EU Says Growth is its Priority

The Spring Council of the European Union in Brussels opened yesterday. The EU bigwigs have said that they want to get the EU GDP moving up from its rather sluggish 1.6% annual growth rate. The American economy is growing at 3.6% by comparison. What the EU leaders want is a plan to kick start economic activity. The trouble is, they've had such a plan since 2000 -- the Lisbon Agenda -- and it hasn't worked.

The Lisbon Agenda, which EU leaders drafted during the happy times of the tech bubble, called for Europe to overtake the US by 2010. To do so, there was to be radical change in economic and social rules. It called for tax cuts, changes to pension systems and healthcare systems, and for relaxation of rules about hiring and firing. The ideas weren't so much wrong-headed, but rather never implemented. Beyond that, it failed to address problems specific to Europe.

Part of the problem stems from the EU's Stability and Growth Pact, which was put in place to keep the euro as solid as the D-mark it replaced. Under the pact, deficits were supposed to remain at 3% of GDP -- and when the economic slowdown and recession of 2001 hit, deficits had to rise to prevent real catastrophe. As the conditions in France and Germany have not improved, their deficits have exceeded the Pact's ceilings. Rather than fine France or Germany, the EU has decided merely to allow loopholes in the rules. Since the euro is well-established, they just might want to drop the Pact altogether.

The euro is also part of the problem. Because the Americans have mismanaged their own fiscal household, the US dollar is not the only reserve currency in the world, and there are capital flows out of the dollar (by definition, because the price of the dollar is falling). So long as the Asian central banks are prepared to buy US Treasuries to help fund this deficit and peg their currencies to the dollar (thus harming their own exporters to aid US consumers), the euro will retain its buoyancy. But that means its more expensive to export euro-denominated goods. Developing intra-Eurozone trade will improve some of this, but that takes time and trade with former colonies remains on the French and British agendas.

Of course, the most useful intra-Eurozone change would be to allow free movement of workers. This is anathema to French and German unions in particular. With 10% unemployment in both countries, they are in no hurry to import workers who will work for less. However, estimates are that 600,000 jobs could result if the directive about service employment mobility went into effect. What is holding back further service sector growth is language. America has one language, as does Japan. Europe, with several, has a cost that its rivals do not. Free movement of doctors, lawyers and insurance professionals is limited to those who are multi-lingual.

In the end, it may be that Europe can't grow as fast as the US, without quantum changes to European societies. Europeans deserve to have that political and economic debate. And the EU Spring Council looks like its going ahead without the people of Europe. Perhaps that's why most Frenchmen would vote "no" on the EU constitution if the referendum were held right now.


© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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