me. Only recently I essentially agreed with Christopher Hitchens concerning Mother Teresa. How's that for irritating the conservatives?
David, your point about Israel is well taken (I can only speak for myself of course), but let's now stick to the topic at hand, the previous posted topic is smack about the Middle-East so if you want an exchange on these issues, that would be the place. Thank you.
>>Have You ever heard of Pat Buchanan? He has absolutely no use for folks like me. Only recently I essentially agreed with Christopher Hitchens concerning Mother Teresa. How's that for irritating the conservatives?<<
David, have you begun to wonder whether there might be a common factor at work here? It is possible -- I'm not saying this is the only explanation, but we ought to consider it -- that you're just a really annoying person.
Somebody needs to practice what they preach. The folowing sentence was earlier posted on this thread:
"I want to warn my fellow Europeans that we have entered an era in the US where any concern for Palestinians is taken as a form of anti-Semitism by Likud suporters (although that's not entirely new as a form of rhetorics on their behalf)."
This is a straw man argument. It does not accurately reflect the views of people like Larry Summers and myself. Anti-Semitism is close to becoming a dogma among the hard core Left. It's time to cease pretending that this isn't the case.
Bob Briant (UK):
"Some smaller economies in the Eurozone have low unemployment rates but not the large ones. The average unemployment rate in the Eurozone is some 50% higher than in the UK outside the Eurozone, and the average inflation rate on the same price index is double. On top of that, the Eurozone's GDP growth rate is about half the UK's. In all, that doesn't look like much of a recommendation to me for the UK to join the Euro."
- Austria, Denmark, Ireland, Luxemburg, Netherlands, Portugal and Sweden all have lower unemployment rates than the US. But you're right about the fact that these are smaller economies and it's also true that the three big ones: Germany, France and Italy have extensive unemployment problems. But someone here wanted to make the case that this was because of "eurosclerosis". There isn't really any strong evidence that supports the view that labour institution regulations creates unemployment. Several of the EU countries with very low unemployment are also quite heavily regulated economies.
And it's also true that UK has some nice growth numbers to show for the last couple of years, but still they are, counting GDP/capita, relatively poorer than Sweden, Netherlands, Luxemburg, Italy, Ireland, Germany, Denmark and Belgium. So can this be some sort of catching up also?
But on the Euro issue I agree. I think it would be a poor decision for the UK to join. I think that the UK, Denmark and Sweden has made the right choices here. Haven't we seen enough failures concerning fixed exchange rates? (Even tough the Euro thing is a bit different)
________________
David Thomson is from Texas? What a surprise...
>>And it's also true that UK has some nice growth numbers to show for the last couple of years, but still they are, counting GDP/capita, relatively poorer than Sweden, Netherlands, Luxemburg, Italy, Ireland, Germany, Denmark and Belgium.<<
Illustrates a common pitfall of using GDP as a proxy for national income; the UK has very substantial income from overseas and thus a much higher ratio of GNP to GDP than most of the countries listed, so it is very wrong indeed to use the term "poorer" here.
I would bet the champion of GNP - GDP discrepency be the Netherlands not the UK. I am not sure what to make of this though, Daniel. Income is always good and capital balance deficits are certaintly more sustainable than deficits over time. But domestic income should be more relevant to job creation and median income than national income. Further, the UK and the Netherlands have in common the effect of their natural resources on their trade and thus capital accounts. Any thoughts?
One big problem with GNP data is that they're becoming increasingly scare because data collection problems have a had number of countries stop reporting them. I think the UN still collects them (does EUROSTAT do this too?). If I have time I'll report some numbers here later in the day.
>>To me the problem is the lack of the equivalent serious federal budget. Simultaneously, Europe also desperately needs to expend the political legitimacy of its communautary institutions.<<
I'm afraid it's rather more than communitary institutions that are lacking, what is lacking is a common sense of identity US style. To try to make the point let's imagine one available solution to the present mini 'crisis'. The real number-one problem seems to be the German economy which is hovering dengerously near to deflation now that the demand boost it was getting from growth in the UK and France has begun to flag. So if the EU was really a 'community' the logical thing would be for the other countries to close ranks, show flexibility with regard to Germany's problems and offer to make sacrifices themselves in the collective interest of the well-being of the monetary union. Case in point, countries like Ireland, Holland and Spain could do something on the fiscal side to reign-in demand and bring down their rates of inflation, which are, after all, why interest rates are so high and thus why so much is being asked of Germany. Of course this would mean more unemployment in these countries in exchange for less in Germany, but isn't that what is meant by solidarity. Prodi's comments just muddy the water by suggesting that if the politicians had more say over ECB policy - and of course all-good-men-and-true want growth as well as stability, then things would be better. Demagogic, but silly.
