The European economic mess is likely to get far worse before it improves. Are they really waiting for Germany to pull them through? The Germans are getting lazier by the day. America's attitude should be one of pity and polite contempt. Europe is increasingly becoming a basket case. The Europeans were seduced by the seductive siren call of “Third Way” socialist nostrums and now they must pay the piper. It is only the United States that stands between them and Armageddon. Think where they would be without our military might.

Have we already forgotten the European veto of the General Electric merger with Honeywell? The reason was not that the Europeans were concerned of a possible negative impact upon the consumer, but because it might hurt other competing companies! There was a good reason why our ancestors immigrated to the United States. They wanted to get away from the losers.

David Thomson you are a a hatefilled idiot.

Nope, I'm simply a rational human being. I also never post anonymously. Why should I respect these Europeans when they don't even respect themselves? After all, it's our tax dollars protecting them---and the Canadians.

The Europeans *did* have a similar boom in 2000. Their New Market indices (indices with TNT - technology, internet, and telecom) had jumps (and, later, falls) which compare favorably to the Nasdaq. Even though individual share ownership is less widespread in Europe than in the U.S., the effects of the bust are still rippling through the economy, in part because government-owned companies (and so the taxpayer) were some of the biggest losers. Witness France Telecom's 70 bln Eur debt, a loss to the French taxpayer (meaning, before the taxpayer owned a company which was worth something, and now it's virtually gutted).


On the other hand, the ECB neither raised nor subsequently lowered rates as rapidly as quick-draw Greenspan and the Fed. Before passing judgment on the ECB, let's see how well the US economy is doing in one or two years. The bigger the debt the harder the fall.

"The immediate challenge was dealing with the Vichy French. The Allied high command tried to cut a deal to prevent them from fighting at all, but it took three days of combat before they agreed to go over to the Allied side. The Germans then staged a landing of their own, putting ashore a substantial force in Tunisia, where it could join up with Rommel's remnants and attack the Allies on interior lines. The French, it should be noted, put up practically no resistance to this Nazi invasion. (Later, however, the French proved particularly vicious in their handling of German and Italian prisoners of war, even using some as human minefield sweepers.)"

http://www.opinionjournal.com/la/?id=110002712

"In Berlin, I often asked Germans how they would feel about Iraq if the president were named Clinton or Gore, and had supported Kyoto and the ICC, but still had the same Iraq policy as Bush. Almost all said: "Oh, that would be different." They've confused the messenger with the message; their problem is Bush, when it should be Saddam Hussein.

Despite their preoccupation with Bush, it is nonetheless true that there's latent anti-Americanism in the German body politic. Its most explicit form is the reflexive rejection by the left of certain American values, economic realities, and lifestyle preferences — which they derisively label "American conditions," now a negative political code word in Germany. ...

Such misperceptions are driving a wedge between the United States and its friends in Europe. Our relationships with them are fundamentally shifting, and will probably never be quite the same again."

http://regionsofmind.blogspot.com/2002_12_01_regionsofmind_archive.html#85421858

Brad,
I'm surprised you have not commented on a very interesting graph at the end of this week (Nov30..Dec6)'s _Economist_ at the bottom of page 88.This shows a graph across OECD countries (including particularly Europe) of unemployment in 1994 and 2002. To me it is striking just how much unemployment has fallen---and in sharp contrast to the story one continually hears which seems to imply that Europe is locked into structural problems which have been there for ages and which are not being addressed.

What I take from this graph is that things change, that they change faster than expected, and that the conventional wisdom (especially in a country as insular, self-centered, and filled with twits like David Thompson) lags behind reality.

The other thing I'd like to point out is that whenever you criticize the ECB, you appear to be thinking in a small, very short term fashion. Consider an alternative viewpoint: I would regard it as an uncontroversial statement that a weakness of democrach is that voters are unable to make sensible decisions about how to invest money via the state (ie through the things that the state does best). This is no different from the fact that voters are frequently unable to make sensible decisions about how to invest their money through the markets. As such we see something of the boom-and-bust of markets in state spending, only perhaps with a lower frequency because the catastrophes that shaped earlier decisions last longer in people's minds, and govt can't make decisions as fast as individuals and corporations.

The US already admits the second point, hence the exists of the Federall Reserve (a controversial construction at the time, and stil considered a bad idea by some of the nuttier elements of the WSJ editorial pages).
The ECB can be viewed as simply accepting the first idea and attempting, in an ambitious way, to do something about it.
There are problems ahead for Europe as a consequence of demographics. Rather than pretending that they do not exist, or attempting to deal with this year's problem (ie get re-elected) at the expense of making next year's problem worse, the ECB is trying to put some discipline into the system.

