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Opinion: Pity poor Europe

While America treats Europe like an ugly stepsister, it worries about economic forecasts.

For a variety of reasons, the medium- and long-term picture for Europe’s major economies — what economists call their “potential growth rate” — is quite grim. The so-called eurozone — which comprises the 16 countries of the EU using the euro as a currency — faces a far steeper decline in their relative economic strength than the United States.  At the core of the problem is a mixture of demographic reality and structural inflexibility which economist believe will significantly reduce the “potential growth rate” of the eurozone.

Potential growth refers to the rate at which any country (or trade bloc, in the EU’s case) can grow annually without triggering a serious bout of inflation. For the U.S., before the crisis, that figure was 3 to 3.5 percent. For Britain it was 2.8 to 3 percent, for China 8 percent, and for the Eurozone 2 to 2.5 percent. New figures, albeit hotly debated ones, have calculated some of the long-term damage done by the crisis. China, not surprisingly, remains at 8 percent (if not higher). The potential growth rate of the U.S economy post-crisis might have lost a full percentage point or more, economists believe. A Brookings Institution study released earlier this month puts the new American figure at 2.25 to 2.5 percent annually. If that holds true, all economic calculations of what the U.S. can afford in terms of national debt and government spending go out the window (and they head for the pavement, not the sky).

But economists are even more pessimistic about the eurozone economies. Already facing the double whammy of declining populations and rising percentages of retirees, now the continent’s economic engine is seen as faltering. The expectation that the euro will continue to rise versus the dollar as China and other major creditor nations diversify away from the house of cards Alan Greenspan built won’t help Germany, France or Italy, all heavily dependent on exports. Add this up, and you have an economic consensus emerging that pegs potential growth at just barely 1 percent.

One percent growth isn’t a cataclysm, but it is something akin to permanent recession.  
In the last two major previous downturns (1982 and 1991), near-miraculous productivity rises saved the day for both the U.S. and major European economies, preventing a permanent fall in potential growth. In the early 1980s, it was the shift from heavy industry to a more service-based economy. In the early 1990s, of course, it was the internet.

If anyone has any bright ideas for a third revolution in productivity, I’m sure the world’s leaders would be all ears.