>>All of which disappear if one assumes an increase of 5 years in the retirement age .....<<
Daniel, this issue is much too complicated, and much too serious to resolve here, I'm sure we'll be hearing more and more about it up the line.
But I'm afraid nothing 'disappears' with a simple
increase of five years in working age. The dynamics of population melt-down doesn't work like that. If you want to try to understand the problem by looking at it the other way round try thinking about population growth and the British industrial revolution, or the role of the population expansion in the New World in the late 19th century. Or if you want to see the opposite side of the strong demography case check out Harold James 'The End of Globalisation' to see what happened to the US economy in the 1920's after the immigration taps were shut off (hint, hint, it started in 1929).
The problem with most economist's approaches to this problem to date is that they assume the equations are nice and linear (for tractability reasons of course). However one initial try at some guesses from two EU economists can be found here:
http://europa.eu.int/comm/economy_finance/publications/economic_papers/2001/ecp138p1en.pdf
Where you will learn, among other things that the Japanese already work as much between 70-75 (25% participation rates) as the Europeans do between 60-65, and of course they are well mired down in deflation. But then I forgot. You don't like participation rates since we should only send 'our best men in to bat' to keep those productivity figures up.
I say let young Eastern Europeans (and others) with skills in relatively short supply come pay taxes in Western Europe. I love disversity all the more when it pays! (Note that the EU seems to be going full speed the other way around on post-enlargement intra-communautary immigration.)
I am not so sure older workers' productivity dips so much that they're not of any marginally positive use to a typical Western economy. Wage rigidities may play an important role here (and especially in ex-neo-feodal Japan.)
I have always thought that more should be done to allow people aged 55+ to work part-time and allow job reallocation, sometimes with lower hourly wages. This should be (made) a preferable deal to (early) retirement to many retirees, longing for an activity that keeps them socially (and economically) alive while keeping working hours in balance with their health and their longing for some well-deserved leisure time.
I recall some (limited) experiments in Belgium have shown that keeping "redundant" aged workers around to train and supervise younger workers and do some firm-knowledge intensive service jobs can be profitable. But this requires, flexibility and creativity from workers, firms and the regulators. That's probably why we haven't seen so much of it in Europe... Any thoughts?
Mikael,
Good - we are back on the thread track.
> Austria, Denmark, Ireland, Luxemburg, Netherlands, Portugal and Sweden all have lower unemployment rates than the US. But you're right about the fact that these are smaller economies and it's also true that the three big ones: Germany, France and Italy have extensive unemployment problems. But someone here wanted to make the case that this was because of "eurosclerosis". There isn't really any strong evidence that supports the view that labour institution regulations creates unemployment. Several of the EU countries with very low unemployment are also quite heavily regulated economies.
I cannot believe it is accidental that the larger EU mainland economies have higher unemployment rates than the smaller economies. Somehow, I am not sure that "regulation" quite conveys the flavour of the situation in the smaller economies but in so far as generalisations apply these economies do not accord with a "free market" model, at least in respect of labour markets. Whether the points of departure can be described as "planning" or "building a national consensus" is arguable but I agree with you that it is inappropriate to claim these smaller economies are afflicted by "eurosclerosis".
A few years back I was reading the Netherlands chapter in a book from Brad's latest reading list [Crafts and Toniolo (eds): Economic Growth in Europe since 1945; CUP(1996)] and was surprised to see: "Between 1960 and 1973 real gross wages rose by 7.6 per cent a year . . From 1961 onwards, the rise in real wages per employee exceeded the advance in labour productivity." [p. 307] But then, "Real wages increased only very slowly, at less than 1 per cent a year on average between 1979 and 1990." [p.311] What brought about the change in annual wage increases between the 1960s and 1980s? Put perhaps over-simply, the rate of annual wage increases was curtailed by some combination of consensus, planning and regulation to improve employment prospects and that worked.
Of course, one of the many questions is whether that is feasible in the larger economies. It seems noteworthy that it is the large EU economies which are presently stressing the fiscal deficit limits enshrined in the Eurozone's Stability and Growth Pact, not the smaller economies, the governments of which come across as somewhat impatient about the plight of the large economies and as resisting change to the terms of the Pact. In all, it stretches credibility to believe in a consensus sufficient to sustain a federal European government with a remit for a Europe-wide economic policy.