Of course there will be stumbles at first. The recent ideas to restructure the growth and stability pact to require balance over a business cycle rather than year-by-year are obviously an improvement on the current pact. But to dismiss the overall system, and the way it is operating, on the grounds that "it hurts now" or that politicians can do better in terms of setting up the preparations for the future, seems to me ludicrous. Compare this with the preparations for the future that are going on in this country courtesy of Bush and co (and described in the BW article of the post above).

(BTW my "hurts now" comments should not be regarded as a flip dismissal of human pain, the sort of thing Republicans say about unemployment. Rather my point is that now, while a strong safety net is in place, is a much better time to prepare for what is inevitably coming than say 8 years from now when the system will be under that much more pressure.)

That's it David Thomson, your lack of respect for the topics Prof. DeLong chooses for his posts has now convinced me that calls to ignore your comments are actually wise and necessary. You are not participating in this forum, you are trying to take it over.

**** Back to sanity ****

I thought the consensus is that central banks have been responsible for many of recessions, but far more for voluntarily engineering deflationary recessions than by the sin of inaction. Like Prof. DeLong, I also think that the ECB should be a little laxer with monetary policy (why would we want deflation to take hold in Germany anymore than in the US?).

Yet, I like the way it is avoiding the Fed's pattern of sharp acceleration and then strong braking (the resulting decrease in variability and even perhaps uncertainty sounds like a plus to me). I still cannot explain myself why the Fed put on so much braking in so little time last time it freaked out about the bubble (I know it sounds like Ancient history now...)

"**** Back to sanity ****?"

The European Central Bank is not likely to do anything about the socialism eviscerating the continent's economy. Does anyone really think I’m wrong about this? The situation is so bad in Germany that it’s difficult to fire employees who are even caught stealing without providing them with substantial compensation. What hope is there for a nation so lacking in common sense?

And yes, what would Europe do if it actually paid for its own defense? What is unfair about pointing this out? There is one more thing that I should add. Did anyone read the previous post where I cited an author stating “Such misperceptions are driving a wedge between the United States and its friends in Europe. Our relationships with them are fundamentally shifting, and will probably never be quite the same again." My guess is that a few of you concluded that the writer is some sort of right wing ultraconservative. Alas, nothing could be further from the truth. He is none other than Peter Ross Range, editor of Blueprint (the magazine of the Democratic Leadership Council).

Maybe somebody can enlighten me: is there a way to know if some US state is by now in deflation? It strikes me that a lot of fuss is being made of German low inflation while European inflation (that is what the ECB cares about) is not alarmingly low. Why should the ECB care so much about regional variations? Does the fed care so much if for example Texas or California are nearly deflating? It doesn't seem to me. The whole thing of looking at national stats in Europe seems like an old and derelict habit of a gone era one refuses to throw overboard.

Chris, the problem is that the US is deemed more of an optimal currency area than the EU. There are stronger counter-cyclical transfers among US states than EU members, and more immigration too.

Differences in inflation, and thus growth rates etc should smooth across EU members over time, but it's a slow and painful mechanism... However, it's not like the above mentionned stabilizers in the US are perfect either, they're just much stronger.

It is a question whether they're effective over the short-run or just to ensure longer-term convergence (an account on which the EU has been quite succesful in any case.) I am tempted to think that what saves the EU in the short run is the ability member states to run their own fiscal and counter-cyclical transfer policies. The hopefully upcoming revision of the "stupidity pact" will be quite helpful I think (if it's done well.)

>Maybe somebody can enlighten me: is there a way to know if some US state is by now in deflation? It strikes me that a lot of fuss is being made of German low inflation while European inflation (that is what the ECB cares about) is not alarmingly low.

Except that it is twice the inflation rate in the UK on the same price index and the average unemployment rate across the Eurozone is more than 50% higher.

The basic inhibitor deterring the ECB from cutting rates is that the Eurozone's inflation rate has been running above the bank's target maximum of 2%. If the bank cuts the rate because GDP growth is slow or because the unemployment rate is uncomfortably high, the bank will have a serious credibility problem.

America has a fairly good record of maintaining low inflation since WW2 but that is not true of most - not all - of the major European economies. Going soft on inflation targeting now is likely to revive memories of the past and that is apt to impact on sovereign bond yields downstream since the markets will factor in the likelihood of higher inflation on trend.

Rightly or wrongly, the ECB's diagnosis is that the Eurozone's high average unemployment rate is due to structural problems in the major economies of the Eurozone, not deficiency of aggregate monetary demand. Debates about the ECB's reluctance to cut rates don't carry much weight absent discussion of whether the bank's basic diagnosis is flawed or not.

