Really Bad Journalism About Europe

When I was a little kid I liked the picture puzzles that asked you to find all the mistakes—the dog with three ears, the plant growing upside-down, the mirror image that wasn’t a mirror image. Maybe that’s why I took a perverse pleasure in reading this thoroughly awful bit of “reporting” about Europe’s economic prospects. Of course, the problem in cases like this is never simply incompetence (although that has to be a factor), but also ideological zeal, which causes “serious” commentators to assume that, if there’s a problem, it has to have something to do with populist meddling with free markets.

So let’s see how many errors we can find:

Crisis Leaves Europe in Slow Lane
By NELSON D. SCHWARTZ and MATTHEW SALTMARSH

PARIS — Two years ago, Europe was growing more rapidly than the United States, and the Old Continent finally seemed prepared to tackle longstanding economic challenges like rigid labor markets, runaway government spending and a rapidly aging population.

But as Asia and the United States emerge from the global economic crisis, Europe appears likely to be the world’s laggard, threatening a return to the dark days of “Eurosclerosis.” Leaders who once spoke optimistically of fundamental changes aimed at enhancing productivity have turned to the more prosaic tasks of protecting jobs and avoiding painful political choices.

“Asia” (all of it?) and the US are emerging? Europe (all of it?) lagging? There is no statistical support at all for this sweeping generalization, and in any case it’s much too soon to tell.

“It’s worse than being back to Square 1,” said Gilles Moëc, a senior economist in London for Deutsche Bank.

That’s true for everyone.

And just when it is needed most, the political will to address Europe’s bigger economic problems seems absent, according to many experts across the region and around the world.

When he was elected president of France in 2007, Nicolas Sarkozy spoke of the need for a “rupture,” including the loosening of a highly regulated labor market to better compete in the global economy.

Excuse me: how can the world’s largest deficit country, or at any rate its journalists, lecture those with whom they have bilateral deficits? Some individual European countries have overall surpluses, some (like France) overall deficits, but none is as off the rails as the US. What better measure than the trade balance is there of the ability to “compete in the global economy”? And even if there were a problem on this front, why should we assume that the cause is excess regulation of labor markets? Those who are paying attention know that the trend of recent economic research has been against the rigid labor market hypothesis.

But now, “President Sarkozy has gone, if not 180 degrees, then at least 90 degrees in the opposite direction,” said Charles Wyplosz, director of the International Center for Monetary and Banking Studies in Geneva. “The things he talked about then still need to be done if we want to have growth, but the crisis has slowed some of the impetus for change.”

In Germany, Angela Merkel, who was elected last month to a second term as chancellor, has also avoided taking on the country’s powerful unions and its regional banks. She has embraced the “social market economy” and has insisted there is no alternative to relying on exports rather than consumers to drive growth.

OK, now we’re getting into really silly territory. First you tell us that Germany has to switch from exports to domestic demand, and then you say it has to attack the unions. I suppose this means that the surge of domestic spending has to come from the bosses. And why the swipe at the Landesbanks? They’re the main reason why Germany has the world’s most productive small and medium-sized firms. I guess they should stop financing capital equipment and switch over to playing shell games with securitized mortgages or some other clever avocation. Like our guys do it.

In addition, her government has come under withering attack from elsewhere in Europe for providing billions of euros in aid to keep the automaker Opel at the possible expense of workers in Belgium, Britain and Spain.

With Europe plagued by huge manufacturing overcapacity, other automakers are likely to suffer further losses. After surging this year on cash-for-clunkers incentives in many countries, car sales in Western Europe are expected to drop 5 to 6 percent next year, according to Credit Suisse.

Yes, cash for clunkers was a bad idea—there as well as here.

In Germany, where the automobile industry is as much a symbol as beer at Oktoberfest, Credit Suisse projects that sales to individual buyers will fall 21 percent, in contrast with an expected 18 percent increase in the United States.

A minor detail: the German auto industry depends primarily on exports; any surge in US demand will mean a corresponding surge in imports.

It is not just the auto sector that is threatened: analysts also contend that recent stress tests applied to the Continent’s banks were not as effective as those used in the United States.

The only folks who think the US tests were stringent are in the banking industry or the Obama administration. (Remind me again, what’s the difference?)

Despite losses on both American subprime debt and local loans in boom-to-bust economies in Spain, Ireland and the Baltics, “the banking system has not really been restructured,” said Nicolas Véron, a research fellow at Bruegel, a policy center in Brussels. As a result, Europe runs the risk of repeating Japan’s “lost decade” in the 1990s, when huge losses clogged bank balance sheets and inhibited new lending.

Certainly true, but also true of the US. Big writedowns are yet to come on both sides of the Atlantic. See the IMF estimates, for instance.

The slowdown is an abrupt reversal from the period leading up to the crisis. Ireland’s economy grew 5 percent a year from 1999 to 2007 and became known as the Celtic Tiger, while unemployment fell during sustained growth in Europe’s biggest economies, Germany and France.