Text of a thread relevant lecture to the British Academy in 1997 by Bob Solow on the subject of: What is Labour-Market Flexibility? at:
http://www.britac.ac.uk/pubs/src/keynes97/index.html
>>I say let young Eastern Europeans (and others) with skills in relatively short supply come pay taxes in Western Europe. I love disversity all the more when it pays!<<
Come-on Jean-Phillipe, I'm sure you don't really believe this. I'm sure you love diversity for it's own sake. But on the Eastern Europe point, look at the population situation in the East, the collapse there is even more dramatic than the EU average. These countries cannot spare their qualified young people, they need the immigration themselves!! And of course, in the end the world is going to run out of countries-of-origin for immigration, so we really are going to have to do some serious long-term thinking.
>>I have always thought that more should be done to allow people aged 55+ to work part-time and allow job reallocation, sometimes with lower hourly wages<<
Of course. Older people should be able to, and may have to, work. But this doesn't solve the problem, the numbers are too enormous - especially in Germany, Spain and Italy. On the productivity side, I'm sorry, but I doubt we get more productive as we get older (after a certain age that is. I think the rate of technological change factor here is important. As is Paul Romer's point about knowledge (which is virtually infinitely expansive) and learning (which is a form of human capital and requires time as an investment). I'm afraid the gale of creative destruction is going to blow far too hard through acquired skills, and that the rate of human capital destruction can easily exceed creation in countries with large old and small young populations. I'm not going to enter the politics here, but just looking at the population figures, perhaps George W would do well to reflect a little on his Iran policy.
And Europe, well we should stop being so hypocritical in our criticisms of the US, a little bit more of 'bring me your poor and huddled masses' would be a lot more convincing.
One last point, in my previous post, maybe I gave the impression that I was in favour of a totally rigid stability pact. This is not the case. What I am trying to argue is that Germany clearly needs help on both the interest rates and the fiscal spending fronts (whether this will work is another matter), but that the way to do this is not to tear up the growth and stability pact. A sacrifice from all concerned is going to be necessary.
>>It seems noteworthy that it is the large EU economies which are presently stressing the fiscal deficit limits enshrined in the Eurozone's Stability and Growth Pact, not the smaller economies<<
Yes Bob, but this only works if you ONLY look at budget deficits. If you also take inflation into account - Holland, Ireland, Portugal, Greece (where incidentally there seems to be no common pattern) - you get a different picture, the big economies are being dragged towards deflation by the inflationary dynamics of the little ones.
Give over Edward:
>>But I'm afraid nothing 'disappears' with a simple
increase of five years in working age<<
Yes it does; the problem of the dependency ratio disappears, according to any actuarial work I've seen.
>>Where you will learn, among other things that the Japanese already work as much between 70-75 (25% participation rates) as the Europeans do between 60-65, and of course they are well mired down in deflation. <<
In related news, raising the retirement age does not cure lumbago, alcoholism, teenage vandalism or the clap. Nor does it solve any other problems than the one I claimed it did. But that ain't nothing; it destroys most of the basis for claiming that the "pensions timebomb" in Europe is an interesting issue. If you believe in a demographic argument for European stagnation, you're going to have to make it without the use of this shorthand.
>>But then I forgot. You don't like participation rates since we should only send 'our best men in to bat' to keep those productivity figures up.<<
Since you are referring to a thread on which I stated no fewer than five times that the published productivity figures were meaningless precisely for that reason, I am fast approaching the point of ceasing to consider you as someone who can be argued with in good faith.
>>Since you are referring to a thread on which I stated no fewer than five times that the published productivity figures were meaningless precisely for that reason, I am fast approaching the point of ceasing to consider you as someone who can be argued with in good faith.<<
Well, I'm sorry you take it like that Daniel, but I was trying to understand your arguments in good faith. I understood the thread to be about whether the structural labour market reforms in the Euro zone countries were a good (and indeed necessary thing). In this context we were referring to participation rates, and whether high participation rates might be a good thing for per capita GDP. We're both British I know, but lets just for once indulge ourselves and practice that quaint American custom - the reality check. Looking through the thread I find the following among your posts.