To Mr. Thomson:

It would appear that the European govts are acting in an entirely rational manner when it comes to things like military spending and funding of the development of pharmaceuticals. The native European population is older and reproducing more slowly than in the US. Because France, Germany and England have no immigrant experience comparable to the US, it is unlikely that those countries will tolerate, over the medium term, large influxes of young non-whites. So, the countries are all responding to their constituents by building long-term social security safety nets while free-riding on US defense policy and technology and pharma research investments. Why shouldn't they?

Last I checked with my french family, their attitude was that if the US is dumb enough to invest almost 4% of GDP on military defense, then that was fine with them. They had two world wars fought largely on their soil, and they were perfectly willing to let someone else spend their blood and treasure on being a global heavyweight.

I guess my point of this somewhat rambling post is to question why so many posters, both in this comment section and elsewhere in the conservative blogosphere, seem so outraged by countries other than the US acting in their own narrow self interest.

p.s. Fuck you and the horse you rode in on for choosing to post about the conduct of Vichy. First, that was over 50 years ago. Second, plenty of young Frenchmen served in the Free French Navy with honor in some of the ugliest naval combat seen during the war -- on the Murmansk run. Finally, there are plenty of episodes of truly awful conduct by the american military. But victor's justice -- we don't hear much about that in this country.

is there a way to know if some US state is by now in deflation?

An excellent question.

Hawaii, hit by the collapse in travel and the decline in Japanese property investing, just might be in deflation.

A *downward* spike in oil might tip Alaska that way too.

But most states are diverse enough not to deflate across-the-board.

That said, some *communities* might be deflating, a la the Rustbelt/Oil Patch recessions of a few decades back.

Although I deem a rate cut by the ECB to be necessary, I still think that the ECB is acting more sensible than the Fed. The Fed has been very, very aggressive in lowering rates in the past two years, in order to prevent a deep recession in the US. This policy has enabled US consumers to keep spending and keep the US economy going. A lot of this spending has been financed by simply taking on more debt. The US household debt level is very high (over 100% of income) in comparison to other countries. IMO, the Fed is maneuvering itself in a trap: it will be difficult for the Fed to increase rates in the future (i.e. in response to sudden inflationary pressures): US consumers will be faced with higher interest charges on their already high levels of consumer debt, making US consumers and firms less inclined to spend money. It may be audacious to make this statement, but the second dip is going to come in the next two years and will be deeper than the first one. The Fed has tried to soften the blow and seems to have succeeded (seen from a short term perspective), but it is merely putting off a deep recession, that will have to occur, judging from the imbalances that are building up in the US economy (neg. current account, neg. savings rate, sharply increasing budget deficits). "Deep recession" in this case can either be a painful recession or a long period with virtually no growth (as has happened in Japan). Euroland will be affected by this recession, but the ECB has still some monetary ammo left and most of the economic fundamentals (except budget deficits) are better than in the US.

"The only reason France still has so many 'French' industries is due to protectionism. Maybe also because who in their right mind would invest in French industries to make money?!?!

Then we have the senior managers. These guys are usually from INSA schools. Nepotism at its finest. Doesn't matter if they are any good - most are not, they will be the ones who float to the top. There is no such thing as meritocracy. And everytime you come up against anyone over 54 the approach is European at its finest - talk, negotiate and two months later nothing is done.

Europe won't come anywhere near the performance of the US, now or in the future. The regulations are killing small businesses, there is no incentive to be highly technically skilled because it doesn't pay, in later life there is no incentive to take risks because no-one wants to jeopardise their pensions."

http://www.denbeste.nu/cd_log_entries/2002/12/Europeanresponses.shtml

"Just about the only thing that is growing in Germany is unemployment, standing at four million at least and, according to one German economist, nearly six million if hidden unemployment is factored in. That, too, will get worse, because although it is evident that labour costs need to be radically reduced, Herr Schröder is levying an extra £90 a month in payroll contributions to state pensions that he ought to be overhauling, but will not. He refuses, too, to touch the rigidly protective labour laws beloved of Germany’s fat controllers, its overmighty union leaders."

http://www.timesonline.co.uk/article/0,,482-501953,00.html

Jean Philippe, you said "the US is deemed more of an optimal currency area than the EU." It seems to me that this assertion is taken as a given without further examination. I remember a study (some years back) about the regional diversity of the US economy with cute coloured maps showing massive variations for a whole set of economic indicators. The articles main conclusion was that variations were far greater than most thought. It would be nice to have US monetary indicators broken down by state to see how much the US and EU situation really differ on that account. I don't trust the received consensual view.

