What European Crisis?

If you read the business press--from the Wall Street Journal to The Economist (London)-- you might conclude that Western Europe is on the verge of collapse. Such rhetoric has only been stoked by France's recent rejection of the new European constitution. France is now being harshly criticized for standing in the way of needed continental reforms to labor market and business regulations. New York Times columnist David Brooks even invokes Europe's purported crisis as proof that US Social Security must be privatized. Europe, with more taxes and regulations, supposedly can't generate the growth needed to sustain its increasingly elderly citizens. Yet this conventional perspective may reflect ideological enthusiasm more than economic history on both sides of the pond.

The business press argues that Germany, the Scandinavian nations, and France suffer from "overly regulated" labor markets and high taxes. They are cursed with dangerous levels of unemployment. The Washington Post charges that Europe is in a "productivity slump." One problem with this analysis is that worker productivity is defined not as output per worker but as output per working hour. Economist Dean Baker reminds us that in terms of output per working hour, European productivity has continued to increase at the rate of 1.0-2.0 percent annually over the last six years. He adds that: "The growth in output per hour has not always translated into output per worker, since workers have taken a large portion of the gains of higher productivity growth in the form of shorter workweeks". Work weeks of 35-37 hours are standard as is five to six weeks a year of paid vacation. Some European nations now enjoy higher absolute rates of worker productivity that the US.

Western Europe's unemployment 'crisis' is also partially an artifact of different definitions of unemployment. The US counts part-time employees seeking full-time employment as employed and excludes so-called discouraged workers from the labor market. If the US definition of unemployment were used, the former West Germany's current unemployment stands only slightly higher than ours. So is this is some looming disaster we need to fear? Unemployment is slightly higher than our own, but workers retire earlier, enjoy more time off, and are often more productive while working.

Even with respect to the admittedly vexing problem of unemployment, conservatives have a conveniently a-historical take. The European economy became more sluggish as the European Union expanded and adopted trade regulation principles closer to US norms. Expanded business investment in and worker emigration from Eastern Europe, where worker protections are slight, has put downward pressure on wages. In addition, the European Central Bank has pursued consistently high interest, pro banker policies. Many French citizens voted against the new constitution not because they were anti-Europe but because they feared that the new constitution would write these corporate norms into fundamental law.

In addition, as University of Texas economist James Galbraith points out, much US job growth has other sources than deregulation and low taxes. There are vital areas where the US government intervenes in markets more than most European nations do. Along with massive expenditures for the military, Galbraith identifies a 'soft Keynesianism' of direct and indirect support for university education and housing. Housing is subsidized not only through tax write-offs but also through federal guarantees of mortgage markets. Tax write-offs for gifts to higher education along with state and federal expenditures give the US a higher education sector that constitutes about twice as much of our GNP as in Europe. In addition, Galbraith reminds us that our much-lamented pensions for the elderly have not only served to reduce poverty but also sustain effective demand.

Even in the face of growing competition from low-wage workforces both within the EU and the US and Asia, some European nations remain remarkably well off and competitive. Guardian columnist George Monbiot points out that even by the favorite business press criteria, Sweden is one of the world's most successful nations. Its per capita GNP and trade balance far surpass its more deregulated and lower tax competitor, Great Britain.

Advocates of the so-called US model also fail to recognize that taxes can buy goods that businesses need to thrive. Swedish taxes are higher. Though redistribution can go too far, some redistribution is needed to sustain effective consumer demand. In addition, taxes fund health care, which US workers and businesses fund themselves--far less efficiently--thereby rendering US manufacturing less competitive. Stronger Swedish unions have kept wages high, thereby fostering worker morale and encouraging more technological innovation and productivity gains.

Both sides of the Atlantic should learn from each other. Galbratih suggests that Europe could stimulate both more consumer demand and greater productivity by subsidizing university education in its less developed eastern nations and by promoting a continent-wide pension system. (Contrary to Brooks, the lack of pensions in Eastern Europe may be a greater problem than their generosity.) The United States needs to consider the role that healthy unions and universal health care, have played in increasing long-run productivity. But a trans-Atlantic business press mesmerized by a model the US itself has never fully practiced is unlikely to consider these options.