>>I'll add that high employment rates would normally be associated with lower productivity per hour, on the basis that the least productive workers are the last to be drawn into the market. A lot of the discrepancy can be explained by this simple fact.<<
>>Thinking about it, this is amazingly obvious and not even a threat to American workers' machismo or amour propre. If you took the country of Italy and put 66% of the female population out of the home and into service industry jobs, what would happen to output per hour worked? It would plummet, and that (higher participation, lower unemployment) is what's happening as you move from Italy to America. The report even spells it out, I see.<<
>>In other words, if you add labour to the economy, then the average productivity of labour will fall so long as the labour you're adding has a lower productivity than the average. Therefore, higher participation rates and lower unemployment will always be associated with lower measured productivity per hour. Do you get it now, Jim? Or is it more comfortable for you to continue to deny the facts, in which case you have a fine future ahead of you in the profession.<<
>>Oh that's fantastic! I'd never thought of it that way, but I will always use that analogy. On a productivity-per-hour basis, Gough being injured is a good thing.<<
It was this last comment about Gough that inspired my 'best men in to bat' quip.
Now obviously I may be wrong but I took you as dismissing here the importance of the labour participation argument. If I was wrong, I apologise. But if I was wrong, then it is not clear to me what you were saying: that the productivity figures are meaningless - surely this is a bit strong. I would say they are perhaps badly measured, and perhaps difficult to interpret, I have even gone so far, on occasion, as to talk about the 'veil' of productivity, but meaningless: give over Daniel.
>>the problem of the dependency ratio disappears, according to any actuarial work I've seen.<<
Well not according to any demographer working for the UN Population Division it doesn't. You are talking about actuarial pension calculations, I was talking about neo-classical growth theory. I know next to nothing about actuarial estimates except to say that they must be extremely difficult to make in the climate of growth and value uncertainty which we can see stretching out in front of us. In other words, don't be too sure the pension funds will be there when you need them. America's problems are much less than Europe's, but even, for eg Paul Krugman, has been speculating recently over whether their social security pensions can last past 2015. He, like me, is concerned about letting the deficits rip now, which is, after all, the point of this thread.
>>In related news, raising the retirement age does not cure lumbago, alcoholism, teenage vandalism or the clap. Nor does it solve any other problems than the one I claimed it did.<<
Look, I'm afraid I don't see the humour in this type of argument. The missing link in your reasoning here is not 'Lucy' but an appreciation of what I was trying to argue. I was not using the language of a pensions 'time bomb', but trying to suggest that there might be sound, growth theoretically based arguments for suggesting that Japan's deflation is associated with the deflation problem there, and they have already raised the retirement age. I was not looking for a cure for lumbago (although I am sure a lot of their ageing workers are).
This is, I admit, only a hypothesis at this stage. But using the proven Sir Karl Popper assymetric risky-hypothesis falsification validity test, should serious deflation begin to show up in Italy (beyond that experienced in other EU countries) in the next five years then you might remember that I was putting this argument now. As VS Naipaul says, the important thing is sometimes not what you say but when you say it.
In signing off I will leave you with two quotes: one from a French Demographer (Jean-Claude Chesnais) trying to explain population meltdown for the layman/woman:
"But the notion of "below-replacement" fertility is vague. From a theoretical point of view, it comprises all levels of Total Fertility rates (TFR) between zero (extinction) and 2.1 children per woman (stationarity, or equilibrium). The impact of the emerging new trends is not familiar, but it is powerful ; if we put aside the role of the population momentum inherited from the past fertility, a TFR of 1 (child per woman) is the symmetrical value of a TFR of at least 4 children per woman, or, more precisely of a Net Reproduction Rate (NRR) of two surviving daughters per woman. Let us push further the argument : if in some regions or cities, the TFR drops to 0.5 child per woman and then stabilizes, the population is subject to a division by eight after two generations ; the symmetrical value on the demographic scale is a NRR of 4 (that is an average family size of at least 8 children). The well-known mechanism of population explosion (multiplication) gives place to a population implosion (division, or exponential decrease)."
The other quote is from two EU economists (K. MCMORROW and W.ROEGER)in the document (mentioned in my post) "The Economic Consequences of Ageing Populations" written for the EU sponsored ECFIN.
"When one looks at the actual numbers involved one can see quickly the magnitude of the challenge to be faced by the EU, US and Japan. Over the past 35 years the number of people aged 65 and over in the 3 areas combined increased by roughly 53 million. This, however, did not pose any major economic problems since the working age population rose by substantially more (138 million) and easily supported the additional economic burden. The next 50 years will see a dramatic turnaround in these numbers, with the number of over 65s growing by an additional 92 million but with the working age population actually declining by 41 million. On the basis of these latter absolute numbers one can more readily comprehend the daunting nature of the challenge which this ageing burden places on the economic systems of the respective geographical areas......
