Yankeecat Wrote:I notice there exists a great deal of confusion regardig the relative economic positions of the US, EU and others on these boards. This is a thread to discuss, using fact and reason, this area.

http://www.timbro.com/euvsusa/pdf/EU_vs_USA_English.pdf

http://www.eurochambres.be/PDF/pdf_general/050311-SpringBusinessForum/EUROCHAMBRES%20Study%20'Time%20For%20a%20Fresh%20Start'.pdf

http://www.openeurope.org.uk/research/2mullally.pdf

http://www.optimist123.com/optimist/2006/06/us_national_deb.html

http://gatesofvienna.blogspot.com/2004/11/demographic-jihad-in-europe.html[url][/url]

Quote:Conclusion:
Asked by a correspondent what he meant by his description of a “social market”
economy, the great German Chancellor Ludwig Erhard said that “When I talk of the
social market economy, I mean that the market is social, not that it needs to be made
social.” He argued that the market undermines cartels and vested interests and gives
outsiders like the unemployed a chance to get on the inside.
Europe urgently needs to rediscover its own liberal traditions. Economic liberalism is
not a malign outside force but part of Europe’s heritage and future. Not an-antisocial
force but the only way to ensure good outcomes for all.
Therefore:
• EU member states should abandon the comforting idea that their current troubles
are a “price worth paying” to preserve a successful social model. The high tax high
regulation approach is already failing in social terms, and this model will lead to a
major crisis in the not too distant future if it goes unchanged.
• The EU institutions should cease their attempts to justify wrong headed
programmes in the name of an attempt to “defend the European Social Model.”
Indeed the EU institutions should be concentrating on the areas which are
actually under their control, rather than constantly trying to interfere in what
should be its members’ domestic policies. If the EU wants to help its member
states, it should focus on cutting trade barriers, hacking back its own overregulation,
and redeploying its €120 billion a year budget towards more useful
programmes.

Yankeecat Wrote:The Skeptical Optimist simply used only explicit national debt. If you include implicit national debt europe looks much much worse in comparison.

This thread was created to inject some reality into the discussion herein. Apparently, they're are a number of participants who's views are based on fantasy and comic books.

Quote: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.

Analysis

The German government reported Feb. 14 that economic growth in the fourth quarter of 2005 weighed in at a dreary 0 percent, putting the country, at least technically, on the lip of its fourth recession in four years. Once Germany's dour statistics were blended into the European whole, growth for the eurozone stumbled to a mere 1.3 percent for the entire year of 2005. While that might sound bad, once one puts the numbers into context, it moves into the realm of the pathetic. Since 1999, the eurozone has only beaten its lackluster 2005 performance once.

The reasons for Europe's uninspiring record are varied and many, but ultimately they can be funneled into three categories: allocation of capital, demographics and concepts of nationality.





Show Me the Money!

Now we really do not want to get into an argument about the various benefits and drawbacks of a social welfare model of economic management. Needless to say, such systems, or at least those in Europe, do offer relatively high levels of income equality, social harmony and environmental consciousness. But they also are incapable of matching the long-term growth potential of their free market competitors.

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. Though the United States is routinely portrayed as the pinnacle of no-holds-barred capitalism, it still retains substantial subsidies in its agricultural and steel sectors, and allocating money to Medicare, welfare and Israel does not exactly embody textbook free market principles.

In Europe, however, state involvement in the economy is far higher. While consumer spending is responsible for nearly 75 percent of all U.S. economic activity, in France the proportion is closer to 40 percent. More money in the hands of consumers and private enterprise means almost by definition that the outcome is more profitable. Collectively, Europe has decided that forgoing this profit is a price it is willing to pay for lengthy vacations, luxurious lunch breaks and cheap or free medical care. Americans, in contrast, prefer cold hard cash.

The end result in the United States has been a heavy concentration of wealth in the hands of the citizenry, even if that wealth is far from evenly distributed. Such relatively deep pockets allow Americans to stun Europeans with their ability to generate massive amounts of cash as needed for causes such as the recovery from Hurricane Katrina. And when Americans are not helping fund rescue, recovery and reconstruction, they are buying candy, camisoles and Cadillacs.

Unsurprisingly, American growth has beaten European growth each of the past 15 years.

A Question of Retirement

Completely separate from the strengths and weakness of the European social welfare model is Europe's second problem: demographics. After World War II, the United States bore the baby boomer generation, which ultimately proved to be the largest generation in U.S. history as a percentage of the population.

The dawning problem in the United States, therefore, is the pending retirement of these boomers. Most boomers now have their homes paid off and their kids are now out of college. Because their expenses are minimal in comparison to their younger years, they are at the period of time in their life where they are socking away loads of money. That money is the bread and butter of the American financial system, and its relative abundance is heavily responsible for the United States' currently low interest rates -- and thus the U.S. economic boom.





But it will not last. As the boomers retire, they will evolve from net creditors to the system to persistent drains on it. Their investments will move into cash and government bonds so that they can lock in their wealth, and then they will steadily draw that wealth out of the system to sustain themselves. Eventually, they will move into smaller homes, drawing out yet more capital.