I know it's wrong to respond to David 'Parasite' Thomson but I just have to this once.

Western European countries spend about half what the US does on defence. However this is still more than treble what Russia does, and a great deal more than Russia and China put together. It's about 1/5 of the world total (similar to Europe's share of world gdp, so hence as a share of GDP it is similar to the world average, and higher than the non-US world average. It also comes to about $500 for every citizen of Europe.

In terms of the capability it gives, that is somewhat less than half of the US's, a consequence of it being spread around 15 countries. However as European political union is not on the cards that is a likely feature for some time to come. As to whether it is adequete, the primary motive for defense spending is...defense...and in preventing an invasion from abroad, Western European can easily defend itself.

Furthermore if the European countries were to increase defense spending to levels comparable to that of the US it would cost about 1-2% of GDP. This is equivalent to about one year's GDP growth. Hence in no accurate sense can you describe the Europeans parasiting off the US. The sums just aren't large enough.

I know facts make no difference to your ranting and raving, but perhaps from now one we can stick to the topic of the post in hand. If the post in hand is 'Does Europe parasite of the US?' then let fly with your fantasies -- otherwise keep quiet, please.

“As to whether it is adequete, the primary motive for defense spending is...defense...and in preventing an invasion from abroad, Western European can easily defend itself.”

Western Europe disgraced itself during the Balkans conflict. Even the host of this web site, Brad DeLong, had to concede that Bill Clinton could no longer wait for these countries to get off their duffs. The United States is also mostly responsible for winning the Cold War against the Soviet Union. Today, it is not so much that Europe has to be worried about a per se full fledged “invasion from abroad.” The European continent instead must focus upon the threat of terrorism.

Am I off topic? Do I address topics not relevant to the particular discussion at hand? I’m sorry but I see no way that one can discuss Europe’s rapidly deteriorating economy without mentioning that it doesn’t even really pay for its own defense needs. I also see a direct connection between its infatuation with absurd socialist nostrums and its childishly dangerous pacifism. Please note that Americans far more liberal then myself are now waking up to the reality about our European "allies." It would be foolish to conclude that only the conservatives share my views.

“Rightly or wrongly, the ECB's diagnosis is that the Eurozone's high average unemployment rate is due to structural problems in the major economies of the Eurozone, not deficiency of aggregate monetary demand.”

I seem to agree with Bob Bryant most of the time. There is actually nothing that I find inaccurate in his most recent post. Nonetheless, I suspect that he is engaging in polite euphemistic language whereas I prefer to be blunt. “Eurozone's high average unemployment rate is due to structural problems” seems to me just another way of saying that the Europeans have too many people on the dole because of their socialist policies. Of course, I could be just some sort of irascible mean thinking person.

Yes you are off topic. In fact you stick to the same topic day in, day out. In Britain you are what we call a 'one-club golfer'.

Unfortunately also you are no Tiger Woods, and usually what you have to say is not only boring and hysterical but also factually inaccurate.

>>It would be nice to have US monetary indicators broken down by state to see how much the US and EU situation really differ on that account. I don't trust the received consensual view.<<

I don't know how much credit to give it either, Chris (probably because I can see first hand the state of the Californian economy these days and thus the plea by many US governors to break out of state budget constrains.) An other important question regarding this comparison is that of where, on this account, the ball is in the EU vs. where the ball is going to be ex-post when the Euro has had full effect on Europe's industrial structure.

When Spain, Portugal, Greece and Ireland were taken aboard the common market it wasn't obvious to see - that is it took vision to foresee - that they would end up being where they're at now. An other point I like to make is that the Euro is going to offer a very nice framework to shelter the entering East-Eurpoean countries from currency crises so typical of fast growing and open developing countries. Of course, this means the EU will need to keep the Growth and Stability Pact around (in some hopefully revised and more flexible / useful form.)

The following is from the Financial Times:

“The capabilities gap between the two sides of the Atlantic has reached a point where the Europeans cannot fight alongside their American allies - even if invited to do so - because their military hardware is too backward.”

“Most important, whatever their pretensions to a greater military capacity, the Europeans will for the foreseeable future depend on US military assistance. Yet the Americans suspect that European defence ambitions are motivated by a desire for competition with the US, not co-operation. French demands for European autonomy in military planning do little to assuage US concerns.”

http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1037872479731&p=1012571727126&ExpIgnore=true

'Jean Philippe, you said "the US is deemed more of an optimal currency area than the EU." It seems to me that this assertion is taken as a given without further examination.'

Labor flows are much more restricted between European countries than between states of the US. That seems sufficient.