.....In the case of the EU this central ageing simulation shows that per capita living standards are likely to fall significantly over the next 50 years. The effect of ageing populations in terms of slowing the rate of growth of potential output will also make the budgetary implications of ageing, in terms of higher pensions and health care costs, more difficult for the individual economies to bear. While the above no policy change simulation may be unrealistic in that Governments are unlikely to stand idly by, it nevertheless gives an idea of the scale of the task faced by policymakers in devising policy measures aimed at avoiding, or at least cushioning, the potential shock to peoples’ living standards."
Well I leave you with these heart warming notions, thank you, Daniel for your indulgence, but I'm sure that at this stage there's only you and me left around to read this, and possibly only me.
I dunno, but it looks to me like the Germans still have a way to go on labor market reform: http://www.ananova.com/news/story/sm_696051.html
The link provided by Jim Glass is a hoot: "German brothel ordered to keep on 77-year-old condom sorter." I though for a moment that this might be a satrical Onion.com piece. Oh well, it's simply further evidence that the land of my forefathers is in deep trouble.
Any agreement that fails to directly challenge the welfare state mentality of the europeans is a complete waste of time. One could better spend their time debating the best ways to masturbate hamsters. The late Mancur Olsen studied the question of how many people could be on the dole before the economic system started to unravel. It's time for more attention to be given to Olsen's work.
>>The link provided by Jim Glass is a hoot: "German brothel ordered to keep on 77-year-old condom sorter." I though for a moment that this might be a satrical Onion.com piece. Oh well, it's simply further evidence that the land of my forefathers is in deep trouble.<<
If this is what Jim and David consider evidence, then no wonder we're having trouble having a reasonable conversion here...
>>And of course, in the end the world is going to run out of countries-of-origin for immigration, so we really are going to have to do some serious long-term thinking.<<
That's not a logical statement, Edward: some regions have an opposite demographical structure to that of Western Europe (or to a large extent America.) It would be a Pareto improvement for these youth and Western Europe to allow them in. I can imagine a world where the population stops growing, but we certaintly not quite there yet, to say the very very least...
The bottom line is that to a conservative, all roads must lead to Rome, whatever the facts. Europe cannot and should not be allowed to perpetuate itself as a mixed economy. It will follow the same model as the US or fall. Did I get the message right?
"The bottom line is that to a conservative, all roads must lead to Rome, whatever the facts. Europe cannot and should not be allowed to perpetuate itself as a mixed economy. It will follow the same model as the US or fall. Did I get the message right?"
Yup, you have got the message right. I most certainly do contend that either Europe essentially follows the American model, or it will continue to be second rate. A viable economy must severely limit its welfare state. Europe has too many Andy Capps living off the dole. It weakens itself every time taxes are raised to support this nonsense.
Oh by the way, every economy is a mixed one! This is another infallible economic dogma. Only the degree of the mix determines whether it is deemed to be either capitalist or socialist. Even the most capitalist society will have some sort of safety net. Stalinist Russia at its worse had people who earned money in the underground economy.
>>That's not a logical statement, Edward: some regions have an opposite demographical structure to that of Western Europe (or to a large extent America.) It would be a Pareto improvement for these youth and Western Europe to allow them in. I can imagine a world where the population stops growing, but we certaintly not quite there yet, to say the very very least...<<
I'm afraid it is Jean-Philippe. Of course what you say is true about the benefits of allowing people to move to Europe as well as capital out of it. I was referring in particular to Eastern Europe where the population collapse is, if anything, worse than in the west. In other words I am not in favour of draining the skill pool of less-well-off countries, but of allowing the unskilled poor to enter. There are sound economic arguments (and of course humanitarian ones) for this.
The turning point of world poulation is a lot nearer than you think, maybe 70 or 80 years, and possibly less, depending on the timing of the demographic transitions. But we cannot assume that the LDCs are going to stand still forever.
My point is that after this transition happens, we are going to have to rethink all our models, since we will no longer be able to plug the demographic hole with population from other parts of the world. eg Once China passes through the transition completely, where will the immigrants for China come from (NB China is living at present from the benefits of internal migration, which are driving the Chinese 'industrial revolution', since the one child per family policy of the past means that the urban population is already ageing fast).