And while this is occurring, it will be left to the generation immediately following the boomers, Generation X, to pick up the financial slack. But it simply cannot: Gen X is the smallest generation as a percentage of the population in U.S. history.

And that is the good news.

Europe's situation is far worse.

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.

Pulling in the Welcome Mat

There is a simple solution to such a demographic crunch: get more people. There are two ways to do that. The first is the old-fashioned way, but telling one's citizens to give it the old college try -- which is essentially what the Merkel government is starting to do in Germany -- hardly represents a quick fix.

Children born nine months from now do not begin contributing to the system for 20 years, and when they do finally begin forming families and buying houses, they become net consumers of capital -- not providers. That means that any "solution generation" will not become the equivalent of today's baby boomers until 2050 at the earliest. Again, the United States holds the advantage. Gen Y might not be as numerous as the boomers, but in addition to being close in number, their oldest members were born almost 30 years ago. They can thus begin to replace their parents in only 20 years.

Europe has no equivalent of Gen Y, however, and since starting from scratch takes so long, Europe will need to resort to the second option if it is to avoid a demographically triggered financial crash. That option is immigration.

Once again, the United States holds the advantage. Beyond being a "nation of immigrants," American culture is unique in that people can choose to become American even if they are nonwhite or foreign-born. Consequently, the United States has been able to absorb wave after wave of immigrants from disparate regions and cultures relatively easily. Becoming an "American," as opposed to an American citizen, is simply a matter of personal choice.

Not so in Europe.

Like the United States, a ready source of precisely the sort of labor Europe needs lies on the Continent's doorstep. Turkey and North Africa are quite literally brimming with labor eager to immigrate. But issues of identity both limit the numbers allowed, as well as the ability of those who do slip in to integrate. European ideas of citizenship are heavily influenced by ethnic identification. A Tunisian may be able to technically become an Italian citizen, but he can never become Italian.

Where an immigrant can choose to join the American polity, in Europe the polity has to choose to accept the immigrant -- and that very rarely happens. As a result, immigrants to Europe come to live in sequestered societies that are clearly not European. The French race riots of October 2005 and November 2005 -- and as many have argued, the London bombings -- laid bare the consequences of this pattern.

This mindset is so ossified that it even inhibits immigrants from fellow members of the European Union. At present, only three EU states allow workers from the 10 newest EU members -- members admitted two years ago -- to have any access to their labor markets. (Three more will likely allow such immigrants in beginning May 1.) In France, Germany and Italy, the countries suffering the deepest demographic imbalances and slowest economic growth, there is no serious talk of easing such restrictions before 2011.

In France, even oblique discussion of the topic played a large role in the rejection of the EU constitution, and such a mentality shows no signs of softening. On Feb. 14, some 25,000 disgruntled workers descended on Strasbourg while the European Parliament discussed a services directive that would allow service workers from existing EU members to work in other EU states. And this only dealt with other Europeans, so one can only imagine the hostility toward allowing in, say, Libyans.

Learning to Live with Less

Such trends are hardwired into the European system, and eventually will break through in ways the Europeans are sure to find distasteful.

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.

In international affairs, Europe will also face an ever-rising challenge. Europeans like to discuss how their style of foreign relations, namely, soft power based on aid and trade, is either complementary or superior to U.S. military policy. They see such soft power as their way to shape the world to their preferences. But soft power requires money, and that is something Europe will have less and less of in the years ahead.

Finally, Europe faces a problem much closer to home as demographic trends alter the ethnic composition of the European states. It is one thing to have exclaves of "foreigners" in one's country when the good times are rolling, quite another when 1 percent economic growth is considered a very good year. Already, a number of European states, most notably the Netherlands, the United Kingdom, France and Spain, boast a Muslim population of nearly 10 percent. The French riots gave the world a taste of what can be expected in the future should there be no radical departure from existing trends, and the recent politicization of cartoons depicting the Prophet Mohammed provide an excellent example of how tensions can ratchet up to the breaking point uncontrollably.

Monsieur Le Tonk Wrote:But Europe will never be like America, there are significant cultural differences, not the least of which is the idea of the welfare state. You should note that whilst Ireland has done much to emulate the American low tax model it still has a free healthcare system.

Quote:If you think Healthcare if expensive now, just wait until it's Free".

Monsieur Le Tonk Wrote:Sorry John, I had assumed we were all adults here with a basic understanding of how these systems worked,

Yankeecat Wrote:Ireland is a very small country with a very small had highly homogenous population which operates basically as an appendage of the U.S. It is, therefore, a poor analogy for you thesis.

MLT Wrote:Sorry John, I had assumed we were all adults here

Quote:Your economy is a dwarf in export, what clearly signals that your products are no-good and can be marketed domestically only, to people blinded by patriotism.

Quote:Each single of about fifty countries in Europe, even the smallest one, has a richer history and culture than you do.

Quote:It is the cultural diversity that makes Europe rich and that's what has to be maintained at all costs, even a percent or two of economic growth.