Underscoring the new pessimism, new statistics released Wednesday showed a 0.2 percent contraction in the euro zone in the second quarter, worse than forecast.

“The Europeans are losing out,” said Simon Johnson, a professor at the Sloan School of Management at the Massachusetts Institute of Technology. “The Europeans are the biggest losers of the economic crisis, even though the home of subprime madness was the U.S.”

And the greatest challenge Europe faces is over-reliance on US trade deficits.

To be sure, the American economy is not out of the woods yet, either, with unemployment still on the rise, homeowners still burdened by mortgage debts and Washington offering few details about how it will cure its own huge government deficits.

But the euro’s recent surge against the dollar mostly reflects higher interest rates on the Continent rather than optimism about Europe’s prospects, and the stronger currency actually makes European exports less competitive globally.

The euro-dollar exchange rate is not an indicator of economic health for either party. It could reflect carry trade factors, as the article asserts, or the continuing effects of the US current account deficit (down but not out), or simply a return to the pre-crisis status quo, before the wave of panic that hit international capital markets.

Already, the euro zone’s share of world trade has slipped to 28 percent in 2008 from 31 percent in 2004, according to the World Trade Organization.

The share of world exports is a valid measure of economic vibrancy, but why would total trade, which can be swelled, as it is in the US case, by imports, indicate anything meaningful?

Economies in Spain, Ireland and Greece are all expected to keep shrinking in 2010, while the region’s economic powerhouse, Germany, ekes out a 0.3 percent gain, according to a bleak new outlook from the International Monetary Fund.

And there are signs that Europe’s anemic economic performance will translate into less political power. European countries had an outsize voice in the Group of 7, the world’s principal economic forum since the mid-1970s. But late last month, world leaders said that elite club would soon be eclipsed by the Group of 20, a much more global assembly that includes emerging economic giants like Brazil, China and India.

But this change is not occurring because European growth is slow, but because growth—or at least reserve accumulation—has taken off in a new set of countries.

Though symbolic, the shift from the G-7 to the G-20 crystallized fears that the world economy would actually be steered by what C. Fred Bergsten, director of the Peterson Institute for International Economics, calls the G-2 — the United States and China. “Ideally, it would be the G-3, but Europe doesn’t speak with a single voice and they can’t coordinate and function the same way the U.S. and China can,” Mr. Bergsten said.

That’s what the Lisbon treaty was supposed to deal with. If someone can sequester Vaclav Klaus in one of the CIA’s black sites for a few months (they could torture him by showing old newsreels of John Maynard Keynes), Europe might find its single voice after all.

What is more, the economic crisis has also paralyzed European efforts to come to grips with longer-term factors inhibiting growth, like an aging work force and slowing population growth in many countries.

Slower population growth is absolutely OK. It is growth per capita that counts, not growth itself. Less population, all else being equal, means less pressure on the environment.

Over the next 25 years, Western Europe’s population is expected to increase just 0.7 percent, to 189.8 million, from its current 188.5 million, compared with a 20 percent increase in the United States over the same period, according to the United Nations. At the same time, the overall population is getting older across the region, from the Russian border to the Atlantic.

The best way to compensate for an aging population — and therefore fewer workers — is higher productivity. But that indicator, too, has been moving in the wrong direction. After rising smartly in the 1970s and 1980s, productivity in the last decade and a half has inched up 0.9 percent annually in Europe, compared to 1.7 percent in the United States, Mr. Moëc said.

But as long as productivity growth exceeds growth in the dependency ratio (nonworkers as a share of total population), Europe will be fine, as will the US. And if, for any reason, Europe wants a younger population, and a larger one, there are lots of folks in Africa and the Middle East who will be willing to help them out.

“Productivity growth in the U.S. has not been spectacular lately, but it’s been much better than Europe, and the U.S. doesn’t have this massive demographic problem,” he said. “Until now, we thought of the demographic issue as theoretical, but it’s starting to bite.”

Over the long term, that is likely to require workers to rethink the generous social benefits, long vacations and early retirement plans they once took for granted.

Yes, these things were so much more affordable in the 1970s and ‘80s; after decades of economic growth people need to realize how much less affluent they are. That’s why we have productivity growth: to reduce our ability to enjoy free time.

Louise Richardson, 65, had planned to retire now as chief executive of the Older Women’s Network, a charity based in Dublin. She will now have to delay that at least two years because of the toll the financial crisis has taken on her retirement savings.

“I can’t retire. I can’t afford to,” said Ms. Richardson, a widow whose savings have dropped to 80,000 euros, or $118,000, from 240,000 euros over the last decade. “My pension’s been completely knocked off its trolley. The money was just swallowed up.”

Swallowed up by demographics? By rigid labor markets? Or by a global financial crisis whose motor was the unsustainable borrowing by deficit countries—some of them European (Ireland, England, Spain), but the main culprit ours truly?