For those who are looking for new social and economic models, these could be exciting times, my only fear is that we have some pain to pass through on the way.
David Thomson:
"I most certainly do contend that either Europe essentially follows the American model, or it will continue to be second rate."
- In Europe one country has followed "the American model" more than others, and that is Britain. Is Britain the most "succesful" economy in Europe? No, by no means according to me. The poverty, the out-dated housing, lower GDP etc. All this in Britain compared to other Western European and North European countries. But it is still the way to go?
Look at HDI for example. Even though I think there are plenty of problems and question marks with making such a ranking, the nations in top is not the US or Britain. It's western welfare states like Canada and Scandinavia.
Mikael,
>In Europe one country has followed "the American model" more than others, and that is Britain. Is Britain the most "succesful" economy in Europe? No, by no means according to me. The poverty, the out-dated housing, lower GDP etc. All this in Britain compared to other Western European and North European countries. But it is still the way to go?
In terms of per capita GDP West Germany had overtaken Britain by the early 1960s and France by the late 1960s or early 1970s at the latest. In those times Britain regularly ranked somewhere near the bottom of GDP and productivity growth leagues among the affluent countries. In short, Britain was falling further behind.
As to why that happened, there are many contributing factors: an outdated capital stock along with a low investment rate and a relatively high incremental capital-output ratio, suggesting low productivity of new capital; a tradition of fractious industrial relations; Britain came out of WW2 with much a small farming sector than in most of mainland W Europe so there wasn't a pool of available labour to meet the demands of a growing manufacturing sector without bidding up wages faster than the relatively poor rate of productivity growth; a higher percentage of GDP spending on defence than in other West European countries; international trade links more orientated towards slower growing markets in the Commonwealth.
I would also add the persistently low stay-on rates in education compared with other W European countries coupled with an under-developed system of industrial training. There is research evidence going back at least to the 1970s showing that the education attainments of managers in British industry were lower than in much of mainland W Europe. OTOH looking back from the perspective of the 1970s, R&D spending as a percentage of GDP had been second only to the US among affluent countries - the trouble is that it was hugely concentrated in defence equipment, aero-space and nuclear energy, all areas where government influence was significant in deciding priorities.
We can add too the distorting effects of various bouts of incomes policy and the relatively large state-owned industry sector in Britain - certainly much of its performance in terms of productivity growth during the 1970s was mainly pretty miserable. For whatever reasons, state planning, whether of output or incomes, does not seem to work well in Britain.
Crafts' assessment in Crafts and Toniolo (eds): Economic Growth in Europe since 1945; (1996) - on Brad's reading list - is that Britain was catching up with the other leading economies in W Europe during the 1980s - his IEA monograph: The Conservative Government's Economic Record (1998) also relates. We have discussed before in threads here what happened during 1990s after Britain dropped out of the European Exchange Rate Mechanism in September 1992 - by the mid 1990s Britain's standardised unemployment rate was lower than in the other major W European economies and the employment rate among working-age people higher. The current inflation rate in Britain is half that in the Eurozone where the average unemployment rate is more than 50% higher.
On the evidence, joining the Eurozone does not look an attractive proposition and there are good reasons for supposing Britain's economy would become more volatile with loss of monetary autonomy because of: (a) greater sensitivity to interest rate changes; and (b) the greater relative importance of variable-interest home mortgages compared with the other leading W European economies.
Some can take comfort from the fact that the tax burden in Britain after more than a decade is now higher again than in Germany: http://news.bbc.co.uk/1/hi/business/2319071.stm
Americans should never forget one very important fact: the Europeans parasite off of us. We essentially pay the bulk of their military costs. Why is this conveniently overlooked? Furthermore, this is a central reason for the anti-Americanism running rampant througout europe. Parasites always have contempt for their hosts. This is how the Europeans can afford their long vacations. American tax dollars are indirectly paying for their laziness.
>>Is Britain the most "succesful" economy in Europe? No, by no means according to me. The poverty, the out-dated housing, lower GDP etc<<
Well I think Bob Briant has effectively answered the principal point. I grew up in some of this out-dated housing (indeed I think Engels was already writing about it in 1844) and the reasons for its existence, together with a lot of other dilapidated infrastructure go back to pre-WWII problems, and the problem of having been first in the industrial revolution.
