Stagnating Europe

[Toro]

EU: The Downward Spiral
February 14, 2006 22 42 GMT

Summary

Economic growth in the European Union lagged U.S. growth in 2005. Not only did the discrepancy widen the wealth gap between the world's largest economic pillars, but it was also the 15th consecutive year of such relatively poor European performance. And it will be far from the last. Europe's political and cultural traditions have locked it into a deepening spiral of lower wealth and decreasing influence.

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It is a simple issue of capital allocation. In a free market system, the money goes wherever its holders believe they can receive the greatest payback. In a social welfare model, development is diverted toward national goals, such as full employment, free higher education, penetration into or maintenance of a specific industry, or supporting an allied government, even if the money would be more profitably invested elsewhere. Though this reallocation might achieve a "national goal," it comes at the opportunity cost of lost growth.

All states find this trade-off acceptable at some level.
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First of all, many European states did not have the benefit of a baby boomer generation after World War II, or at least not one as large as the U.S. boom. Not only does this mean Europe is not coming off a boomer-fueled financial high, but there is no echo generation of the boomers in Europe as there is in the United States. On the west side of the pond, the boomers' kids -- Generation Y -- will eventually be able to step into their parents' shoes. Europe has no similar demographic. The European Commission now estimates that by 2050, Europe's working age population will fall by 48 million while its number of retirees will increase by 58 million. Combined with longer life spans, the commission expects the current retiree-to-worker ratio to fall from 1-to-4 to 1-to-2.

Second, Europe's balance sheet is far more out of whack than the balance sheet of the United States. This goes beyond the changing ratio of retirees-to-workers, merging with the culture of reliance on the state previously discussed. In simplest terms, the net effect is a younger retirement age, which means Europeans tend to end their period of being net creditors before their American counterparts.

The result is higher pension costs for the economy as a whole. Already, Denmark (one of Europe's better-managed economies) and Italy (one of Europe's worst-managed economies) spend more than 10 percent of gross domestic product every year on pension outlays, nearly three times the level absorbed in the United States. The implications for state finances, particularly in a culture where the state is expected to shoulder most burdens, are as dire as they are clear.

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Economically, its is not so much that slow growth will become the norm, but more that slow growth will become the best-case scenario. Already, the European Commission believes that Europe's "ideal" growth rate, assuming all cylinders are firing, is only 2.2 percent. The Continent has only achieved this level once in five years, and even then only barely. By 2010, the commission expects that ideal number to dip to 1.9 percent, and to continue its steady downward slide in the years thereafter.

National budgets also are already deeply affected. Italy, Germany and France's chronic budget deficits are chronic for a reason: Tax income cannot compensate for state expenses. As the pension disconnect widens, this will become the norm across Europe. There also is a reason why the dollar, despite deep U.S. budget and trade deficits, remains the global currency: the euro alternative is based on economies flirting ever closer with economic insolvency. Frits Bolkestein, a former EU commissioner, went so far as to say that the combination of state involvement in the economy and demographic pressures jeopardizes the euro itself. Stratfor agrees for these reasons and more.

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Strategic Forecasting ($)

 

[Jay]

Well put.

 

[Daz_Hockey]

the baby boom happened in britain toro (the main reason for current pension problems today).

 

[Toro]

Re: RE: Stagnating Europe

the baby boom happened in britain toro (the main reason for current pension problems today).

The author wasn't directing his criticisms towards the UK.

In the article, he mentions that there was an increase in the population in Europe after the war, but not to the same effect as in North America. Perhaps it was different for Britain though.

BTW Matt LeTissier rocks!

 

[Daz_Hockey]

of course he wasnt, I wasnt trying to present myself as insulted.

Matt Le Tissier is a football Genius
http://www.saintsforever.co.uk/letiss.html
(check that out, you'll understand ppl, he was like a brazillian...oh with a french name, english ccent and a bloody big nose lol)

Thanks for that......Matt Le Tissier/Southampton FC.....nice linkage there toro

 

[Blackleaf]

Don't include Britain as a part of stagnating Europe.

Our economy is doing fine, our population is growing and Britain is the only G7 country to have suffered no recession since 1997.

 

[Blackleaf]

Re: RE: Stagnating Europe

the baby boom happened in britain toro (the main reason for current pension problems today).

If you think Britain's pension problems are bad, they are much worse on the Continent.

Despite it having a younger population, Britain has more money stored away for pensions than France, Germany, Italy and Spain COMBINED.

 

[BitWhys]

An interesting topic but I really don't consider the States any better off since their baby-boomers' OASS nest egg has been systematically reduced to a stack of IOUs.

I'll also venture to say that this...

There also is a reason why the dollar, despite deep U.S. budget and trade deficits, remains the global currency: the euro alternative is based on economies flirting ever closer with economic insolvency.

isn't as much of a deciding factor as the capital losses China and Japan would (will?) incur when US T-Bills (and such) lose their charm. I think the differences in between how the European Central Bank and the US Treasury/Federal reserve are structured and operate are important too, but I've never taken a close look at how the ECB operates.