And don't laugh anybody because if China is halfway successful in its present 'leap forward', the US could start to experience some of this a little more downstream.
Bob Briant's points on attitudes to education are also important, as are the factors of class antagonism which so preoccupied Ralph Dahrendorf.
The bottom line is all of this is pre-ninetees. I do think it is worth pointing out here that Britain was the inventor of what is called the welfare state (with some judicious imports like PAYGO pensions from Roosveltian America) under the benign leadership of Chairman Churchill. And Britain's decline accelerated with this system firmly in place. So I don't think it's logical to look for the causes of Britain's decline in the years of Thatcher/Blair reform. Margaret Thatcher was incredibly cruel and uncharitable, but that is a separate point.
>>Britain came out of WW2 with much a small farming sector than in most of mainland W Europe so there wasn't a pool of available labour to meet the demands of a growing manufacturing sector without bidding up wages faster than the relatively poor rate of productivity growth<<
A good and interesting point this one Bob. Of course this shortage and the consequent 'wage cost push' argument only began to be re-addressed when Enoch Powell (god, isn't history ironic) went to Trinidad and Jamaica to recruit workers for London Transport and the NHS. You know, more really should be made of all this, since it's Harold James's contention in the above mentioned book, that it was precisely the shortage of labour for low wage sectors like construction which built up in the 1920's that exaccerbated enormously the length of the 1930's depression.
And on all this, I have in front of me a set of demographic figures for the Japanese labour force:
http://www.stat.go.jp/english/data/roudou/zuhyou/1542.xls
They really are very interesting reading. Firstly the potential labour force began to decline in 1999, while the participation rate is also now dropping. Now some of the non-participants are undoubtedly people who would seek work if there were more available, however it is a moot point which is the driving mechanism here. What is clear is that the drop in potential labour force does not automatically produce more participation to compensate, and I think with establishing this we've already established a lot for those who want to consider what might be the future for the European economies.
Edward,
I can recall from the early 1960s the late professor Paish of the LSE making the then heretical suggestion that maybe the British economy would grow somewhat faster if the average unemployment were somewhere around 2.5%. Of course, that was dismissed as outrageous . . .
Credits for building the governmental social safety nets, which we have come to call the welfare state or the European "social model", are distributed through time and place.
One thread of ancestry extends back to Elizabethan poor laws in 16th century England and then the Speenhamland System for "outdoor" relief of the late 18th century through to the Poor Law Amendment Act of 1834, which introduced harsh eligibility criteria for poverty relief for reasons we now think of as curbing "moral hazard". Another thread credits Bismark, first chancellor of the German empire (1871-90), with devising state pensions for the aged - which were not much of a fiscal burden when average life expectancy at birth was only 40 to 50 years. Yet another: Imperial Rome for distributing bread to the masses and providing circuses for popular entertainment. The ancient religions in their own ways created charitable institutions to care for the poor and sick.
What is for sure is that the origins of the welfare state did not start with a leftist plot to mulct the rich. In mainland Europe, conservatives and Christian Democrats have promoted and extended the Social Model, which is one powerful political reason why it is so difficult now to reform. The situation is rather like the "chicken" scenario in Games Theory - the first party going into an election with a commitment to reform the Social Model will be clobbered in the polls so it's better to stay on the collision course.
As for military spending, as we can see few things are quite as satisfying as instant simple solutions to complex issues. Western Europe was hugely vulnerable to Soviet expansion and subversion after WW2 - recall how Czecho-Slovakia succumbed in 1948. That is why America committed to NATO for defence and the Marshall Plan to support post-war economic recovery in Europe.
The Soviet Bloc had overwhelming superiority in armoured capability - recall the Soviet strategic maxim in response to claims about superior western military technology: Quantity has a quality all of its own. That is why NATO came to rely on Mutual Assured Destruction. In the Bipolar context of two global superpowers that was successful in protecting western Europe against invasion but not against internal subversion in Europe or asymmetric conflicts elsewhere.
In parts of western Europe, Communist Parties and their like were electoral forces to be reckoned with. In France through to the 1970s, the Communist Party was attracting c. 20% of the vote in national elections and the Communist Party had formed the backbone of the resistance in France during WW2 - after Germany's invasion of the Soviet Union in June 1941, that is, and Stalin had decided the conflict in Europe was a patriotic war for the Soviet Union after all. America didn't enter the European war until December 1941, following the attack on Pearl Harbor and Germany's declaration of war on America.
For a flavour of France's Communist Party, its General Secretary, Georges Marchais, said on the collapse of the Soviet Union in the early 1990s: "I tell you they didn't arrest enough. They didn't imprison enough. If they had been tougher and more vigilant, they wouldn't have got into this situation they're in now." [Jonathan Fenby: France on the Brink (1999), chp.5 - and least anyone thinks that is a bit of traditional xenophobia on my part, Jonathan Fenby was made a Chevalier of France's Order of Merit in 1990.]
Frankly, a prospect of Europe with a coherent foreign policy, let alone a consistent defence policy with the necessary wherewithal, is ... err ... premature. Quite a few of us feel a good deal safer without that. In Britain, we do not elect communists and fascists to Parliament, unlike many of our European neighbours - the previous governments in France and Italy were dependent on communist votes in the respective national assemblies to maintain government majorities. Prodi came to be President of the EU Commission because he was voted out of the premiership in Italy by the communists.
Look carefully at official EU Commission Europolls and you'll find the greatest enthusiasm for European federalism in those countries with the greatest problems with stable internal governance - and a high positive correlation with national debt-GDP ratios. Suggest that there's a hidden agenda to pool national debt in a federal Europe and nasty things are apt to happen to one's computer.
Bob Briant:
You don't elect fascists or communists in Britain. Even though your old grand lady, Thatcher, strongly defended the murderer and fascist Pinochet. Concerning the situation in Italy I think it's misleading to talk about communists, because the "communists" in Italy of today are not "soviet-communists" or anti-democratic communists.
In Sweden the former communist party gets around 10% of the votes, and the right-wingers still try to attack them by different forms of guilt-by-association, even though they are a "democratic communist party" that do not have any intention to create a monster like the old Soviet Union. They just want more political intervention in economic issues and a broader safety net and so on. This is the case with several "former communist organisations around Europe".
Concerning the euro I firmly agree with you. I think it's a bad idea. It's a bad idea for Britain and all other countries. What I replied too though was the statement from Thomson that everyone has to follow the American model if they want to survive in the long run.
David Thomson writes:
"Americans should never forget one very important fact: the Europeans parasite off of us. We essentially pay the bulk of their military costs. Why is this conveniently overlooked?"
- We have seen your argument by now, you don't have to repeat it over and over again. One reason why not so many may care about it is that you are a paranoid right-winger that takes the radical "islamic" and terrorist threat and blows it up to something it is not. Terrorism is important to fight, yes, but that it should mean that every country has to spend the amounts on military resources that the US does is by no means a logical conclusion from this former point. (Especially when the Bush is talking about the "Star Wars" project and similar things, that in no way would be beneficial in fighting the kind of terrorist attacks we have seen the last couple of years)
"One reason why not so many may care about it is that you are a paranoid right-winger that takes the radical "islamic" and terrorist threat and blows it up to something it is not."
What world do you live in? Paranoid right-winger? The reality is that your own views are far more in tune with those of the radical right. Pat Buchanan, David Duke, and you seem to have much in common. It is the more moderate consensus of neo-Liberals and neo-Conservatives who agree on the enormous threat of the Islamic fascists. Have you ever heard of a guy named Christopher Hitchens?
And yes, the Europeans and the Canadians fail to do their part to preserve world peace. It is very fair to describe them as parasites. The tax payers of the United States indirectly subsidize the welfare state policies of these countries. Even our host, Brad DeLong, had to concede that Clinton desperately wanted the Europeans to handle the mess in the Balkans. Finally, he could wait no longer and was forced to take action.
PS: Am I indulging in vicious slander? Well, take a look for yourself. This is the link to David Duke’s web site:
http://www.davidduke.org/
Thomson:
I yet haven't seen any proof that your opinion about the size of the threats motivates the enormous amounts spent on military resources by the US government. You use big words and attacks the welfare states quite strongly...at least you should be able to motivate this in some way. So far we have seen nothing of this. Though I'm not surprised...
Even though my knowledge about US domestic politics isn't that extensive I can say for sure that I have not much in common with hacks like Pat Buchanan and his opinions that lack every sense of knowledge and wisdom (a lot like the Bush then). And no, I have never heard of Cristopher Hitchens.
Not doing our work for world peace? Well, more or less every time the US army goes in and bombs or attacks a country (usually only for egocentric motives) to the ground (for example Afghanistan), it is usually us Europeans that stays there afterwards trying to help the country build up their infrastructure and let them do so in a somewhat safe environment.